Closing post
Time for a recap.
The clouds covering the UK economy have darkened today, after mortgage approvals tumbled last month, company insolvencies jumped, and the IMF predicted Britain would be the only major industrialised country to see its economy shrink this year.
The Bank of England reported that mortgage approvals decreased to around 35,600 in December from 46,200 in November. Housing experts said higher interest rates and the cost of living squeeze had hit the housing market.
The number of companies falling into insolvency in England and Wales last year surged to its highest since 2009, according to figures from the Insolvency Service. Total company insolvencies registered in 2022 leapt by 57% to 22,109 from the previous year.
Uk households were hit by soaring price in supermarkets this month, with grocery inflation jumping to 16.7%.
2023 will be a rough year for the UK economy, according to the latest IMF forecasts which predict GDP will shrink by 0.6% this year, a downgrade of almost 1%.
The IMF revised up its forecast for global growth this year, though, to 2.9% from 2.7% before.
Labour shadow chancellor, Rachel Reeves, has told parliament that Britain has huge potential, but 13 years of Tory failure has been a “drag anchor on prosperity”.
She told MPs:
The UK is the only major economy forecast to shrink this year.
Weaker growth compared to our competitors for both of the next two years.
The World upgraded. The UK downgraded.
Growth even worse than sanctions-hit Russia.
Staff shortages, Brexit and mortgage costs are all holding the country back, experts say.
But there was better news from the eurozone – it avoided recession in the last quarter of 2022, with growth of 0.1%. France also managed modest growth in October-December.
Here’s the rest of today’s main stories:
Updated
Infosys, the company founded by Rishi Sunak’s father-in-law NR Narayana Murthy, is in a multimillion-pound dispute with the UK tax authorities.
HMRC and the Indian IT services firm, in which the prime minister’s wife, Akshata Murty, holds a stake of close to 1%, disagree over a corporation tax bill of about £20m, according to the company’s annual report.
The dispute, first revealed by the Times, is one of a clutch of tax issues the company has in a range of jurisdictions, including Australia.
Large tax disagreements that could affect a company’s operations or profits often have to be disclosed to shareholders and regulators. Infosys is publicly listed in India and New York.
US consumer confidence dips
Over in the US, consumer confidence has fallen as people grow more concerned about the economic outlook.
The Conference Board Consumer Confidence Index decreased in January, to 107.1, down from December’s upwardly revised 109 (where 100 was the average in 1985).
The Present Situation Index, which is based on consumers’ assessment of current business and labor market conditions. increased to 150.9 from 147.4 last month.
But the Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, fell to 77.8 from 83.4, which partially reverses December gain.
The Conference Board explains:
The Expectations Index is below 80 which often signals a recession within the next year. Both present situation and expectations indexes were revised up slightly in December.
Tesco has bought the brand and intellectual property of Paperchase, after the struggling stationery retailer collapsed into administration.
However, the deal does not include Tesco taking on the brand’s 106 stores across the UK and Ireland, leaving the future uncertain for Paperchase’s 820 employees.
The deal follows a difficult few months for Paperchase after rising costs and disappointing sales.
“Paperchase is a well-loved brand by so many, and we’re proud to bring it to Tesco stores across the UK,” said Jan Marchant, the managing director of home and clothing at Tesco.
Freddy Khalastchi, business recovery partner at accountancy firm, Menzies, said:
“After bleak data released this morning showed that corporate insolvencies rose by 7 per cent last quarter, it’s not surprising to see another well-known retail chains collapse under economic pressures.
“Spiking energy costs, rising interest rates, inflation, staff shortages and reduced customer spending will have all contributed to Paperchase’s collapse, as the business failed to secure a buyout.
The value of Darktrace has plummeted to a record low after the emergence of two new short sellers betting against its business, as the British cybersecurity firm was hit by a new wave of criticism of its sales, marketing and accounting practices.
The company, which earlier this month warned of slowing numbers of new customers signing up for its artificial intelligence-led security products, has attracted the attention of Quintessential Capital Management (QCM) and the London-based Marshall Wace, one of the world’s biggest hedge funds with $60bn (£49bn) in client assets.
Darktrace has been dogged by criticism and struggled to emerge from the spectre of its controversial co-founder Mike Lynch, the British billionaire fighting extradition to the US over fraud charges relating to the $11bn sale of his software company Autonomy to Hewlett-Packard in 2011. Lynch denies all charges against him.
The US hedge fund QCM has backed up its short position, publishing on Tuesday a 69-page document criticising the management and operations of Darktrace.
The firm alleges that questionable and aggressive marketing, sales and accounting practices were employed by Darktrace to drive up the value of the company before its multibillion-pound flotation in London almost two years ago.
Here’s the full story:
Twitter makes first interest payment on Musk buyout debt
Twitter has made its first interest payment on the $12.5bn of debt that Elon Musk used to take the social media giant private last year, Bloomberg reported overnight.
The social media group paid a group of seven banks, led by Morgan Stanley, who are still holding the debt after not managing to sell it on to investors.
The first coupon was expected to cost Twitter roughly $300m, according to Bloomberg calculations and market participants not involved in the Twitter deal.
Appetite for this debt may have weakened after Musk fired half of Twitter’s staff, spooking advertisers and leading to a slump in revenue.
Musk has been busy pushing through changes at Twitter, including the Twitter Blue subscription service, which lets users pay for the “verified” badge.
Twitter co-founder Biz Stone told the Guardian earlier this month that Elon Musk “doesn’t seem like” the right person to own Twitter, and that positive changes at the company had been unwound.
The UK economy has been hit by a triple-whammy in recent days, Liberal Democrat Sarah Olney tells MPs.
She cites the IMF’s prediction that the UK economy will shrink this year, figures from the ONS showing the horrors of the winter of discontent (almost a quarter of adults can’t keep warm, and 15% fear running out of food) and this morning’s figures showing the surge in insolvencies last year to the highest level since 2009.
Q: When and where will the Brexit benefits begin?
Treasury minister James Cartlidge says UK unemployment is the lowest in almost 50 years, helped by measures such as the pandemic furlough scheme. He repeats his earlier point about energy support for households.
Back in the global economy, Canada probably expanded by 0.4% in the final quarter of last year.
That’s according to Statistics Canada, which reports that real GDP edged up by 0.1% in November, following a +0.1% uptick in October.
Canadian GDP grew 0.1% in Nov and is expected to be unchanged in Dec. This means that GDP likely grew 0.4% in Q4 2022. Increases in retail and public sector growth were offset by declines in mining, finance, and energy sectors. #canada #gdp (@StatCan_eng) https://t.co/6zJsNsDrIP pic.twitter.com/WwF0F7T4bG
— MTS Insights (@MTSInsights) January 31, 2023
Labour MP Dame Angela Eagle tells the Commons the IMF’s forecasts are “devastating”, and “lay bare the economic incompetence of the government”.
Even santioned Russia is expected to do better than the UK this year, Eagle points out, adding that the government is unfit to run the country.
James Cartlidge reiterates that the IMF said the UK economy had done relatively well in the last year.
SNP Treasury spokesperson Stewart Hosie MP suggests the government should reform its windfall tax on energy companies, removing the 91p tax saving for every £1 spent on North Sea investment.
This, Hosie tells the House of Commons, would create a “meaningful windfall tax” which could support the economy and help small firms and households with their energy bills.
Treasury minister James Cartlidge says inflation is a global challenge, and the government wants to get it down. But, he points out, the average household will receive £1,300 of support this winter (from cost of living payments and the price cap on bills).
And on Hosie’s specific suggestion to change the windfall tax – Cartlidge say this would hurt the North Sea industry, and undermine energy security.
Updated
Q: Why the UK is still the only G7 economy that is smaller than before the pandemic, and the only G7 economy with its growth forecast downgraded this year, Rachel Reeves asks?
Treasury minister James Cartlidge says that since 2010, the UK has grown faster than France, Japan and Italy. He repeats that UK growth over the three years from 2022 to 2024 is expected to be higher than in Germany or Japan, and similar to the US.
And he cites the IMF’s overnight press conference, where IMF economic councellor Pierre-Olivier Gourinchas said the good news was that the UK economy had done relatively well in the last year, with estimated growth of 4.1% in 2022 – one of the highest in Europe.
Cartlidge then points out that the Covid-19 pandemic, and the Ukraine war, have both hit the UK economy this year, and claims Labour would have kept the UK locked down for longer.
Reeves: Tory failure has been a “drag anchor" on UK prosperity
Labour shadow chancellor, Rachel Reeves, has told parliament that Britain has huge potential, but 13 years of Tory failure has been a “drag anchor on prosperity”.
Responding to treasury minister James Cartlidge’s comments, Reeves says the IMF’s latest World Economic Outlook holds a mirror up to the UK’s wasted opportunities, adding “it is not a pretty sight”.
Reeves tells MPs:
The UK is the only major economy forecast to shrink this year.
Weaker growth compared to our competitors for both of the next two years.
The World upgraded. The UK downgraded.
Growth even worse than sanctions-hit Russia.
Reeves points out that the IMF chief economist, Pierre-Olivier Gourinchas, singles out higher mortgage rates as a reason for Britain’s poor performance.
She says:
The Tory mortgage penalty is devastating for family finances and is holding back our economy.
British business are paying the price for the “gaping holes in the Tories’ Brexit deal”, Reeves warns, adding:
It will fall to Labour to clean up this mess.
And she criticises Jeremy Hunt for not answering today’s urgent question:
If the Chancellor had ideas, answers or courage - he would be here today. But he is not.
The question people are now asking is this:
Are me and my family better off after 13 years of Tory government?
The answer is no.
And as the IMF show today – it doesn’t have to be this way.
Over in parliament, the Labour party have posed an urgent question on the IMF growth forecast for the UK, showing it is the only G7 economy forecast to shrink in 2023.
Junior Treasury minister James Cartlidge is responding, and defends the UK’s record.
He says the government has three economic priorities – to halve inflation this year, grow the economy and get debt falling.
Cartlidge points out that the IMF said today that it thinks the UK is on the right track, and that the UK had one of the best estimated growth rates for 2022 (revised up to 4.1%).
The UK’s cumulative growth over 2022-2024 is predicted to be higher than Germany and Japan, and similar to the US, Cartlidge adds.
Cartlidge insists that the government’s actions, “from unleashing innovation across AI, financial services and a host of other sectors to improving technical education and protecting infrastructure investment” will spur growth in coming years.
But, he adds, the IMF’s figures do confirm the UK is not immune to pressures hitting all advanced economies (a point chancellor Jeremy Hunt made earlier).
The best tax cut possible now is to lower inflation, the minister says.
2022 was a rough year for Norway’s sovereign wealth fund, which this morning reported a record loss of 1.64 trillion Norwegian kroner, or £132bn, for last year.
The so-called Government Pension Fund Global cited “very unusual” market conditions for its return of -14.1% last year.
Norges Bank Investment Management CEO Nicolai Tangen said in a statement.
“The market was impacted by war in Europe, high inflation, and rising interest rates. This negatively impacted both the equity market and bond market at the same time, which is very unusual,”
“All the sectors in the equity market had negative returns, with the exception of energy.
Global stock markets fell by around 20% last year, while the UK’s FTSE 100 index managed a small rise (lifted by oil companies).
As the IMF reports that the UK is the only major advanced economy set to slide into recession this year with growth forecast for other leading economies, it comes as no surprise that corporate insolvencies continue to rise.
So says Inga West, restructuring and insolvency counsel at law firm Ashurst, who warns UK firms are suffering a ‘particular toxic cocktail of economic pressures’.
West explains:
This trend is evident in both the latest quarterly insolvency statistics (which reveal a 30% increase on the previous quarter and the highest quarterly total since Q4 2008) and in the annual statistics for 2022 (which show that levels of corporate insolvencies are the highest they have been since 2009).
In line with the pattern we have seen over the past few months, the increase in corporate insolvencies has been driven by the large number of creditors’ voluntary liquidations in the last quarter (comprising 85% of all corporate insolvencies). This is a process typically favoured by the SME market. There is little doubt, however, that greater numbers of large corporate insolvencies are on the cards: the increase in the number of administrations in Q4 2022 indicates that larger corporates are also succumbing to the prevailing macroeconomic conditions and I expect to see these numbers continuing to climb over the next quarter.
Recent high profile failures have included Joules, Byron, BritishVolt and Flybe – demonstrating that this recession will impact a lot of sectors. There are very few sectors that are immune to the particular toxic cocktail of economic pressures currently facing UK business.”
KPMG partner pay climbs
Average pay for partners at big four audit firm KPMG topped £717,000 in 2022, despite fines and higher operating costs, my colleague Anna Isaac reports.
The rise, of around 4%, is set against a backdrop of a surge in dealmaking which has also benefited the company’s competitors.
Companies have spent large sums with management consultancies as they struggled to adapt to the impact of the Covid-19 pandemic. The pandemic-triggered slump in some parts of the economy also spurred mergers and acquisitions.
KPMG’s revenue rose 12% to £2.72bn with a 24% increase in advice on deals and a 22% increase in consultancy. Its profit rose 3% to £449m before tax.
With a paypacket of more than £700,000, KPMG partners still earn less than rivals on average. The earnings for an equivalent role at Deloitte is more than £1m, and PwC partners’ pay also rose above £1m last year due to a one off-pay out of £100,000. EY partners’ pay was around £800,000 in 2022.
The firm is also set to increase its audit fees as higher costs and regulatory pressures mount.
“The price of audit will have to increase this year,” the company’s CEO Jon Holt said in an interview with Bloomberg, adding:
“The sector is facing a number of upward cost drivers, from new audit and accounting standards to inflationary pressures.”
Partners would have been paid more, were it not for the risk of future regulatory fines. Last year, the company was fined more than £14m after former staff forged documents and misled the regulator over audits for companies including the collapsed outsourcer Carillion.
The company reported a median gender pay gap of 20.9% in April last year and a mean gap of 32.1%. The gap for bonuses - even excluding partners - was around 40% by both median and mean measures.
The surge in energy prices has helped US oil giant Exxon to smash profit records last year.
Exxon has reported it made an adusted profit of around $59bn in 2022, or around $6.7m per hour. That is not only a company record, but a historic high for the Western oil industry, Reuters says.
Reuters’ Sabrina Valle explains:
Exxon’s results far exceeded the then-record $45.2 billion net profit it reported in 2008, when oil hit $142 per barrel, 30% above last year’s average price. Deep cost cuts during the pandemic helped supercharge last year’s earnings.
“Overall earnings and cashflow were up pretty significantly year on year,” Exxon Chief Financial Officer Kathryn Mikells told Reuters. “So that came really from a combination of strong markets, strong throughput, strong production, and really good cost control.”
Exxon said it incurred a $1.3 billion hit to its fourth quarter earnings from a European Union windfall tax that began in the final quarter and from asset impairments. The company is suing the EU, arguing the levy exceeds its legal authority.
Exxon smashes Western oil majors' earnings record with $59 billion profit https://t.co/DmzMlFXgfY
— Reuters Energy and Commodities (@ReutersCommods) January 31, 2023
Energy news: National Grid has completed the sale of a majority stake in its gas transmission and metering business.
National Grid has sold a 60% equity interest in the business to a consortium comprised of Australia’s Macquarie Asset Management and Canada’s British Columbia Investment Management Corporation.
Back in March last year, National Grid agreed to sell the unit for an enterprise value of about £9.6bn. But in August, Britain reportedly launched an investigation into the deal under new national security rules.
Bloomberg: Brexit is costing the UK £100bn a year in lost output
Brexit is costing the UK economy £100bn a year, new analysis by Bloomberg Economics shows.
The analysis highlights how Britain’s exit from the European Union three yeas ago has caused wide-ranging damage, from business investment to the ability of companies to hire workers.
Bloomberg reports:
Economists Ana Andrade and Dan Hanson reckon the economy is 4% smaller than it might have been, with business investment lagging significantly and the shortfall in EU workers widening.
“Did the UK commit an act of economic self-harm when it voted to leave the EU in 2016? The evidence so far still suggests it did,” Andrade and Hanson wrote in a note published Tuesday. “The main takeaway is that the rupture from the single market may have impacted the British economy faster than we, or most other forecasters, expected.”
More here: Brexit Is Costing the UK £100 Billion a Year in Lost Output
At 11pm tonight the UK will mark the third anniversary of the moment that it left the European Union.
As my colleague Andrew Sparrow points out, increasingly, by a margin of around 60% to 40%, Britons are saying that this was a mistake.
But ministers are marking the anniversary by talking up the supposed benefits, with prime minister Rishi Sunak insisting the UK has made “huge strides” in harnessing the freedoms unlocked by Brexit to tackle generational challenges.
Sunak says:
And in my first 100 days as prime minister, that momentum hasn’t slowed – we’re cutting red tape for businesses, levelling up through our freeports, and designing our own, fairer farming system to protect the British countryside.
Here’s the latest:
The surge in company insolvencies across England and Wales last year should serve as a warning to business owners bracing for a recession to act early, according to Robert Young, R&I director at accountancy firm Azets.
Young says:
The IMF predicts that the UK will be the worst performing of the big economies in 2023. The alarming statistics and gloomy outlook are driven by a perfect storm of working capital and supply chain pressures, as well as rising interest rates and reducing consumer confidence. Business leaders must remain alive to the pressures and must manage their finances – and their stakeholders – very closely.
“In times of economic decline, we expect to see the number of insolvencies increasing. However, it is the number of liquidations that is of particular concern as this highlights the high number of businesses ceasing to trade. Liquidation is an end-of-life process and should be avoided at all costs, as this is very rarely of benefit to the creditors and employees.
“Spotting the warning signs and seeking early advice is absolutely crucial as this will ensure that the widest range of options is available and will maximise the chances of survival.”
England and Wales see most company insolvencies since 2009
The number of companies collapsing into insolvency in England and Wales has hit its highest level since shortly after the financial crisis, after jumping over 50% last year.
There were 22,109 company insolvencies registered in 2022, official figures show, which is the highest number since 2009 and 57% higher than in 2021.
The Insolvency Service, which released the data, says:
The increase compared to 2021 was driven by the highest annual number of Creditors’ Voluntary Liquidations (CVLs) since the start of the series in 1960.
The number of CVLs in 2022 was approximately 21% higher than if the pre-pandemic trend had continued.
In a CVL, a company’s directors decide to voluntarily shut down the company because it has become insolvent and unable to continue to trade.
Gareth Harris, partner at RSM UK Restructuring Advisory, fears that the next six months will be very tough for companies, given the UK’s economic weakness:
‘These Q4 insolvency numbers have confirmed that the “excess insolvencies” which have been put off by the Government Covid support packages are now in free flow. We expect these high liquidation numbers to continue for a couple more quarters before slowly tailing off as the recession softens.
‘But, the next 6 months may be the toughest for UK business since the early 1990s as almost all economic indicators paint a gloomy picture and survival will represent success for many. This will however create opportunity for those strong businesses who may be able to capitalise if they can move quickly.’
Sarah Rayment, managing director at Kroll, fears there will more insolvences, particularly in sectors reliant on consumer spending.
Rayment says:
“Business failures have been suppressed in recent years as many businesses took on Government backed Covid loans through the pandemic in addition to wider support measures.
This year, in a tough macroeconomic environment, we are beginning to see a significant uptick in insolvencies as the support measures unwind, cashflows become tighter together with the wider economic headwinds
Updated
The Bank of England has also reported a sharp slowdown in borrowing last month.
Consumers borrowed an additional £0.5 billion in consumer credit, on net, compared with £1.5 billion borrowed in November, today’s data shows.
It’s a sign that consumer spending may have weakened at the end of the year, says Thomas Pugh, economist at audit, tax and consulting firm RSM UK.
Pugh says this raises the chances that the economy contracted in Q4 and fell into recession.
‘Admittedly, the slowdown in credit growth could reflect timing around Christmas spending. The overall fall in consumer credit was driven by £0.5 billion of repayments on credit cards, the first net repayment since December 2021, after a large jump in November.
But we already know retail sales volumes were especially weak in December and the drop in borrowing suggests overall spending also dropped.
There is now probably a 50:50 chance that GDP in December fell by the 0.4% needed to drag Q4 as a whole into the negative.
Eurozone shrugs off recession fears with small pick-up in GDP
The eurozone grew by 0.1% in the last quarter of 2022, according to preliminary data just released by Eurostat.
That’s a slowdown on the third quarter of last year, when the euro area expanded by 0.3%, but it beats forecasts of a 0.1% contraction.
Ireland (+3.5%) recorded the highest quarterly increase in GDP, followed by Latvia (+0.3%), and Spain and Portugal (both +0.2%), while we learned earlier that France grew by just 0.1%.
The highest declines were recorded in Lithuania (-1.7%) as well as in Austria (-0.7%) and Sweden (-0.6%). Germany’s economy shrank by 0.2%.
Euro area #GDP +0.1% in Q4 2022, +1.9% compared with Q4 2021: preliminary flash estimate from #Eurostat https://t.co/U8NTPUudEJ pic.twitter.com/xYrlTg6HQT
— EU_Eurostat (@EU_Eurostat) January 31, 2023
This means Europe lagged behind the United States at the end of last year. US GDP expanded at a 2.9% annualized pace in the fourth quarter, or by around 0.7% quarter-on-quarter.
UK mortgage approvals slump: what the experts say
The slump in mortgage approvals in December show that higher interest rates and the cost of living squeeze dampened economic activity at the end of last year, City economists say.
Ashley Webb, UK economist at Capital Economics, explains:
Mortgage approvals fell for the fourth consecutive month, falling from 46,200 in November to 35,600 in December, the lowest level since May 2020. That leaves approvals around 45% below their pre-pandemic levels and we expect elevated mortgage rates to keep approvals suppressed in the coming months. This weakness is likely to reflect the fact that the effective interest rate on newly drawn mortgages has continued to increase – by 32bps in December to 3.67%.
However, with 75% of all outstanding mortgages on fixed interest rates, many existing borrowers have yet to feel the full effects of higher interest rates. That’s one reason why we expect the drag on activity from higher interest rates to intensify in the next six months.
The housing market is now in the midst of “a significant slowdown”, says Karen Noye, mortgage expert at Quilter:
“Over the past few months, we have witnessed a sizeable fall in the level of demand in the market. While mortgage rates have dipped somewhat since the highs seen towards the end of last year, monthly costs remain far higher than many people had become accustomed to in recent years.
When coupled with rising energy bills – particularly now the winter has truly set in and people are becoming more reliant on their heating - we may be entering a time where more people begin to consider putting their properties up for sale in favour of a cheaper home. House prices have started to fall in recent months, and should the level of demand continue to decrease at the same time more people put their homes on the market, we will likely see this trend continue and a switch from the seller’s market to a buyer’s market could materialise.
Simon Gammon, managing partner at Knight Frank Finance, says activity picked up in January, though.
“The traditional property market Christmas slowdown came early in 2022 as prospective buyers opted not to act during the chaotic weeks after the mini-budget. Mortgage approvals for house purchase reveal just how poor sentiment was during the period.
“January has been much more active, which will show in next month’s data. It is clear now that many buyers’ merely postponed house moves rather than cancelled them altogether.
UK mortgage approvals tumble
Just in: the number of UK mortgages approved for house purchases fell sharply last month, in the latest sign that the housing market is cooling.
Mortgage approvals decreased to around 35,600 in December from 46,200 in November, new figures from the Bank of England show, which is a rather larger fall than expected.
It’s the lowest monthly reading since May 2020, when demand was hit by the pandemic lockdowns, and is the fourth consecutive monthly decrease in mortgage approvals.
If you exclude the Covid-19 pandemic period, house purchase approvals are at the lowest level since January 2009, the Bank says.
💥Shockingly small number of mortgages approved in January, according to Bank of England data just out - just 35,612.
— Andy Bruce (@BruceReuters) January 31, 2023
Lowest number since the financial crisis, if you exclude the pandemic. Reuters poll of economists had pointed to 45,000 https://t.co/bAqMGlW0lt
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 32 basis points, to 3.67% in December, the BoE reports.
Mortgage rate surged after the disastrous mini-budget in late September, and were slow to fall once the panic in the bond market eased.
That increase in mortgage rates was one factor pushing down house prices at the end of last year.
With the Bank of England expected to hike its benchmark interest rate to 4% on Thursday, from 3.5%, analysts are predicting house prices will keep falling.
European markets have dropped this morning, despite the IMF upgrading its forecast for the world economy this year.
The pan-European Stoxx 600 has dropped by 0.6%, as has the UK’s FTSE 100 which is down 52 points at 7,732 points.
Investors are anxious about tomorrow’s meeting of the US Federal Reserve, concerned that the Fed may sound more hawkish about future interest rate rises.
Russ Mould, investment director at AJ Bell, explains:
This week’s US central bank decision on interest rates is incredibly important to the future direction of stock markets. Investors have been feeling quite relaxed of late, with a risk-on mentality when it comes to bidding up equities. Increasingly a lot of people have become confident that US rates are close to their peak in this part of the cycle, hence a strong run for many markets since late 2022.”
“But what if they’re wrong? A sense of nervousness has been creeping into the markets in recent sessions, evident by another bad showing on Wall Street last night. That’s extended to Asian and European stocks on Tuesday, causing a wobble among the main indices.
“With many stocks delivering large gains in the past few months, it’s understandable that some people want to take their money off the table. Locking in profits now means they are not gambling on what the Fed does next.
Here’s our news story on the shake-up at Tesco:
More European growth figures have been released this morning, highlighting the strain on economies as household spending falls.
Austria’s economy contracted by 0.7% in the fourth quarter of 2022, according to the Wifo research institute, as a drop in private consumption weighed on growth.
The Gross Domestic Product (GDP) in Austria contracted 0.70 percent in the fourth quarter of 2022 over the previous quarter. https://t.co/UXd4BQXDY2 pic.twitter.com/VRai44Xzqq
— Simply Investor (@InvestorSimply) January 31, 2023
The Czech Republic also stumbled, with GDP shrinking by 0.3% in October-December.
The Czech Statistical Office says that final consumption expenditure of households had a negative influence on growth, wiping out the impact of external demand and expenditure on gross capital formation.
The Gross Domestic Product (GDP) in Czech Republic contracted 0.30 percent in the fourth quarter of 2022 over the previous quarter. https://t.co/VrXpi2X7uM pic.twitter.com/G7DPgN1DLB
— Simply Investor (@InvestorSimply) January 31, 2023
All the Tesco staff affected by the closure of its remaining counters and hot delis next month will be offered alternatives roles at stores.
Explaining the decision to shut these counters, Tesco says:
We first announced changes to our counters back in 2019, and we’ve been reviewing them on an ongoing basis ever since.
We have seen a significant decrease in demand for our counters over the last few years, and our customers no longer say they are a significant reason for them to come in store and shop with us. Instead, they are choosing to buy from our wide range of great quality products available in our aisles.
The majority of our stores no longer operate any counters. In the small number of stores that do still have them, many are only open with reduced days and times – and we have strengthened our in-aisle ranges to ensure that customers can still find the meat, fish and deli products they want.
We have therefore decided to close our remaining counters and hot delis from 26 February, and the space will be repurposed to better reflect our customers’ needs. All affected colleagues will be offered alternatives roles in store.
Where we can work with a third party to offer a counter experience in-store, we will continue to do so.
Updated
Tesco UK and ROI chief executive officer, Jason Tarry, says the supermarket chain hopes to find new roles for those hit by the shake-up of its management structure, and other changes.
Tarry explains:
“These are difficult decisions to make, but they are necessary to ensure we remain focused on delivering value for our customers wherever we can, as well as ensuring our store offer reflects what our customers value the most.
“Our priority is to support those colleagues impacted and help find alternative roles within our business from the vacancies and newly created roles we have available.”
While Tesco is cutting the number of lead and team managers in large shops as part of a shake-up of its management structure, impacting around 1,750 workers, it is also introducing around 1,800 new shift leader roles in stores. Those workers will lead operational duties on the shop floor.
Tesco to shake-up shop management roles and shut remaining counters and hot delis, impacting 2,100 jobs
Newsflash: supermarket chain Tesco says it plans to reduce the number of lead and team managers in its large UK stores, impacting around 1,750 workers.
In addition, a further 350 roles across Tesco’s UK business will be impacted by localised changes, such as the closure of eight pharmacies at Tesco stores and reduced hours at some in-store post offices.
Tesco says it also plans to close the remaining counters and hot delis in UK stores from February 26th.
Tesco store management shake-up plus other changes including pharmacy closures to hit 2,100 jobs
— John-Paul Ford Rojas (@JPFordRojas) January 31, 2023
Updated
Speaking of inflation… the IMF is hopeful that price pressures will ease this year.
About 84% of countries are expected to have lower headline inflation in 2023 than in 2022, today’s World Economic Outlook predicts.
Global inflation is forecast to fall from 8.8% in 2022 to 6.6% in 2023, and fall again to 4.3% in 2024.
However, that would still leave average annual headline and core inflation above pre-pandemic levels in more than 80% of countries.
IMF chief economist Pierre-Olivier Gourinchas has warned that inflation could remain stubbornly high if tight labour markets push up wages, leading to higher interest rates. Plus, an escalation of the war in Ukraine could potentially destabilize energy or food markets and further fragment the global economy.
Gourinchas says central banks should be careful not to cut interest rates too early:
The inflation news is encouraging, but the battle is far from won. Monetary policy has started to bite, with a slowdown in new home construction in many countries.
Yet, inflation-adjusted interest rates remain low or even negative in the euro area and other economies, and there is significant uncertainty about both the speed and effectiveness of monetary tightening in many countries.
Where inflation pressures remain too elevated, central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path. Easing too early risks undoing all the gains achieved so far.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, also warns that the UK’s shrinking workforce is hitting growth:
“The IMF now expects the UK economy to shrink by 0.6% this year, which is a stark downgrade from previous expectations. This is a direct contrast to other major economies who have seen their outlooks upgraded because of resilient consumer demand. The UK is facing some specific problems, including its over-exposure to high energy retail prices, which are weighing on household budgets.
The UK also has a significant labour problem, which was initially caused by Brexit but has been made worse by a shrinking workforce since the pandemic. Mortgage rates are also prohibitively high in the UK which adds further pressure to the economy because it limits how much money people will spend on non-essentials. Ultimately, the UK has a productivity and demand problem, which when put together creates a very difficult environment.
There’s a chance the UK could muster a better performance than the IMF is predicting, given upgrades to expectations from other bodies in recent months. The market will remain very sensitive to interest rate and inflation readings until we have a clear path out of the stagnation.
UK grocery price inflation rises to record 16.7%
More bad news: British grocery inflation has hit a record 16.7% in the four weeks to January 22, as households continued to be hammered by soaring food and drink prices.
Market researcher Kantar says this means families faced a potential £788 annual rise in the cost of their regular shopping basket as a result of rising prices, unless they change their shopping habits.
At 16.7%, grocery inflation was the highest since Kantar started tracking the figure in 2008. Prices are rising fastest in markets such as milk, eggs and dog food, it says.
This is a sharp jump on December’s grocery inflation reading of 14.4%, which lifted Christmas spending to a record £12.8bn.
Fraser McKevitt, Kantar’s head of retail and consumer insight, says January’s increase in prices was ‘staggering’:
“Late last year, we saw the rate of grocery price inflation dip slightly, but that small sign of relief for consumers has been short-lived.
Grocery price inflation jumped a staggering 2.3 percentage points this month to 16.7%, flying past the previous high we recorded in October 2022.”
Digging into the IMF’s latest forecasts, they show that about 90% of advanced economies are projected to see a decline in growth in 2023.
But the US, the eurozone and Japan are all expected to grow this year, unlike the UK.
Here’s the details:
In the United States, growth is projected to fall from 2.0 percent in 2022 to 1.4 percent in 2023 and 1.0 percent in 2024. With growth rebounding in the second half of 2024, growth in 2024 will be faster than in 2023 on a fourth-quarter-over-fourth-quarter basis, as in most advanced economies. There is a 0.4 percentage point upward revision for annual growth in 2023, reflecting carryover effects from domestic demand resilience in 2022, but a 0.2 percentage point downward revision of growth in 2024 due to the steeper path of Federal Reserve rate hikes, to a peak of about 5.1 percent in 2023.
Growth in the euro area is projected to bottom out at 0.7 percent in 2023 before rising to 1.6 percent in 2024. The 0.2 percentage point upward revision to the forecast for 2023 reflects the effects of faster rate hikes by the European Central Bank and eroding real incomes, offset by the carryover from the 2022 outturn, lower wholesale energy prices, and additional announcements of fiscal purchasing power support in the form of energy price controls and cash transfers.
Growth in the United Kingdom is projected to be –0.6 percent in 2023, a 0.9 percentage point downward revision from October, reflecting tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets.
Growth in Japan is projected to rise to 1.8 percent in 2023, with continued monetary and fiscal policy support. High corporate profits from a depreciated yen and earlier delays in implementing previous projects will support business investment. In 2024, growth is expected to decline to 0.9 percent as the effects of past stimulus dissipate.
Government minister Richard Holden has argued the International Monetary Fund (IMF) has been “wrong” before, and predicted that the UK will outperform its latest economic forecasts.
Holden, who is Parliamentary Under Secretary of State at the Department for Transport, told Times Radio:
“They’ve been wrong in the last two years, the OECD were also wrong over the last two years. I think Britain can beat those predictions.”
“[The IMF] have been wrong in the last two years…I think Britain can beat those predictions.”
— Times Radio (@TimesRadio) January 31, 2023
Transport minister Richard Holden tells #TimesRadio post-Brexit trade deals will ensure the UK economy is “world leading”. pic.twitter.com/aJqqs1wAQ5
On Thursday, the Bank of England will release its own updated forecasts – and probably raise UK interest rates by another half a percent, to 4%. The BoE may upgrade its outlook, having warned in November that Britain could suffer its longest recession in century.
Updated
IFS's Paul Johnson: shortage of workers, higher mortgage costs and Brexit hitting UK
Labout shortages, high mortgage costs, and Brexit challenges are all weighing on the UK economy, says Paul Johnson, director of the Institute for Fiscal Studies.
Speaking on Radio 4’s Today Programme, Johnson points out that the UK’s performance doesn’t look quite so bad if you look at 2022 and 2023 together. The IMF estimates the UK economy grew by 4.1% last year, faster than the US’s 2% or the eurozone’s 3.5%.
But there are several factors affecting the UK more than other countries, Johnson says.
One, in particular, is the loss of people from the labour force, where the UK has lost more than half a million workers. That’s due to people retiring early, and “immigrants not coming in from the European Union, and so on”, Johnson says, adding:
That’s not affecting any other country in Europe…. That’s a particular challenge for us.
Secondly, higher interest rates are feeding through very quickly to mortgages in the UK.
And thirdly, the UK has “the continuing challenges from Brexit” – today, incidentally, is the third anniversary of the UK’s departure from the European Union.
Paul Johnson also warns that there is only a “limited amount” that government’s can do in the short run to improve the economic outlook. He thinks chancellor Hunt is correct to focus on bringing inflation down.
Q: Is any of this a result of Liz Truss’s brief premiership?
Johnson replies that most of the immediate effects have gone – the UK’s borrowing costs are similar to other countries again (after surging after the mini-budget), while the exchange rate has recovered (the pound is worth $1.235 today, having hit a record low of $1.03 in the autumn).
But, there are long-term consequences of political instability, he adds, particularly in terms of how happy international companies are to invest here, and what risk premium they might take on the UK.
Despite downgrading its UK growth forecast this year, the IMF has said it thinks the UK economy is now “on the right track” following the autumn statement, points out Victoria Scholar, head of investment at interactive investor:
“The International Monetary Fund (IMF) has predicted that the UK will be the only major economy out of the 15 in the report including sanction-rocked Russia to shrink in 2023. The fund expects the UK economy to contract by 0.6% this year, downgraded from growth of 0.3% in its previous forecasts. The British economy is expected to contract on the back of high energy prices, tax increases and rising interest rates.
However the IMF said the Treasury appears to be on the right track after the Autumn Statement and the fund upgraded the UK’s growth outlook for next year from 0.6% to 0.9%. Interestingly, the IMF did not mention Brexit as a reason because of the UK’s underperformance.
The UK’s latest GDP figures saw the UK economy grow in November by 0.1% versus expectations for a contraction, Scholar points out:
It hangs in the balance whether the UK will narrowly stave off a recession or not. At the start of the year, Prime Minister Rishi Sunak pledged to halve inflation and grow the economy. While inflation is already showing signs of easing, the IMF’s forecast indicates the latter pledge may be more difficult to achieve.
The IMF showed its support for the government’s fiscal prudence in the Autumn Statement in stark contrast to the fiscal fiasco around the mini-budget in September. This suggests that the Treasury is unlikely to pull any rabbits out of the hat at the Spring Budget on 15th March with Chancellor Jeremy Hunt expected to stick to tax increases rather than cuts as taming inflation remains an ongoing priority.”
Updated
IMF downgrades UK forecasts: what the media says
There’s plenty of media reaction to the IMF’s prediction that Britain’s economy will shrink this year as the cost-of-living crisis hits households hard, leaving the UK with the worst performance of all the advanced nations.
The Financial Times points out that even Russia – hit by sanctions following the Ukraine war – is expected to grow this year. They say:
The fund upgraded its forecasts for most leading economies and said the global outlook had brightened.
But it identified the UK as an exception and said the British economy would shrink by 0.5 per cent between the final quarter of 2022 and the final quarter of this year. Even Russia’s economy is now likely to outpace the UK’s, growing 1 per cent this year, according to the IMF forecasts.
Bloomberg points out that higher interest rates and tighter fiscal policy (government tax and spending policy) are blamed for slump:
Britain faces the bleakest two years of any major industrial nation with a recession in 2023 and the slowest growth of peers in 2024, the International Monetary Fund predicts.
The UK will be the only Group of Seven member whose economy will shrink this year, with a contraction of 0.6%, the IMF said. The Washington-based institution downgraded its outlook by a massive 0.9 percentage point from October, saying higher interest rates and taxes along with government spending restraint will exacerbate a cost-of-living crisis.
The Daily Mail says Britain has been hit with a “devastating forecast”, which adds to the pressure on Jeremy Hunt to produce a convincing plan for recovery.
While the Daily Telegraph points out that business leaders including Marks & Spencer chairman Archie Norman and Sir James Dyson have already been critical of the Government’s economic approach, adding:
The Prime Minister and the Chancellor are however resisting calls to cut taxes in the upcoming budget, with Mr Hunt insisting on Friday that inflation needed to come down first.
And in the Guardian, my colleague Larry Elliott writes:
The UK chancellor, Jeremy Hunt, last week warned a sense of declinism was hampering the UK’s economic recovery, and has come under pressure to come up with a credible plan to boost growth.
His speech, which focused on “enterprise, education, employment and everywhere”, was widely criticised by business leaders as being devoid of policies.
You can read the International Monetary Fund’s latest World Economic Outlook here.
Global growth is slowing in 2023 but should rebound in 2024. China reopening, a strong US labor market with cooling inflation, and a mild winter in Europe have all helped avoid the worst. Read our latest #WEO: https://t.co/4ifKc9qi4j pic.twitter.com/f41UeRtHFW
— IMF (@IMFNews) January 31, 2023
French economy grew 0.1% in Q4 2022
Just in: France’s economy slowed at the end of last year, but did better than economists predicted.
The French economy eked out growth of 0.1% in the fourth quarter of 2022, according to preliminary gross domestic product (GDP) figures just released.
That’s a slowdown compared to economic growth of 0.2% in the third quarter, but does beat forecasts – economists expected France to stagnate in Q4.
It also beats Germany, which shrank by 0.2% in Q4. We don’t yet know how the UK economy fared in the October-December quarter.
Rachel Reeves MP, Labour’s Shadow Chancellor, says the IMF’s forecasts show Britain needs a proper plan for growth:
“Britain has huge potential - but too many signs are pointing towards really difficult times for our economy, leaving us lagging behind our peers.
“The government should be doing all it can to make our economy stronger and to get it growing.
“It is the only way that we can move beyond lurching from crisis to crisis as we have been for far too long.
“Labour has a proper plan for growth that will get our economy back on track. Our Green Prosperity Plan and our active partnership with business will get our economy growing so we can get out of this spiral and onto a better path.”
Updated
Hunt: UK not immune to pressures on advanced economies
Chancellor Jeremy Hunt has responded to the IMF report, saying nearly all advanced economies were facing headwinds.
Hunt declared:
“The Governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted, however these figures confirm we are not immune to the pressures hitting nearly all advanced economies.
“Short-term challenges should not obscure our long-term prospects.”
[the IMF’s message, though, is that the UK is an exception to the brightening global prospects this year]
Introduction: IMF forecasts UK recession this year
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
Growth, or the lack of it, is the main issue today after the International Monetary Fund released its latest economic forecasts overnight … and as we await eurozone GDP figures this morning.
The IMF’s message for Britain was grim – the UK is the only advanced economy expected to fall into recession this year.
UK GDP is forecast to shrink by 0.6% this year, the worst forecast for any G7 country this year, which is a 0.9 percentage point downward revision from October’s forecasts.
The IMF blamed the downgrade on tighter government spending policies and higher interest rates (which may be raised again on Thursday), and the burden from still-high energy retail prices on household budgets.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, said 2023 would be “quite challenging” for the UK as it slipped from top to bottom of the G7 league table.
He added:
“There is a sharp correction.”
The move piles more pressure on UK chancellor Jeremy Hunt, who’s facing calls from business groups for a more ambitious growth strategy, and demands from some Conservative MPs for tax cuts.
This contraction would follow 4.1% growth in 2022, the IMF says, one of the fastest growth rates among advanced economies last year.
The broader economic picture has brightened a little, though, the IMF says, citing “signs of resilience and China reopening”.
The IMF has lifted its forecast for the world economy this year: global growth will slow from 3.4% in 2022 to 2.9% in 2023 – an upgrade on its previous forecast of 2.7%.
The IMF’s Gourinchas says China’s sudden reopening paves the way for a rapid rebound in activity.
Gourinchas writes:
The global economy is poised to slow this year, before rebounding next year. Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity.
Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining.
Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe. Inflation, too, showed improvement, with overall measures now decreasing in most countries – even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.
Also coming up….
We find out today how the French, Portuguese, Italian and the wider eurozone economy fared in the final quarter of last year.
Yesterday we learned that Germany’s GDP shrank unexpectedly in Q4, by 0.2%, putting Europe’s largest economy at risk of a winter recession.
The agenda
6.30am GMT: French Q4 2022 GDP report
8.55am GMT: German unemployment report for January
9.30am GMT: Portugal’s Q4 2022 GDP report
9.30am GMT: UK mortgage approvals and consumer credit data for December
10am GMT: Italy’s Q4 2022 GDP report
10am GMT: Eurozone Q4 2022 GDP report
1.30pm GMT: Canadian December and Q4 2022 GDP report
2pm GMT: US house price index
Updated
