Will a weak UK economy lead to a stock market crash?

The latest report for the economy is disappointing, leaving Manika Premsingh speculating whether it could drive a stock market crash.

Manika Premsingh ❯

@macro_think

Manika Premsingh is an economist, financial writer and investor, with a focus on converting macro trends into actionable investment ideas. She has worked in the UK and India with clients across financial services, consulting firms, public sector and non-profits. She has shared her views at multiple international forums and has been widely quoted for them in leading media. Manika is a Masters in Economics and was also a recipient of the Goldman Sachs 10,000 Women scholarship for Certification in Entrepreneurship for her research startup, Orbis Economics. She is on twitter @macro_think

Published 10 December, 2021 4:36 pm GMT

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The FTSE 100 index is on a roll this week, as it continues to stay above the 7,300 mark. However, I am not feeling terribly confident that the stock markets will remain bullish. In fact, after looking at the latest numbers for the UK economy, I am beginning to think that we might just have a stock market crash on our hands soon.

The UK economy slows down

In October, the UK economy grew by a minuscule 0.1% from the month before. It also slowed down considerably from a 0.6% increase in September. The numbers are particularly disappointing right now, because growth was expected to pick up after the the easing of restrictions. And clearly, that is not happening quite as fast as was hoped.

With the Omicron variant resulting in some travel restrictions and possibly even making us cautious about being in public places again, some more weakness could build into the economy. This in turn could have a sentiment impact on the stock markets and even show up in company’s results going forward.

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Is a housing market crash likely?

I also think that the rollback of government support to segments like real estate might have impacted the pace of recovery. Construction, which can be seen a loose proxy for property markets, actually saw a decline in October. It fell by 1.8%, the biggest fall since, wait for this, April 2020, which was very early in the pandemic. And one of the biggest contributors to this was the decline in the private new housing segment.

Considering that there are a handful of property developers in the FTSE 100 index, this does not sound good for the markets. Even though they have reported growth in order books recently, I think the first signs of a slowdown in the housing market are here. And if there is a sudden crash in the segment, I reckon the FTSE 100 index as such could weaken.

What I’d buy in a stock market crash

However, there is reason to look on the bright side as well. Even if the broad weakness in the economy were to add to conditions that could result in a stock market crash, I think today’s report also indicates the best stocks to buy in that case. As we at the Motley Fool keep saying, a stock market crash is a buying opportunity. The latest numbers from the economy show that the services sector is doing well. It is back to its pre-pandemic levels, racing ahead of the overall economy.

One of the big contributors to its October growth is wholesale and retail trade. And considering that there are a few retailers among FTSE 100 and FTSE 250 constituents, I think these might make good buys for me. I reckon that especially those that either are e-commerce businesses or have significantly ramped up their online operations during the lockdowns could do quite well irrespective of the state of the recovery.