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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK economy ‘running on empty’ as high inflation threatens recession, and drives up borrowing costs – as it happened

United Kingdom Inflation United States National Debt (Topic) OBR
Commuters on London Bridge heading towards the City of London.
Commuters on London Bridge heading towards the City of London. Photograph: Bloomberg/Getty Images

Closing post

Time to wrap up, after growing signs that the UK, eurozone and US economies are slowing….

….and as rising inflation pushed up Britain’s debt repayment costs.

With railway workers continuing to strike, and British Airways’ Heathrow staff voting to walk out, a summer of industrial action looks increasingly likely.

And as Germany takes a step closer to rationing gas after a drastic drop in supplies from Russia, energy disruption this winter looms....

Updated

US private sector growth hits five-month low

The US economy slowed sharply in June as companies were hit by a drop in demand, according to the latest healthcheck on American firms.

Growth across the US private sector slowed to its lowest level since January, when the Omicron variant caused a massive surge in Covid-19 infections.

S&P Global Flash US Composite PMI, which measures activity in the sector, hit a five-month low this month, while manufacturing output is now shrinking.

Companies also reported a drop in new business, for the first time in almost two years, which underlines that demand is easing.

The report says:

Although service providers continued to indicate a rise in output, it was the weakest increase for five months.

Manufacturers fared worse, with factory production slipping into decline as the respective seasonally adjusted index fell to a degree only exceeded twice in the 15-year history of the survey, at the height of the initial pandemic lockdowns in 2020 and the height of the global financial crisis in 2008.

Weaker demand conditions, often linked to the rising cost of living and falling confidence, led to the first contraction in new orders since July 2020.

But athough inflationary pressures “remained marked in June”, the pace of input price inflation eased to the slowest for five months.

Traders are calculating that this means US interest rate may not rise as fast as thought -- if the economy is at greater risk of dropping into recession....

British Airways said it was ‘extremely disappointed’ after staff at London’s Heathrow airport voted in favour of strike action in a pay row today.

A spokesperson said in a statement:

“We’re extremely disappointed with the result and that the unions have chosen to take this course of action,”

“We are fully committed to work together to find a solution, because to deliver for our customers and rebuild our business we have to work as a team.”

Updated

The dates when British Airways’ staff at Heathrow would hold industrial action will confirmed in the coming days.

It is likely to be over the busy summer holiday period, the GMB union says, unless a pay deal is reached in time.

Nadine Houghton, GMB national officer, says holidaymakers face massive disruption -- but there is still time for BA to avoid a walkout, if it reverses pay cuts made during the pandemic.

“Our members need to be reinstated the 10% they had stolen from them last year with full back pay and the 10% bonus which other colleagues have been paid.

“GMB members at Heathrow have suffered untold abuse as they deal with the travel chaos caused by staff shortages and IT failures.

“At the same time, they’ve had their pay slashed during BA’s callous fire and rehire policy.

Here’s some snap reaction:

BA workers at Heathrow vote in favour of strikes in pay dispute

British Airways staff at London’s Heathrow airport have voted in favour of a strike for better pay, trade union GMB said.

The move could bring fresh disruption to the UK’s busiest airport, after passengers have already suffered significant disruption, delays and cancellations as airlines struggled to handle the increase in demand.

The dispute stems from BA using “fire and rehire” practices to cut workers’ pay during the pandemic when they could not fight back, the GMB union said.

A GMB spokesperson said earlier today that:

“All our members are asking for – and these are primarily low-paid women – is for BA to reinstate the 10% taken from them during the pandemic.”

Updated

Wall Street’s main indexes have opened a little higher, as investors continue to weigh up the risks of a US recession.

The Dow Jones Industrial Average has gained 121 points, or 0.4% in early trading to 30,604 points.

The broader S&P 500 (which sank into a bear market last week), is also 0.4% higher, while the tech-focused Nasdaq is up 0.3%.

Raffi Boyadjian, Lead Investment Analyst at XM syas:

Shares on Wall Street closed marginally lower on Wednesday as investors were unable to shake-off worries about the US economy contracting in the upcoming quarters. But neither was there any panic.

If anything, [Fed chair Jerome] Powell’s acknowledgement of the real threat of a recession might have been taken as a sign by some traders that the Fed will adjust its policy if the data worsens.

The UK’s offshore oil industry have told chancellor Rishi Sunak that his new windfall tax will hit investment.

Sunak met oil and gas chiefs in Aberdeen today, a month after executing a tight u-turn and imposing a levy on the earnings of energy companies.

Deirdre Michie, chief executive of Offshore Energies UK, has thanked Sunak for coming to Aberdeen but said the new tax would undermine the industry.

OEUK also says the sudden introduction of the 25% levy on oil and gas producers also threatened the UK’s reputation for fiscal stability.

Michie said:

“The Energy Profits Levy is an unexpected new tax that changes the basis for investments. We had a candid and constructive meeting with the chancellor to discuss these issues and our industry leaders were clear about their concerns, especially the impact on investor confidence. Both sides have committed to further discussions.

“We will work constructively with the UK government and do our best to mitigate the damage this tax will cause but if energy companies reduce investment in UK waters, then they will produce less oil and gas. That means they will eventually be paying less taxes and have less money to invest in low carbon energy.”

Back in the City, shares in online drinks retailer Naked Wine have plunged over 40% today after it predicted it will only breakeven this year.

Naked, which had seen a surge in sales in the pandemic lockdown, posted a £2m adjusted profit for the last financial year, up from a £1.5m loss a year earlier.

But sales growth slowed, up just 3% in the year to the end of March, or 73% higher than two year ago before the pandemic sparked a rush of interest.

Naked predicted that total sales this year would be between 4% lower and 4% higher, pointing to the uncertain macroeconomic background. Its customers pay a monthly fee, which is then spent on wine from independent winemakers.

Nick Devlin, chief executive, says:

Looking ahead Naked Wines is well positioned to continue to grow amidst a changing consumer environment. Our enhanced scale, attractive unit economics and healthy balance sheet allow us to continue to invest for growth.

At the same time we will not pursue growth at any cost, and our guidance is that we intend to trade the business at or around breakeven this year.

Shares in Naked, which hit a record high over 850p last year, are down almost 45% today at 162p.

Naked Wine’s share price
Naked Wine’s share price Photograph: Refinitiv

Over in the US, 229,000 people filed new unemployment claims last week, slightly more than expected.

The previous week’s total has been revised up, to 231,000, while the four-week average of claim (which are a proxy for layoffs) nudged up to its highest since late January.

Jobless claims have been moving up, generally, over the last few weeks, but are still around their pre-pandemic levels (after hitting the lowest in over 50 years this spring)

Heathrow airport could be hit by strikes this summer, as 700 check-in and ground staff vote on whether to walk out during the peak holiday period in a dispute with British Airways over pay.

As a second day of national rail strikes is under way, 700 workers employed by BA are being balloted on industrial action by unions including GMB and Unite, with the result of the vote expected on Thursday afternoon. The Unite ballot closes on Monday.

If they vote for strike action, it would be “likely during school holidays”, a GMB spokesperson said.

The dispute stems from BA using “fire and rehire” practices to cut workers’ pay during the pandemic when they could not fight back, the GMB union said.

European gas prices for delivery later this year have jumped, after Germany raised its level of alarm over disruptions to Russian gas supplies.

Berlin warned that Moscow’s decision to weaponise its energy exports had plunged Europe’s largest economy into a “gas crisis”, as it announced the second of three energy emergency phases.

Philip Oltermann, our correspondent in Berlin, reports:

The ministry said the reason for the warning was a reduction in Russian gas deliveries since 14 June amid continued high prices on the gas market. Should Russian gas deliveries via the Nord Stream 1 pipeline continue to remain at the low level of 40%, the ministry said in a statement, “a storage target of 90% by December cannot be reached without additional measures”.

“There’s no point pretending: the throttling of gas deliveries amounts to an economic attack on us by Putin,” said Robert Habeck, the minister for economic and energy affairs. “Putin’s strategy is blatantly to stir insecurity, to drive up prices and to drive a wedge through our society.”

“Even if it doesn’t feel like it yet: we are in a gas crisis,” he added. “From now on, gas is going to be a scarce good.”

The benchmark Dutch wholesale gas contract for winter 2002 has risen 7.7%, while the UK contract for delivery in the third-quarter of the year is up 5.9%.

Turkey’s central bank has bucked the trend of interest rate hikes, by leaving borrowing costs unchanged despite soaring prices.

The Central Bank of the Republic of Turkey (CBRT) left its policy rate on hold at 14% today, even though consumer price inflation surged to 73.5% in May.

Turkish inflation has roared higher after the CBRT cut interest rates several times last year, under pressure from president Recep Tayyip Erdoğan.

That weakened the lira dramatically, driving up import costs, before Russia’s invasion of Ukraine drove energy and food prices higher.

The central bank said disinflation would begin due to measures already taken, a potential end to the Ukraine conflict and favourable base effects.

“The Committee will continue to implement the strengthened macroprudential policy set decisively and take additional measures when needed.”

US sportswear maker Nike making a full exit from Russia, three months after suspending its operations there, the company said in an emailed statement to Reuters today.

It might be time to have a rummage through your wallet purse or piggy bank for any old paper banknotes lurking.

People have just 100 days left to use the paper £20 and £50 banknotes remaining in circulation, before they stop being legal tender status on 30 September.

The Bank of England is encouraging anyone who still has them to use them or deposit them at their bank or a post office before the end of September. More here.

Updated

Fuel prices climb again

The entrance to the M6 northbound Burton-In-Kendal service station.
The entrance to the M6 northbound Burton-In-Kendal service station. Photograph: Joel Goodman/The Guardian

There is no respite from rising inflation for UK motorists.

Petrol and diesel prices hit new records on Wednesday, despite a drop in wholesale petrol prices last week, new figures show.

The average price of petrol rose half a penny to 189.84p on Wednesday while diesel jumped almost a penny to 198p a litre, data from RAC Fuel Watch shows.

That will have stung drivers who had to take the car to work this week due to train strikes.

RAC fuel spokesman Simon Williams says:

“It seems as though we are just days away from the frightening prospect of the price of diesel averaging £2 a litre across the UK taking the cost of a full tank to a staggering £110. For drivers who still think in gallons this would be £9 a gallon.

“We’re surprised and disappointed to see the price of unleaded continuing to rise as the cost on the wholesale market tells a very different story. Over the course of last week delivered wholesale petrol averaged 148p a litre which should lead to a price of around 186p after factoring in 7p-a-litre retailer margin and VAT at 20%.

We suspect if retailers fail to reduce their prices in the next few days they will find themselves playing into the hands of the Competition and Markets Authority which is currently looking into their behaviour.”

The CMA is conducting a “swift high-level review of competition in the fuel retail market” following a request by Business secretary Kwasi Kwarteng:.

Petrol retailers have denied claims of profiteering, saying they are simply passing on higher prices for fuel.

But there were hopes that price rises would have topped out, after wholesale prices finally fell earlier this month.

Williams also points out that prices vary across the sector:

“The average price of a litre at a motorway services is now 203.45p for petrol and 205.88p diesel while at the cheaper end of the market the average paid at one of the big four supermarkets is 187.83p for petrol and 196.21p diesel.

The price of supermarket diesel has rocketed by 11p a litre in the last fortnight alone.”

Full story: UK economy starting to ‘run on empty’ as order books dry up

Britain’s economy is starting to “run on empty” as post-pandemic order books dry up and the highest inflation in 40 years affects confidence, the latest snapshot of the private sector has shown.

Flash estimates of the economy’s performance in June showed business optimism at its lowest since the early months of the Covid-19 pandemic in the spring of 2020 and the sharpest drop in new order volumes for a year.

The monthly survey of purchasing managers produced by S&P and the Chartered Institute of Procurement and Supply (CIPS) said overall business activity across the services and manufacturing sectors was unchanged on the 15-month low of 53.1 reached in May.

A reading above 50 suggests private sector activity is expanding while a reading below 50 points to contraction....

Here’s the full story:

UK retail sales weaken as inflation hits consumers

The UK’s cost of living squeeze has hit spending at UK retailers this month.

British retailers have reported a year-on-year fall in sales in June, the third month in a row in which sales volumes didn’t grow.

The CBI’s latest ‘distributive trades’ survey, just released, found that sales were seen as poor for the time of year in June and are expected to remain below seasonal norms in July too.

With demand softening, orders placed with suppliers fell in the year to June, while wholesalers also saw a sharp drop in sales growth.

Ben Jones, lead economist at the CBI, says inflation is eroding shoppers’ disposable income:

“Retail volumes are struggling as high inflation eats away at consumers’ budgets. The squeeze on household incomes appears to have offset any boost to activity from the extended Platinum Jubilee bank holiday earlier this month.

“There are also clearer signs that a downturn in consumer spending is beginning to ripple out across the wider distribution sector, with wholesalers seeing a 14-month period of robust sales growth come to a grinding halt this month.

“As business sentiment weakens, government action is needed urgently to prevent a deeper and more prolonged downturn. Creating a permanent investment incentive and tackling skills shortages by introducing immediate flexibility to the apprenticeship levy would be strong first steps for boosting confidence.”

The Norwegian central bank.
The Norwegian central bank. Photograph: Gwladys Fouche/Reuters

Rising inflation isn’t just a UK problem of course.

It’s just prompted Norway’s central bank to make its largest interest rate increase in two decades, as it joined the rush to raise borrowing costs.

The Norges Bank’s monetary policy committee has raised its benchmark interest rate by 50 basis points, from 0.75% to 1.25% - more than expected, and predicted another rate hike in August.

The hike came after Norwegian inflation hit 5.4% in April, a 13-year high (but still much lower than the UK, US or eurozone).

Britain has introduced a new tranche of trade sanctions against Russia, a notice published on the government website said, Reuters reports.

The ‘Notice to Exporters’ listed new measures including prohibitions on the export to Russia of a range of goods and technology, the export of jet fuel, and the export of sterling or EU denominated banknotes.

It also said there were new prohibitions on the provision of technical assistance, and financial services, funds, and brokering services relating to iron and steel imports.

The notice set out a further list of goods prohibited for export:

  • internal repression goods and technology
  • goods and technology relating to chemical and biological weapons
  • maritime goods and technology
  • additional oil refining goods and technology
  • additional critical industry goods and technology

Earlier this week we learned that the UK’s sanctions enforcement office has been trying to introduce the “most extraordinary package of sanctions ever implemented” in UK history with a group of just 70 staff.

UK consumer spending softened last week, as job ads fell

UK consumers’ spending on credit and debit cards fell slightly over the past week and the number of job adverts declined, which also indicates growth is slowing.

The ;atest weekly data from the Office for National Statistics found that credit and debit card spending fell two percentage points last week.

Spending fell in all categories, apart from “work related” (including spending on road fuel) which rose by 6 percentage points last week, as petrol and diesel prices continued to climb to new heights.

The number of jobs advertised by recruiters Adzuna fell by 5% in the week to June 17 to 123% of its pre-pandemic average.

A fifth of companies reported that their turnover decreased last month compared with April, while 14% reported a rise in turnover.

And over a third said that record energy prices had affected production, suppliers or both.

Consumer-facing businesses at particularly concerned that demand is slowing, says Rhys Herbert, senior economist at Lloyds Bank.

He also warns that small firms less able to protect themselves against inflation.

Here’s his take on today’s survey of UK purchasing managers:

“Even though today’s PMI index remained in growth territory the economic outlook remains cloudy. The one thing that is certain about the UK economy right now is the high degree of uncertainty. High inflation remains a key concern, but as its drivers are still primarily international, using interest rates to combat it creates its own pressure on an economy still shrugging off the effects of the pandemic.

“While there are now signs that blockages and delays in supply chains are easing, these are still well above normal and affecting prices. In particular, fuel and raw material costs remain very elevated, and while bigger businesses may be able to hedge these, that may be less of an option for smaller ones, which are left to explore other operational and financial options to ease pressures on their profit margins.

“Meanwhile, consumer-facing businesses, particularly, are becoming more concerned that demand is slowing. The squeeze on real spending power from high inflation on essentials, such as energy and food, leaves little room for other, more discretionary items. With further fuel cost rises to come and broader above-target inflation to remain for some time, businesses have almost certainly not yet seen the full effects of the squeeze on spending.”

UK firms are being hit by rising inflationary pressures, warns Dr. Peter Colman, partner at global consultancy Simon-Kucher & Partners:

“Another disappointing flash PMI for the UK this morning with Manufacturing down to 53.4 for June from 54.6 previously, though Services steadies at 53.4. These figures follow on from the slowdown in May’s data and yesterday’s record CPI reading, showing that inflationary pressures on the UK economy are continuing to build.

“It’s becoming increasingly obvious that UK businesses in the manufacturing and services sectors are caught between a rock and a hard place. With unprecedented levels of inflation, slowing volumes and recession fears, implementing price increases is the only viable option to address margin erosion – a solution that many businesses have been desperate to avoid but may no longer be able to do so.

“With no obvious end in sight, the agenda within many UK boardrooms is turning from growth to profitability.”

Supply chain managers are worried about the current cost of doing business, as inflation hits 40-year highs, says Duncan Brock, group director at CIPS:

“The economic uncertainty brought about by war disruptions, the cost of living crisis, and China’s Zero Covid-19 policy, have all dampened [UK] business optimism to its lowest point since the start of the pandemic.

Here’s the PMI report:

UK economy 'running on empty' as high inflation threatens recession

UK firms have been hit by a slowdown in new orders, indicating that the economy is ‘running on empty’ as business confidence falls to levels that typically signal a recession.

S&P Global’s survey of UK purchasing managers at services firms and manufacturers found that new order growth this month was the weakest since February 2021.

Factory bosses reporting a drop in new business for the first time in two years,

UK private sector firms said demand was hit by hesitancy among clients and squeezed budgets due to rising inflation.

Overall, June’s composite PMI index (which tracks activity in the economy) was unchanged at 53.1 in June, showing the slowest growth in a year, helped by orders placed in earlier months.

But the new order index fell to 50.8, the lowest since March 2021, showing near-stagnation.

Business confidence slumped to its weakest since May 2020, as firms worried about customers cutting back on spending, and the impact of rapid inflation on the longer-term economic outlook.

Job creation was the fastest for three months, led by stronger hiring in the service sector, while wage growth pushed up businesss costs.

Firms also kept raising their own prices, as they passed on higher energy, fuel and wage costs to customers.

Chris Williamson, chief business economist at S&P Global Market Intelligence says the data suggests the UK faces ‘a troubling combination of recession and elevated inflation’.

“The economy is starting to look like it is running on empty. Current business growth is being supported by orders placed in prior months as companies report a near-stalling of demand. Manufacturers in particular are struggling with falling orders, especially for exports, and the service sector is already seeing signs of the recent growth spurt from pent-up pandemic demand move into reverse amid the rising cost of living.

“Business confidence has now slumped to a level which has in the past typically signalled an imminent recession. The weakness of the broad flow of economic data so far in the second quarter points to a drop in GDP which the forward-looking PMI numbers suggest will gather momentum in the third quarter.

“While there are some signs that the inflation could soon peak, the survey data suggest the rate of inflation will meanwhile remain historically high for some time to come, indicating that the UK looks set for a troubling combination of recession and elevated inflation as we move into the second half of the year.

Updated

Full story: UK borrowed £14bn in May as inflation drove up interest debt costs

Government borrowing was higher than expected in May at £14bn as soaring inflation sent interest payments on the UK’s debt to a monthly record, my colleague Phillip Inman writes:

The Office for National Statistics (ONS) said debt interest payments leapt 70% on a year ago to £7.6bn, the third highest debt interest payment made by central government in any single month and the highest payment in May on record.

Some economists said the increase in borrowing and the UK’s slowing economy was likely to push government borrowing £20bn higher this year than the Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, expected at its last estimate in March.

Paul Dales, chief UK economist at the consultancy Capital Economics, said:

“With the economy weakening and interest rates rising, the public finances will probably perform worse this year than the OBR forecast.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the extra spending by the government to protect low-income families and pensioners from inflation would also dent the public finances in the second half of the financial year.

“Accordingly, we think that public borrowing will total about £130bn this year, well above the OBR’s £99bn forecast.

June’s ‘flash PMI’ report shows that the eurozone economy is slowing fast, explains Chris Williamson, chief business economist at S&P Global Market Intelligence:

“Eurozone economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost of living shock and slumping business and consumer confidence.

Excluding pandemic lockdown months, June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008.

The slowdown means the latest data signal a rate of GDP growth of just 0.2% at the end of the second quarter, down sharply from 0.6% at the end of the first quarter, with worse likely to come in the second half of the year. Inflows of new business have stalled, led by a slump in demand for goods and reduced demand for services from cash-strapped consumers in particular.

Eurozone business growth slumps as rising prices hit firms

Euro zone business growth has slowed sharply to a 16-month low, as demand stalled and rising prices hit customer spending.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI) has slumped to 51.9 in June from 54.8 in May, weaker than expected, and the lowest level since February 2021.

Manufacturing output contracted for the first time in two years and service sector growth cooled, particularly for consumer-facing services.

This will reinforce concerns that rising prices could push the eurozone into recession, after inflation hit a record high of 8.1% in May.

An index of new business dropped to a 16-month low of 50.0 -- the dividing line between growth and contraction.

With growth slowing, companies scaled back their expectations for output over the coming year to the lowest since October 2020 - just before the first Covid-19 vaccine results.

The report says:

Both the stagnation of demand and worsening outlook were widely blamed on the rising cost of living, tighter financial conditions and concerns over energy and supply chains linked to the Ukraine war and ongoing pandemic disruptions.

Price pressures meanwhile remained elevated at levels not seen prior to the pandemic, though a moderation of cost growth for a third successive month hinted at a peaking in the rate of inflation.

Private sector growth in both Germany and France has slowed sharply this month, which will fuel concerns that Europe’s economy is faltering.

In France, growth has slumped to its weakest since the peak Omicron disruption at start of 2022, the latest survey of purchasing managers shows.

In Germany, growth slowed for the fourth month in a row to a six-month low, signalling a “sustained loss of momentum in the private sector economy”.

We get the eurozone-wide PMI report in about 20 minutes....

The copper price has dropped to a 16-month low this morning, as concerns rise over a rise in Covid-19 cases in key consumer China and aggressive US interest rate hikes.

Copper is seen as a barometer of economic health; if the global economy dropped into recession, demand for metals would be dented.

Three-month copper on the London Metal Exchange is down over 1% at $8,673 a tonne, Reuters reports, after dropping to its lowest since February 19, 2021, at $8,564.50.

The pound is also weaker this morning, dropping by half a cent against the US dollar to $1.22.

Recession fears weigh on markets

A recession would put fresh strain on the UK public finances, knocking tax revenues and pushing up welfare spending.

And worries about an economic downturn have knocked European stock markets at the start of trading.

In London, the FTSE 100 index has shed 70 points, or 1%, to 7018 points, back towards last week’s three-month low. Mining companies are among the fallers.

Germany’s DAX has lost 0.5%, with France’s CAC 0.6% lower and Italy’s FTSE MIB down 1%.

Investors fear that interest rate increases to fight inflation could tip economies into recessions. Yesterday, US central bank chief Jerome Powell said the Federal Reserve was fully committed to bringing prices under control, even if doing so risked an economic downturn.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:

Market optimism couldn’t survive to Jerome Powell’s testimony yesterday, as he said that a recession is possible, and that calling a soft landing is ‘very challenging’ under the current circumstances.

More worryingly, Powell mentioned another risk: the risk of the Federal Reserve not managing to restore price stability and allowing inflation to get entrenched in the economy.

Updated

The larger-than-expected rise in public borrowing in May is an early blow for the government on a day when it is expected to lose two by-elections, says Paul Dales of Capital Economics:

What’s more, the combination of a further weakening in economic activity and more interest rates rises will probably mean that borrowing overshoots the OBR’s 2022/23 forecast of £99bn by at least £10bn.

That will limit the ability of the Chancellor to cut taxes and/or provide more grants to households when the cost of living crisis worsens later this year.

Here’s Bloomberg’s take:

The UK government borrowed more than forecast in May after a 70% surge in interest payments to service the national debt.

The budget deficit stood at £14 billion, £2 billion higher than economists had forecast. Overall government spending was higher than the Office for Budget Responsibility predicted in March, and receipts lower.

Higher interest rates and inflation boosted the money the Treasury spends to service its debt to £7.6 billion, the most for any May on record, from £4.5 billion a year earlier. The OBR is forecasting a surge to £19.7 billion in June.

Public finances 'off to a bad start' this year

Martin Beck, chief economic advisor to the EY ITEM Club, says the public finances have made a bad start to the financial year, and could get worse.

Although the May data showed central government current receipts continuing to grow strongly, the rise was not as robust as the OBR had anticipated. Similarly, the fall in central government spending was less steep than the OBR expected, with the impact of very high inflation on debt interest payments a factor.

“With April’s outturn revised up significantly, fiscal year 2022-2023 has got off to a disappointing start – borrowing over the first two months of the fiscal year was £6.4bn above the OBR’s forecast. The borrowing data is notoriously revision-prone, so this picture could change. But a further decline in the public finances looks likely as we move through the fiscal year.

A slowdown in economic growth could also hit tax revenues, Beck adds:

Growth in receipts is likely to come under increasing pressure from faltering activity

At the same time, government spending is set to come in well ahead of the OBR’s March forecast given that inflation and interest rates will be much higher, and the cost of the Government’s recent fiscal support package is yet to be incorporated into the OBR’s forecasts.

As a result, the EY ITEM Club expects borrowing to come in some way above the OBR’s March projection.

Sunak: Rising inflation and debt interest costs challenge the public finances

Chancellor of the Exchequer, Rishi Sunak, has warned that rising inflation is a challenge to the public finances:

“Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets.

“That is why we are taking a balanced approach - using our fiscal firepower to provide targeted help with the cost of living, while remaining on track to get debt down.

“Being responsible with the public finances now will mean future generations aren’t burdened with even higher debt repayments, and we can secure our economy for the long term.”

As this chart shows, UK borrowing is running ahead of forecasts this financial year (since April), and is higher than before the pandemic:

UK government borrowing
UK government borrowing Photograph: ONS

The cost of servicing UK government debt has increased considerably in recent months as inflation pushes up the interest paid to holders of RPI index linked gilts, explains Fraser Munro, public sector finance statistician at the ONS.

He’s pulled together the key points from May’s borrowing figures:

Introduction: Rising debt costs add to UK borrowing in May

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The UK government borrowed more than expected to balance the books last month, as rising inflation pushed up the cost of servicing the national debt.

May’s public finances, just released, show that the public sector spent more than it received in taxes and other income. This required it to borrow £14bn, £3.7bn more than the independent Office for Budget Responsibility (OBR) forecast -- and ahead of City forecasts of a £12bn monthly deficit.

That’s £4bn less than a year ago, due to the drop of pandemic spending such as the furlough scheme, and Test and Trace. But it’s £8.5bn more than in May 2019, before the coronavirus (COVID-19) pandemic.

As this chart shows, it’s the third-highest May borrowing on record (after 2020 and 2021).

UK government borrowing
UK government borrowing Photograph: ONS

Tax take increased year-on-year reflecting the reopening of the economy; Value Added Tax revenues were up 10%, and Business Rates bringing in 13% more than a year ago. That helped to lift tax receipts to £48.3bn, an annual increase of £3.4bn.

But interest payments on the UK national debt jumped by 70% compared with a year earlier. Britain spent £7.6bn on debt repayments, around £3.1bn more than a year ago when it cost £4.5bn.

That’s because the payments on some UK government debt, or gilts, are linked to the retail prices index measure of inflation (which hit 11.7% last month, we learned yesterday). So as the cost of living increases, so does the interest bill on the national debt.

The ONS says:

On an accrued basis, this month saw the third highest debt interest payment made by central government in any single month and the highest payment made in any May on record.

UK borrowing
UK borrowing Photograph: ONS

May’s borrowing lifted the national debt (excluding public sector banks) to £2.36 trillion, or around 95.8% of GDP.

Michal Stelmach, senior economist at KPMG UK, warns that “debt reduction this year remains a long shot”, given Rishi Sunak’s £15bn cost of living support package will add to borrowing.

“The pace of deficit reduction is set to slow over the coming months, with the government’s latest package of cost of living measures providing a net fiscal loosening worth 0.4% of GDP in 2022-23. We expect borrowing to overshoot the OBR’s March forecast by around £20bn this year, largely on account of higher spending and weaker economic growth.

“The debt profile will depend on the economic outlook which faces acute downside risks in the near term, while rising demand for healthcare coupled with falling working-age participation could also impede fiscal sustainability. We now expect public sector debt to peak in 2023-24, missing the OBR’s March forecast by two years.

Also coming up today

New surveys of purchasing managers in the UK, eurozone and US will show whether growth is slowing this month, as worries about a possible recession rise.

Millions of UK rail passengers faced another day of disruption as this week’s second strike begins. The rail industry is asking people to only travel if necessary today, with fewer than one in five trains in Great Britain expected to run.

With UK inflation hitting a 40-year high of 9.1% last month, industrial unrest could spread as the government faces more calls for pay rises that reflect the cost of living.

The country’s biggest teaching union is warning of strike action this autumn without an “inflation plus” deal.

Norway’s central bank is expected to raise interest rates, from 0.75% to 1%, while the Central Bank of the Republic of Turkey could leave rate on hold at 14%.

The agenda

  • 7am BST: UK public finances for May
  • 9am BST: Eurozone ‘flash’ PMI survey of manufacturing and services for June
  • 9am BST: Norges Bank interest rate decision
  • 9.30am BST: UK ‘flash’ PMI survey of manufacturing and services for June
  • 11am BST: CBI distributive trades survey of UK retail
  • Noon BST: Turkish central bank interest rate decision
  • 1.30pm BST: US weekly jobless claims report
  • 2.45pm BST: US ‘flash’ PMI survey of manufacturing and services for June

Updated

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