Is a recession coming for the FTSE 100?

The FTSE 100 is up 11% year-to-date, to 7,314 points. That’s only 434 points off its all-time high of 7,749 points it struck on 31 July 2018. It only needs to rise an additional 6% to get back to that record breaking point.

And only a month ago, it was worth 7,384 points. Then the Bank of England hinted it would finally start to raise the base interest rate, while the Omicron variant hit investor nerves. The index dropped to 7,044 points in the space of a fortnight, losing 4.7% of its value. Having now recovered, the FTSE 100 might now face a perfect storm.

ONS October figures

Official figures from the Office for National Statistics show that the economy grew by just 0.1% in October. While the health sector and second-hand car sales performed well, a fall in eating out and oil extraction meant that growth fell by more than was expected. Worryingly for the FTSE 100, this GDP figure was measured in the month before the Omicron variant was discovered.

In an interview on the Today programme, Liz Martins, UK economist at HSBC said that the ‘economy was stuttering a little bit,’ and that ‘the recovery is on pause in December at least.’ But in September, GDP growth was 0.6%. This fall might represent more than just a ‘pause.’

ONS Chief Economist Grant Fitzner said the construction industry saw its biggest drop since April 2020, with ‘notable falls in house building and infrastructure work, partly driven by shortages in raw materials.’ A fall in new built homes is likely to send house prices soaring even higher. And this could be a problem for the Bank of England.

Nationwide’s chief economist Robert Gardner believes that ‘the number of housing transactions so far this year has already exceeded the number recorded in 2020…and is actually tracking close to the number seen at the same stage in 2007, before the global financial crisis struck.’ With house prices already up 10% over the past year, the UK’s central bank is coming under intense pressure to raise rates. This would make mortgages less affordable, limiting price rises.

FTSE 100: interest rate hike?

But Telegraph columnist Louis Ashworth says that ‘out of nine economists to issue updated forecasts in the wake of the new restrictions, just two expect the MPC will increase the Bank Rate to 0.25pc this month.’

Meanwhile, UBS analyst Dean Turner says that October’s flatlining growth will give ‘further cause for hesitation ahead of the interest rate setting meeting next week.’ Yael Selfin, chief economist at KPMG believes further that ‘the key consideration will be the effect of the Omicron variant…we expect the MPC to unanimously hold off raising rates until February.’

With the impact of the Omicron variant yet to be known, the government has once again mandated national Covid restrictions on the population. Face coverings in most public places are back, people have been told to work from home if possible, and an NHS Covid pass is now needed to gain access to nightclubs or large events. These new restrictions are likely going to hit multiple FTSE 100 companies — hospitality stocks like Whitbread and Compass Group are both down today.

April could be a moment of reckoning for the FTSE 100’s bull run. Bank of England Deputy Governor Ben Broadbent expects inflation to ‘comfortably exceed 5%’ by Spring. According to National Energy Action, the typical domestic gas bill will have doubled in 18 months when the price cap rises. And, petrol and electricity are both at multi-year highs.

Meanwhile, the government is increasing National Insurance by 1.25 percentage points, increasing taxes on dividends, and is freezing income tax bands. The student loan repayment threshold might be lowered soon, while council tax is sure to increase. And the Resolution Foundation says real wages will fall again next year, and that the average tax bill will ‘rise by £3,000 a household by 2027.’ And large wage rises seem unlikely, as corporation tax is increasing from 19% to 25% in 2023.

An interest rate rise next year could be the catalyst for a recession. With the FTSE 100 still at a near-record high, it has plenty of room to fall. But with inflation more than double the Bank of England’s target, it may be left with no choice.

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