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UK economy to shrink, but avoid recession for now

A combination of a weak March handover and the Queen’s Jubilee in June is set to see the UK economy contract in the second quarter.

An easing of coronavirus restrictions resulted in the UK economy growing 0.8% over the first quarter. But this respectable outturn masked a deterioration in the monthly profile. After a 0.7% expansion in January, GDP was unchanged in February before going on to contract by 0.1% in March. While this was in line with our expectations, City economists had looked for it to be steady in March.

On a sectoral basis, a 0.2% decline in services output was driven by a 15.1% fall in motor trade activity as persistent bottlenecks impacted a typically bumper month for sales. Meanwhile, weaker pharmaceutical manufacturing and mild March temperatures resulted in a 0.2% fall in industrial production. By contrast, construction output jumped 1.7% on the back of repair work following storms in February as well as office refurbishments.

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Looking past these distortions, today’s figures reinforce our expectation that the UK economy will contract in the second quarter. Rock bottom consumer confidence will spur precautionary saving as households eye the income squeeze that is set to come to a head later this year from higher energy prices. There is also no let up in sight for capacity-constrained sectors, limiting any boost afforded by the rotation in consumption back from goods to services. These factors are set to result in subdued April and May prints, before a sharp contraction in June on account of the Queen’s Jubilee bank holiday weekend.

However, we suspect the UK will avoid falling into a technical recession (i.e., two consecutive quarters of negative growth). Contractions incurred by the Jubilee celebrations in 2002 and 2012 were followed by sharp July rebounds. We think history will repeat itself and ensure that GDP grows over the third quarter as a whole. Beyond this, we think that the UK economy could head back into reverse in the fourth quarter as the Ofgem price cap rises by a further 40% or so. A key factor will be what additional support the Chancellor provides and whether this comes in the autumn Budget or if he bows to pressure for an emergency fiscal package.

In any case, we doubt the Bank of England’s Monetary Policy Committee (MPC) will be deterred from further tightening policy. It will almost certainly raise interest rates at both its June and August meetings, taking Bank rate to at least 1.50%. But it is less clear whether the MPC will subsequently raise it to 2.00% by year-end, as markets expect. If the labour market starts to deteriorate, the committee may find it hard to justify further tightening before the window to do so closes in 2023.

By GEORGE BROWN

Source: City AM

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UK economy shrunk in March as service industry struggles

The UK economy contracted by 0.1 percent in March, according to data out Thursday from the Office for National Statistics.

The release also reported that GDP flatlined in February, revised down from a preliminary estimate of 0.1 percent growth.

The March slump stemmed from weakness in wholesale and retail trade and consumer services, including the repair of motor vehicles and motorcycles industry, the ONS said. Production also fell, although this drop was partly offset by an increase in construction. The UK economy is now 1.2 percent above its pre-pandemic levels in February 2020.

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“The U.K. economy grew for the fourth consecutive quarter and is now clearly above pre-pandemic levels, although growth in the latest three months was the lowest for a year,” said Darren Morgan, director of economic statistics at the ONS.

A range of service sectors, such as hospitality, transport and travel, had initially rebounded after the pandemic, said Morgan. But there were also “some downwards effects from other services, including retail, wholesaling and car sales.” The health sector also shrank, as the U.K’s “test and trace” system was scaled down.

Overall, U.K. GDP growth grew by 0.8 percent in the first quarter of 2022. That’s below analysts’ expectations of 1 percent and down from the 1.3 percent increase in the last quarter of 2021.

BY LOUIS WESTENDARP

Source: Politico

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UK rates to top 1% as BoE tightening continues

A 25 basis point hike in UK rates might not do much for the pound in the short-term, especially when set against the Fed’s more hawkish comments.

What to expect from the Bank of England?

The UK’s Monetary Policy Committee (MPC) is expected to raise rates by 25 basis points to 1%, the highest level in 13 years.

What else might it say?

As with the Federal Reserve (Fed) meeting the previous day, the actual rate hike decision is very much priced into markets at present. The March meeting saw the MPC ease back on some of the hawkish rhetoric, as it assessed the impact on the British economy, the overall plan to tighten rates remains intact.

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UK inflation continues to run at a high level, so we should expect further rate hikes later in the year, with 25 basis point moves still the most likely course of action. While this means the pound will remain under pressure vis-à-vis the US dollar, it allows the bank to proceed with its hiking policy without putting too much pressure on the economy, which remains in a weaker position than its US counterpart.

In addition, we will also potentially get more detail on how the bank will begin unwinding some of its balance sheet. The MPC has already said that it will stop reinvesting the proceeds of its bond purchases, but a move to outright selling is still viewed as potentially disruptive, so a tentative timetable may be all we get this time around.

What will happen to the pound?

After the impressive move to the downside since late March, much of the bank’s cautious outlook seems priced in. But as ever GBP/USD is not just about what the Bank of England (BoE) does, but what the Fed is doing too. Here the pound finds itself firmly on the defensive – set against the increasingly hawkish Fed rhetoric, it may struggle to gain traction.

While the BoE plods along with 25 bps increases, the Fed is moving to 50 bps, and some on the Federal Open Market Committee (FOMC) are even calling for 75 bps as a means of getting ahead of inflation. I

n the short-term, there may be little real movement in GBP/USD, unless the Fed is even more hawkish at its upcoming meeting. But the recent run of strength in the dollar seems relatively spent, which provides scope for a counter-trend rally in GBP/USD that could see it head back towards $1.30.

This, however, still favours a bearish outlook, and would give sellers the chance to move on cable once again, but with a better risk-reward outlook in the medium-term than chasing it down at its current level and in the wake of the steep decline of the past four weeks.

By Chris Beauchamp

Source: IG

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UK economy stumbles as consumers, firms brace for downturn

UK economy is losing steam as households face a tightening cost-of-living squeeze, according to data published on Friday which showed sliding retail sales and consumer confidence approaching all-time lows.

The pound slid by more than a cent to fall below $1.29 for the first time since November 2020 after official data and surveys of consumers and businesses pointed a sharp growth slowdown, or worse, in the coming months.

A closely watched gauge of business activity from S&P Global showed growth slowed by more than expected this month as companies grappled with surging costs and became much gloomier about the outlook.

Official data showed retail sales volumes slid by 1.4% in March from February, a worse reading than any economist forecast in a Reuters poll.

Earlier on Friday, market research firm GfK said consumer confidence slumped this month to close to its lowest level since records began nearly 50 years ago.

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Overall, the data underscored growing concern at the Bank of England about the opposing challenges of weakening demand and inflation at a 30-year high of 7% and likely to rise further beyond the central bank’s 2% target.

Governor Andrew Bailey said on Thursday the BoE was walking a tight line between tackling inflation and avoiding recession, a challenge facing other major central banks around the world.

“Whether the UK heads into a recession is still an open question,” said ING economist James Smith, who highlighted the potential for savings that many households built up during the coronavirus pandemic to continue driving growth.

“The jury’s out, but we think the Bank of England is more likely to hike interest rates once or twice more, before pressing the pause button over the summer.”

The S&P Global Composite Purchasing Managers’ Index fell in April 57.6 from 60.9. While still comfortably above the 50 threshold for growth, economists polled by Reuters had mostly expected a smaller fall to 59.0.

Consumer-facing businesses will likely face a tough time in the months ahead, with GfK’s gauge of households’ confidence about their finances in the future slumping to a record low.

The Office for National Statistics said food and petrol sales fell sharply last month and it cited rising prices as possible explanations for the falls. Online retail sales also declined.

Retail sales volumes are 2.2% above their level in February 2020 but they are a long way behind where they would have been if growth had continued along its pre-pandemic trend, Keith Church, an economist from risk consultancy 4most, said.

Earlier this month, Tesco (TSCO.L), Britain’s biggest retailer, warned of a drop in profits as high inflation squeezes the supermarket group and its customers.

Reporting by Andy Bruce

Source: Reuters

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UK economy slows to 0.1% growth in February

The UK economy barely grew in February as GDP expanded by just 0.1 per cent, with the economy suffering from the impact of weaker contributions from the health and manufacturing sectors and disruption from storms.

February’s growth was lower than markets were expecting and compared with with 0.8 per cent in January, according to the Office for National Statistics.

The main area of growth was services, which grew by 0.2 per cent, but this was offset by a 0.6 per cent fall in production and a 0.1 per cent fall in construction levels.

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Consumer-facing services grew 0.7 per cent in February, driven by a 33 per cent rise in travel agency and tour operator services, though these services continue to be 5.2 per cent lower than their pre-coronavirus levels.

A 47 per cent slowdown in the NHS’s test and trace programme and a 65 per cent fall in the Covid vaccination programme contributed to a 1.1 per cent detraction from GDP in the month but the ONS said it was important to note this followed particularly high levels of activity in December and January.

Monthly GDP now sits 1.5 per cent higher than its pre-Covid level in February 2020.

The ONS noted it had received anecdotal reports of the impact of the storms Dudley, Eunice and Franklin which hit the UK between February 16 and 21, but it said it was difficult to quantify these effects.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said that while the economy was above pre-pandemic levels, its underlying health may be weaker given increased healthcare activity has been the “crutch” supporting the UK economy.

“The main contributor to the recovery from the start of the crisis has been human health and social work activities and the reduction of the test and trace scheme and vaccination programme partly accounted for the slowdown in February,” she said.

“We still need to see a shift upwards in overall productivity levels but with the labour crunch intensifying, borrowing costs rising and business investment flagging that is proving elusive.”

Derrick Dunne, chief executive of You Asset Management, said: “GDP currently sits at 1.5 per cent above pre-pandemic levels, however with consumer confidence plummeting and inflation expected to rise once again on Wednesday, fears that the UK could enter a recession this year are rife.

“Whether or not this will become a reality remains to be seen but, against this uncertain backdrop, it would be prudent for investors to review their portfolio and consider where any adjustments may be needed to keep them on course to meet their long-term goals.”

Chancellor of the Exchequer, Rishi Sunak, welcomed the positive growth seen across the UK economy in February.

“Russia’s invasion of Ukraine is creating additional economic uncertainty here in the UK, but it is right that we are responding robustly against Putin’s unprovoked invasion,” he said.

By Sally Hickey

Source: FT Adviser

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UK economy stalls with concerns that growth may shift into reverse

UK output slowed in February indicating the economic recovery was weaker than thought even before the additional surge in inflation triggered by Russia’s invasion of Ukraine.

Figures from the Office for National Statistics show monthly gross domestic product (GDP) expanded by just 0.1 per cent as the rebound in tourism-related industries was offset by a reduction of activity in the healthcare sector and declines in industrial and construction output. Manufacturing slumped amid supply chain constraints that have left car producers and others struggling to source vital components and materials.

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February’s growth was down sharply on the 0.8% expansion recorded the previous month, and also undershot analysts’ consensus forecast of 0.3%.

GDP is now 1.5% above its pre-pandemic level of February 2020, but there are growing concerns that the economy could slip into recession as pressure on consumer spending mounts. Household consumption is the largest element of expenditure across the UK economy, accounting for 59% of the total in 2021.

“The news that the economy was hardly growing at all in February suggests the economy had a little less momentum in Q1 than we had previously thought, and increases the risk of a contraction in GDP in the coming months as the squeeze on household real incomes intensifies,” said Ruth Gregory, senior economist at Capital Economics.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said labour shortages, rising borrowing costs and flagging business investment have made an upward shift in overall productivity “elusive”.

“Although the economy is 1.5% above its pre-pandemic level, the underlying health may be weaker particularly because increased healthcare activity has been the crutch supporting the economy during the pandemic,” she said.

“The main contributor to the recovery since the start of the crisis has been human health and social work activities and the reduction of the test and trace scheme and vaccination programme partly accounted for the slowdown in February.”

Chancellor Rishi Sunak – whose popularity has slumped after offering only limited support to consumers weathering the inflationary storm – welcomed the continued growth. However, some economists believe the economy is set to shrink in the coming months.

James Smith at ING predicts GDP will come in at roughly 1% for the first quarter before a “small contraction” of up to 0.3% during the three months to June. Thereafter, the “jury’s out” on whether this will evolve into the technical definition of a recession, which would require a subsequent fall in GDP in the third quarter of the year.

Samuel Tombs of Pantheon Macroeconomics is also predicting a 0.3% decline in the second quarter, which he believes will persuade the Bank of England to stop raising benchmark interest rates after an increase to 1% next month.

Activity in the manufacturing sector fell 0.4% in February, led by a 5.4% drop in the production of transport equipment and a 4.3% decline in computer, electronic and optical products. Both have been disrupted by global shortages of microchips.

Tourism rose sharply as easing pandemic restrictions led to an increase in people booking holidays in the UK and overseas. Travel agencies and tour operators recorded growth of 33%, while hotels were up by 23%.

The Office for National Statistics said the impact of storms Dudley, Eunice and Franklin, which all hit the UK between the 16th and 21st of February, may have also weighed on growth.

“Most of those reporting a negative impact were in service industries with comments received from businesses operating in areas including accountancy, leisure parks and holiday centres, photography, hairdressing and beauty, leasing of construction equipment, restaurants and takeaways, and marquee hire,” the ONS said.

“However, some businesses reported a positive impact on turnover such as those working in fencing, torch sales, and temporary off-grid power.”

BY KRISTY DORSEY

Source: Herald Scotland

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UK economic growth slows to just 0.1% in February

The UK economy grew by just 0.1% in February, despite a strong resurgence of both inbound and outbound tourism activity – including travel agencies, hotels, and tour operators.

But growth has slowed sharply since January, when gross domestic product (GDP) jumped by 0.8% as people returned to normal life following a surge in Omicron rates in December 2021.

The figure of 0.1% for February falls short of the 0.3% growth predicted by most analysts.

Data from the Office for National Statistics (ONS) showed that monthly GDP is now 1.5% above its pre-pandemic level of February 2020.

But despite a rise in tourism, the UK economy was dragged down by a fall in production, which slipped by 0.6% and construction, which fell by 0.1%, the ONS said.

Car production in particular has fallen steeply in recent months, pushed down by the ongoing chip shortage and the closure of Honda’s plant in Swindon.

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Growth was also hampered by the reduction in the NHS Test and Trace and vaccination programmes, which made a strong contribution to GDP at the start of the year, according to Darren Morgan, director of economic statistics at the ONS.

The UK’s economy grew by 7.4% last year in a record rebound from a devastating 2020, when it suffered its biggest annual fall since just after World War One.

But last month, Chancellor of the Exchequer Rishi Sunak revised down the UK’s 2022 growth forecast to 3.8% from 6% in light of the growing cost of living crisis and surging energy prices following Russia’s invasion Ukraine.

In a statement on Monday following the release of the most recent GDP figures, Mr Sunak said: “I welcome the positive growth seen across the economy in February, which continues to recover from the pandemic, boosted by the support we provided.”

“Russia’s invasion of Ukraine is creating additional economic uncertainty here in the UK, but it is right that we are responding robustly against Putin’s unprovoked invasion,” he said, adding: “We are supporting families with the cost of living with £22bn of support this financial year.”

The average UK household will experience a £2,553 drop in income this year, half of which is as a result of the invasion of Ukraine, according to the Centre for Economics and Business Research (CEBR).

There is also expected to be a considerable jump in the prices we pay at the supermarket and petrol pump.

The CEBR predicts that inflation will now peak at 8.7% next quarter and then stay twice as high as expected until the second half of 2023. This means a shopping basket that cost £20 a year ago will cost almost £22 in the next few months.

The impact of deadly storms Dudley, Eunice and Franklin, which all hit the UK between 16 and 21 February, may have also weighed on economic growth, the ONS said.

“Most of those reporting a negative impact were in service industries with comments received from businesses operating in areas including accountancy, leisure parks and holiday centres, photography, hairdressing and beauty, leasing of construction equipment, restaurants and takeaways, and marquee hire,” the report stated.

“However, some businesses reported a positive impact on turnover such as those working in fencing, torch sales, and temporary off-grid power.”

Source: Sky News

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Return to the office boosts UK economy: Services sector clocks up one of its best months since Covid restrictions ended

Britain’s dominant services sector has clocked up one of its best months after Covid restrictions ended and workers returned to the office.

In an upbeat report on the state of the UK economy, S&P Global said its closely-watched index of activity in the sector rose to 62.6 in March, well above the 50 mark that divides growth from contraction.

It was the second strongest reading for 25 years, only beaten by the post-lockdown recovery last May – boosting hopes that the country can weather the cocktail of threats hanging over the global economy from the war in Ukraine to soaring prices.

Firms in the sector, from train operators and estate agents to restaurants and hairdressers, were boosted by workers returning to the office, the report said.

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The UK fared far better than the eurozone, which is still held back by worries about the pandemic and recession.

Tim Moore, economics director at S&P Global, said companies specifically mentioned ‘stronger demand arising from the return to offices, alongside a resurgence in the travel, leisure and entertainment sectors’.

But businesses fear rising inflation would squeeze their profit, and optimism for the year ahead was at its lowest level since 2020.

A mixture of factors, from supply chain bottlenecks to a reduction in supply of fuels from Russia, has bumped up costs.

The rate of inflation in prices charged in March was the steepest since the indexes began in 1996.

This will come as a blow to households who were looking forward to getting out and about, following the end of Covid restrictions, as the cost of everything has gone up.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, which compiled the report with S&P, said: ‘People returned to work and had a flutter of spending on hospitality and entertainment before energy and fuel prices increase in April and potentially purse strings are tightened again.’

He added that there were ‘fewer reasons to be cheerful this month’, despite a ‘stellar recovery’, as the cost of living surges.

Workers in the services sector were helped by a rise in job creation in March, as staffing numbers leapt at the fastest rate since October. Even so, businesses are struggling to find the right staff.

Moore said many businesses said they were yet to pass on the full extent of cost spikes.

In the eurozone, S&P said exports were declining as the war hit travel and transport.

Chris Williamson, chief business economist, said: ‘A recession [in the eurozone] is by no means assured, as the extent to which the economy could suffer in the coming months will depend on the duration of the war and any changes to fiscal and monetary policy.’

By LUCY WHITE

Source: This is Money

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UK economy back close to pre-pandemic levels, says ONS

The UK economy grew at a rate of 1.3% in the last three months of 2021, a faster pace than first thought and bringing GDP to just below pre-pandemic levels.

The Office for National Statistics (ONS) had previously estimated GDP grew by 1.0% between October and December last year.

“GDP grew a little stronger than we first thought in the fourth quarter, meaning it is now only 0.1 per cent below its pre-pandemic level,” said Darren Morgan, the ONS director of economic statistics.

The UK’s economy grew by 7.4% last year in a record rebound from a devastating 2020, according to the latest ONS estimates, but just missed the 7.5% initial estimate.

The ONS also revised its estimate of how much GDP collapsed at the start of the pandemic – drawing the number down from 9.4% to 9.3%.

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The news comes amid a cost of living crisis in the UK, with living standards set for their largest drop on record thanks to a perfect storm of rising inflation, the economic hit of the pandemic and Russia’s invasion of Ukraine.

Wages are failing to keep up with rising prices, according to the UK’s fiscal watchdog, as rapidly rising energy prices push inflation towards 9%, its highest level in 40 years.

According to the Office for Budgetary Responsibility (OBR), Russia’s invasion of Ukraine has had “major repercussions for the global economy, whose recovery from the worst of the pandemic was already being buffeted by Omicron, supply bottlenecks, and rising inflation”.

The war has left oil and gas prices far higher than their historical averages – a fact that will “weigh heavily on a UK economy that has only just recovered its pre-pandemic level”, the OBR said in its report released on Wednesday.

Higher energy bills will lead to further inflation, which in turn will put pressure on household consumption and erode incomes.

Coupled with rising taxes, this fall in spending power will lead to a decline of 2.2% in living standards this year and next – the largest fall on record.

As a result, living standards will not recover to their pre-pandemic level until 2024-25, the OBR added

Source: Sky News

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UK economy: What’s next for inflation, output and the pound?

As the UK economy has dealt with the blows of the Covid pandemic and Russia’s invasion of Ukraine, the Bank of England has had to roll with the policy punches in its effort to pursue financial and economic stability.

Amid an atmosphere of enduring conflict in the East and inflationary pressures, Bank of England governor Andrew Bailey spoke with Breugel director Gundstrom Wolff, laying out the present environment in the UK and how policy can stabilise finance, the economy and currency in the wake of a large-scale military clash, a pandemic and the UK-specific development of Brexit.

Bailey said that the present “shock from energy prices” was historic, greater than any single year of the inflation-stoked 1970s, albeit with the caveat that that decade featured several rough years in succession.

“In the UK, and indeed elsewhere, we are very much facing a very large shock to aggregate real income and spending. That is not something that we have a policy toward that can make it go away,” Bailey said. “It’s coming through energy prices, through imported goods, through some food and is very much what we’d tend to call trade shock in that sense. Inflation measures are well above target. Unfortunately, I think it’s best to think that there is some more to come on that front.”

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“We expect it to cause growth and demand to slow. We’re beginning to see the evidence of that in both consumer and business surveys,” Bailey added.

Tradeoff, unconventional shocks

Bailey said that the Central Bank’s goal was to return inflation to its target “a couple of years out” and ensure that real adjustment occurs sustainably with minimal volatility and disruption. Bailey also said that the BOE and its contemporaries around the world remained committed to a globalised, integrated economy, much as they were during the widespread financial crisis more than a decade ago.

Bailey focused primarily on the disruptions of the pandemic and the dispute between Russia and Ukraine, stating that those two globally impactful events overshadowed and muddied any comprehensive analysis of Brexit’s effects on the UK’s economy and trade.

He said that thus far he felt the Central Bank’s planning had been effective in the face of the harrowing Covid era, the calmer-than-expected Omicron variant period and pandemic recovery, which resulted in a tight labour market and an unforeseen buildup of personal savings.

He said, however, that those with fewer economic means bore a disproportionate brunt of the current circumstances because they did not benefit generally from the surge in savings while simultaneously experiencing greater exposure to rising energy costs.

A resolution to the crisis in Ukraine would go a long way toward solidifying the UK’s position and stabilising energy and commodities markets, Bailey said, though near-term pressure could make the situation worse before it improves.

Now approaching a month old, the conflict has brought a deluge of question marks, which Bailey said caused the BOE to revise its guidance regarding “further modest tightening” in the form of interest-rate hikes from “likely to be appropriate” to “may be appropriate.”

“We’re facing a very big shock, by any historical standard. We’ve got a very large tradeoff between inflation and output activity, with the two moving in opposite directions. There is a very high level of uncertainty,” Bailey said.

Behind the curve?

In prior instances of market shock, Bailey said that the current policy would be behind the curve, facing pressure to accelerate counter-inflationary measures, including rate hikes.

However, he said, this was not a typical instance of a demand shock, with some favourable economic indicators as well as the large scale of the disruptions giving some pause and cause for caution to policymakers.

“We’ve got a pandemic followed by a European war, on any scale that is a very difficult position to be in for policy. The task we have is clear, but it’s hard, but we will stick to it and all central banks are committed on that front,” Bailey said. “In our case, it’s appropriate to tighten policy in these circumstances, but we do so recognising the uncertainty.”

Forex implications, long-term prognosis

Bannockburn Global Forex chief strategist Marc Chandler assessed the broader strategy in the UK and its impact on the pound, which has produced a mixed forecast and tepid results in recent days even as stable currencies have been attractive to risk-off investors.

“Sterling has underperformed here in March. It is the second weakest major fx, off 2.45%, well less than the Japanese yen’s 7.1% decline. The Bank of England hiked rates but softened its guidance, and the market does not think it can keep pace with the (US Federal Reserve),” said Chandler, noting that the US two-year premium over the UK doubled in March, around 100 basis points and that he saw the pound as “heavy,” poised to drop to $1.28 or $1.29 from its present position near $1.38.

Bailey emphasised repeatedly the need for collaboration among central banks around the world in a globalised economy. Yet as tones grow more hawkish in many countries, including the US and Canada, the UK has opted for prudence.

“At the end of the day, Bailey talks like a hawk and acts dovishly,” Chandler said. “There are shades of former Bank of England governor Mark Carney, who was often talked about as the bad boyfriend who over-promised and under-delivered.”

By Andrew Knoll

Source: Capital

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