Afternoon summary
Time for a quick recap
Europe’s stock markets are rallying, after Ukraine’s forces made rapid gains against Russia in the north east of the country. The Stoxx 600 index of European countries has now gained 1.5%, to the highest level since the end of August.
News that Ukrainian forces had advanced rapidly in Kharkiv province have lifted the euro and the pound too.
Gas prices have dropped, on optimism that Ukraine’s successes could lead to an easing of the energy crisis.
STOXX 600 AT HIGHEST LEVEL SINCE AUG. 30, LAST UP 1.5%
— Breaking Market News (@breakingmkts) September 12, 2022
The UK economy has returned to growth, partly thanks to the economic lift from hosting the Women’s Euros and the Commonwealth Games.
GDP increased by 0.2% in July, compared with June when the Jubilee bank holidays weighed on activity. The service sector led the recovery, while industrial production and construction output both fell.
UK GDP grew 0.2% MoM in Jul after a -0.6% MoM decline in Jun. Services grew 0.4% MoM after a decline last month while production fell -0.3% MoM and construction fell -0.8% MoM. Consumer-facing services grew 0.6% MoM. #uk #GDP (@ONS) https://t.co/EG2limFWbu pic.twitter.com/vUHegBshnw
— MTS Insights (@MTSInsights) September 12, 2022
Worryingly, the economy stagnated over the last quarter, the Office for National Statistics reported. Several economists warned that the UK could fall into recession this quarter.
Craig Erlam, senior market analyst at OANDA, says UK growth “continued to struggle”
The UK economy grew slightly less than expected in July, with growth supported by consumer-facing services on the back of the Women’s EUROs and the Commonwealth Games.
With the additional bank holiday this month, the economy could be facing a small technical recession, albeit one that won’t be nearly as bad as was expected prior to the cap on energy bills.
There’s a lot more data to come this week which should show consumer spending slipping as inflation remains above 10% and the labour market still strong.
In other news….Britain’s biggest housebuilders privately lobbied for the government to ditch rules requiring electric car chargers to be installed in every new home in England, documents have revealed.
The FTSE 100 construction firms Barratt Developments, Berkeley Group and Taylor Wimpey were among the companies who argued against the policy in responses to an official consultation seen by the Guardian.
The “blatant lobbying efforts” were criticised by Transport & Environment, a campaign group.
Britons must develop a spirit of “radical generosity” to prevent lives being lost because of soaring gas and electricity bills this winter, the head of the World Energy Council (WEC) has warned.
Mourners hoping to travel to London to pay their respects to the Queen are being told to prepare for “unprecedented” demand on transport and in stations, with hundreds of thousands expected to make the trip.
London Underground services have suffered severe disruption on Monday morning due to “power supply problems”, Transport for London (TfL) said.
And the UK government contractor Serco has announced the planned retirement next year of its chief executive, Rupert Soames, who said “it is now time for me to outsource myself” after leading the controversial company since early 2014.
In New York, stocks have opened higher as the rally in Europe feeds through to Wall Street.
The S&P 500 index of US shares has gained 0.7%, or 28 points, in early trading to 4,095 points.
There are similer gains on the tech-focused Nasdaq, and the Dow Jones industrial average of 30 large companies.
DOW JONES UP 128.01 POINTS, OR 0.40 PERCENT, AT 32,279.72 AFTER MARKET OPEN
— Breaking Market News (@breakingmkts) September 12, 2022
S&P 500 UP 22.76 POINTS, OR 0.56 PERCENT, AT 4,090.12 AFTER MARKET OPEN
NASDAQ UP 58.86 POINTS, OR 0.49 PERCENT, AT 12,171.17 AFTER MARKET OPEN
Ukraine’s military progress, and hopes that the US inflation rate could fall tomorrow, perhaps to 8% per year from 8.5% in July, are lifting stocks.
Fiona Cincotta, senior financial markets analyst at City Index, explains:
Another falling inflation print could suggest the start of a trend. While the Fed is still likely to hike rates by 75 basis points in September, it could adopt a less hawkish stance after. This optimism is being reflected in an increased demand for stocks, pushing the indices high and a falling USD.
The upbeat mood is being helped as well by advances by Ukraine in the war. Suddenly investors are opening their eyes to the possibility of a sooner end to the war.
Electrolux has warned of a steep drop in demand for its home appliances across Europe and in the US, a signal that consumers are cutting back on big-ticket items.
The drop in demand has prompted the firm to launch a major cost-cutting plan, as the FT explains:
The grim outlook from the world’s second-largest home appliances manufacturer after Whirlpool is one of the starkest signs yet of the toll high inflation is having on consumers.
The Swedish company said on Monday that demand in the third quarter fell at a “significantly accelerated pace” compared with the second quarter and that it expected sales to remain weak in the US and Europe next year.
President and chief executive Jonas Samuelson said he expected consumer confidence to stay low in Europe, adding that “I think people will hold on to their wallets quite hard.”
Electrolux warns on profits as rising inflation hits demand for appliances https://t.co/ZyF94DSMYh
— Financial Times (@FT) September 12, 2022
European natural gas prices now back to July levels and close to halving from the top. I’m not sure where we’ll end up this winter, it might very well halve again. If it does, it would still be 2-3 times higher than periods of “high“ prices pre-2021. But the bubble has popped. pic.twitter.com/7Htv6E6SEQ
— Aslak Berg (@BergAslak) September 12, 2022
“The wind of change” seems to be blowing for euro/dollar, which has gained almost 3% over the last four trading sessions, reports Marios Hadjikyriacos, senior investment analyst at XM:
European governments finally seem ready to intervene in the energy market by capping power prices for households, taking some of the burden off the consumer and putting it on the shoulders of the state.
Meanwhile, the ECB has decided to defend the single currency by rolling out a three-quarter point rate increase last week to stop the bleeding, and the pendulum in the war has started to swing in Ukraine’s favor after the latest counter-offensive.
All of these factors have joined forces to engineer a short squeeze in the euro.
Shares and euro lifted by Ukrainian advances
European stock markets are continuing to rally, as investors welcome the rapid advances made by Ukrainian forces in recent days.
The pan-European Stoxx 600 index is up 1.3%, on track for a two-week closing high, following Ukraine’s advances in the northeast of the country in recent days.
There are gains in Germany (1.5%), France (+1.2%), and Italy (+1.8%), as well as the UK (where the FTSE 100 has jumped 1.4%), holding onto those earlier gains.
Wall Street is set to open higher too.
The euro and pound are still up around one cent against the US dollar, on hopes that the energy crisis which is driving Europe towards recession could ease.
Hani Redha, a multi-asset portfolio manager at PineBridge Investments, says:
“The Russia-Ukraine situation is creating some glimmers of hope for the market that there might be a resolution and provide some relief on the intensity of the energy shock.”
Ukraine reported its military had forced Russian forces from more than 20 towns and villages in the last day – during its successful counter-offensive in the northeastern territories. Russian forces were fleeing deep into the occupied areas of the Donbas or back into Russia itself, they said.
Gas prices are also continuing to drop, to around their lowest levels in a month.
The wholesale contracts for October, November and December delivery in the UK are currently down around 6% today, and down around a third from their peaks in the panic late last month.
Adam Cole of RBC Capital Markets points out, though, that European gas prices are much higher than in the US:
Ukraine’s recapture of a large amount of territory over the weekend has brought significant relief for near-term natural gas prices and this is one factor driving the rally in EUR/USD today. But longer-term prices imply a structural shift higher that will remain a constraint on European growth and, in our view, the euro.
The latest move lower in near-month European futures (-8% today) has taken prices to a 7x premium to the US – down from a peak of more than 10x two weeks ago.
Kit Juckes, currency expert at Société Générale, agrees that the news from Ukraine is encouraging…. but cautions:
There are many steps between news of Ukrainian success in one part of the conflict with Russia and signs that Europe’s energy costs can come down enough to improve the economic outlook.
And even if that were to happen, we can no more easily go back to ignoring dependency on cheap imported Russian gas, than we can ignore the fact Humpty Dumpty is made out of eggshell.
Updated
China will continue to roll out phased policies to stabilise its economy with a focus on reviving consumption and boosting investment, and implement these policies as soon as possible, state media cited Premier Li Keqiang as saying on Monday.
China will implement a variety of measures to stabilise growth, employment and prices, Premier Li said (via Reuters).
Premier Li was quoted by state radio saying:
“China will promote the recovery of consumption as the main pulling force and make greater efforts to boost effective investment, “
Li also said China would accelerate building key projects and increase policy bank financing based on the needs of local economies.
Heathrow Airport welcomed almost three times as many passengers in August than it did in the same month last year.
New figures show that six million people passed through the London airport’s terminals last month - up from 2.2 million last August.
It was still below the pre-coronavirus total of 7.7 million passengers in August 2019, however, with Heathrow capping its daily passenger numbers to avoid a repeat of the chaotic scenes earlier this year.
That cap was recently extended to the end of October.
We shouldn’t get too excited that the UK posted 0.2% growth in July, cautions Charles Hepworth, investment director at GAM Investments.
He points out that this morning’s growth report was below forecasts, with industrial production and construction both shrinking for a second consecutive month.
“It feels like a recession bullet may have been dodged temporarily, but there are plenty more salvoes coming this quarter and in the fourth quarter so it is likely only a matter of time before a recession is confirmed.
“A further rise in inflation in this month’s reading [due on Wednesday] will keep pressure on the Bank of England to act again –hardly a good set-up for a pro-growth environment.
We expect at a minimum a 0.5% hike but 0.75%, which seems to be “de-rigueur” for central bankers at the current time, cannot be ruled out.”
Updated
Serco shares fall as Soames outsources himself
In the City, shares in outsourcing group Serco have fallen 6% after long-serving CEO Rupert Soames announced his retirement after eight years at the helm.
My colleague Jasper Jolly has the detials:
The UK government contractor Serco has announced the planned retirement next year of its chief executive, Rupert Soames, who said “it is now time for me to outsource myself” after leading the controversial company since early 2014.
Soames, 63, will step down as chief executive on 1 January 2023, by which point he will have led Serco for nearly nine years. He will be replaced by Mark Irwin, the chief executive of Serco’s UK and Europe division, the company said on Monday in a statement to the stock market. Soames will remain as an adviser until September 2023.
Serco is one of the most prominent beneficiaries of the government’s push to outsource services once seen as core functions of the public sector, ranging from running prisons to housing people seeking asylum. It has faced repeated scandals over the quality of its services as well as a near-£23m fine in 2019 for overcharging for the electronic tagging of offenders – including some who were dead – before Soames joined.
The company also took a key role in the UK government’s response to the coronavirus pandemic. It was paid more than £600m to run about a fifth of the Covid-19 testing sites and contract-tracing call centre workers, in a programme that repeatedly faced criticism for alleged poor performance as well as concerns over possible tax dodging by subcontractors used by Serco.
Here’s the full story:
Borrowers have nearly 1,000 fewer mortgage deals to choose from than they did a year ago, with more than 500 deals vanishing since last month.
The number of available fixed and variable rate home loans has shrunk to 3,890 - marking the lowest level since April 2021, Moneyfacts.co.uk said.
Some 517 fewer residential mortgages were available in September than the total counted by Moneyfacts just a month earlier, in August.
Back in September last year, 4,812 mortgage deals were available - 922 more deals than there are this month.
There are also now 1,425 fewer mortgages than there were at the start of December 2021, before the recent run of Bank of England base rate rises – including August’s 50 basis point rise.
With cheap deals vanishing, and borrowers keen to protect themselves from rising borrowing costs, lenders can afford to play ‘hard to get’, reports property agent Emma Fildes:
Lenders fickle relationship with borrowers means they only want to get into bed on their more conservative terms. Whilst inflation soars & buyers want to cement an economical relationship, lenders can afford to play hard to get @thetimes @imogent_ pic.twitter.com/WmFlffDrhi
— Emma Fildes (@emmafildes) September 11, 2022
Updated
MPs likely to be recalled after Queen’s funeral next week for emergency ‘budget’, No 10 signals
MPs are likely to be recalled to parliament for an emergency budget next week, our Politics Live-blogger Andrew Sparrow reports:
The Downing Street lobby briefing has just finished, and the prime minister’s spokesperson strongly hinted that we will get what in effect would be an emergency budget next week, where Liz Truss will announce her plans for immediate tax cuts.
Truss promised such an emergency budget during the leadership contest, and in her speech to MPs last week she said Kwasi Kwarteng, the chancellor, would be making a “fiscal statement” later this month.
She refers to it as a “fiscal event” rather than a budget (perhaps because holding a formal budget would require the Office for Budget Responsibility to update its economic forecasts), but in practice it is going to be just like a normal budget – only much bigger.
The death of the Queen, which led to parliament being in recess this week, put those plans on hold. But at the lobby briefing, when asked if there would be a fiscal event next week, the spokesperson replied:
We are still planning to deliver a fiscal event this month. We would not do that in recess. Beyond that, we have not set out a date.
In practice, that means the emergency “budget” is pencilled in for next week. MPs were meant to be on recess next week, because the Lib Dems were supposed to be holding their party conference then, but that has been cancelled. They could return to parliament after the Queen’s funeral a week today.
Labour is having its party conference the following week, and the Conservatives are having theirs the week after (starting on Sunday 2 October), and so in practice next week is the only slot available. When this was put to the spokeperson, he did not confirm this – but did not deny it either.
NIESR: We think UK remains in recession
NIESR, the economic thinktank, predict that the UK economy will contract by 0.1% in the third quarter of the year, as high inflation hits consumer spending and confidence.
That would put the UK into a technical recession, as GDP has already fallen by 0.1% in the second quarter of this year.
NIESR points out that UK construction and manufacturing both shrank in August, according to the latest surveys of purchasing managers, while the services sector slowed sharply.
Stephen Millard, deputy director for macroeconomic modelling and forecasting, NIESR, says:
“GDP grew by 0.2 per cent in July following the large fall of 0.6 per cent in June. This was stronger than we had expected and was driven by a rise in services, particularly consumer-facing services, with production and construction continuing to fall.
That said, GDP in the three months to July was flat relative to the previous three months and we think the UK economy remains in recession.”
⚠️Our latest #NIESRGDP Tracker suggests the UK economy will contract by 0.1% in the third quarter, with growth slowing as #inflation maintains its drag on consumer demand and confidence
— National Institute of Economic and Social Research (@NIESRorg) September 12, 2022
⚡️We therefore think the UK economy remains in #recession 📈📊⬇️https://t.co/S65g1Ohq57 pic.twitter.com/Wb5c5npQ3g
Record increase in over-65s in jobs market.
The number of people over 65 in work across the UK has hit record levels.
There were 1.468m over-65s in employment in April-June, more than ever before, following a record increase of 173,000 on the quarter.
That suggesting that the cost of living crisis is leading some older workers to return to the labour force.
This increase was driven by rises in part-time work, the Office for National Statistics reports, with many new hires working relatively few hours.
The industries where informal employment is more common, such as hospitality and arts, entertainment and recreation, saw some of the largest increases.
Many investors expect Europe will need to introduce some gas rationing to get through the winter.
That’s according to Deutsche Bank’s latest survey of market participants, which found that investors are pretty bearish.
A majority also expect the US stock market to hit new lows, and bond prices to fall further, pushing yields higher.
Here’s the key points:
Respondents are expecting the next big move in the S&P 500 to be lower over higher, and more than 90% of respondents still think the S&P 500 has yet to find its bottom for the cycle
Respondents are also structurally bearish on sovereign bonds as well, where nearly 80% expect the next move in 10yr Treasuries and Bunds to be notably higher (to 5% for TSYs, 3% for Bunds), than lower (to 1% for TSYs, 0% for Bunds).
Nearly 90% of respondents expect the next US recession to start before the end of 2023 but less think 2022 than before the summer break.
Most expect that Europe will have to institute some form of gas rationing to get through the coming winter, with most respondents in Europe expecting to curb their own energy usage
On other market risks, respondents are expecting Covid (ex-China’s impact) and the impending Italian elections to prove benign affairs.
Wholesale gas prices have eased lower this morning.
The UK month-ahead wholesale gas price has dropped 5% to 358p per therm. That would be the lowest settlement price in over a month (before the surge in gas price in mid August).
The European benchmark gas price for October delivery has dropped 5% too.
Updated
Germany’s economy expected to shrink next year
Germany’s will fall into recession next year, a leading economic research group warns, as due to the dramatic rise in energy costs due to the war in Ukraine.
The Ifo institute has predicted that German’s econony will shrink by 0.3% next year, reversing its forecast of 3.7% growth made three months ago,
IFO has also lifted itss forecast for 2023 inflation by 6 percentage points to 9.3%.
Timo Wollmershaeuser, Ifo’s head of forecasts, warned that Germany is facing a hard winter.
“The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus.”
.@ifo_Institut Economic #Forecast Autumn 2022: Inflation Stifles Private #Consumption - German Economy Facing a Hard Winter - Gross domestic product will increase by 1.6 percent this year and then contract by 0.3 percent next year. https://t.co/x0LAOlGpWo pic.twitter.com/DrelDT62BT
— CESifo (@CESifoNetwork) September 12, 2022
IFO points out that Germany’s economy has been cooling since the summer, with high inflation hitting consumer spending, and manufacturers hit by ongoing supply problems and the global economic slowdown.
Bank of England to suspend market operations for State funeral
The Bank of England’s CHAPS interbank payment system will be suspended on Monday, due to Queen Elizabeth’s state funeral.
The BoE said CHAPS will be closed on 19th September, in line with its normal bank holiday arrangements.
CHAPS handled around 174,000 payments each day, in the year to February 2021, with an average payment value of £2.1m. That works out at around £367bn each working day.
CHAPS is used by banks and large corporations to settle high-value money market and foreign exchange transactions, by companies to pay taxes, and by solicitors and conveyancers to settle property transactions.
The Bank’s Real Time Gross Settlement (RTGS) service, which underpins large transfers between bank accounts, will also be closed.
Back in 2014, RTGS collapsed for most of a day, putting thousands of housing market transactions on hold.
Last week the BoE said the sale of corporate bonds held by the Asset Purchase Facility will be delayed by a week, to 26 September, following its decision to delay its next interest rate decision by a week (to 22nd September).
Updated
Economists are warning that more timely data from August suggests the UK economy weakened last month, after July’s ‘feeble’ rebound.
Basically flat GDP for the past few months while business and consumer confidence surveys point to a downturn in August.
— John Hawksworth (@jhawksworth5) September 12, 2022
But the energy price freeze plan should have reduced the chances of the economy falling off a cliff in Q4 (as happened in Q31990 and Q42008). https://t.co/EOXFhXuh97
Timelier than the #GDP numbers...
— Julian Jessop (@julianHjessop) September 12, 2022
Regional breakdown of the UK #PMI in August shows broad-based weakness in August, with just 3/12 reporting growth...https://t.co/ZIK6VVkEPr pic.twitter.com/OURLgDDIYq
Danni Hewson, AJ Bell financial analyst, has summed up the message from July’s UK GDP report:
“July boasted record temperatures and as lots of people flocked to the beach, the park or outdoor pools to enjoy a little respite from the heat, many service businesses benefited.
Ice creams were consumed, sun cream was slathered on and beer gardens overflowed. Sporting events distracted people from their personal budgeting headaches and the incredible success of the Women’s England team bathed the country in a warm glow.
“But even in celebration there was an undertone of caution and July’s rather anaemic growth came in below expectations, a factor which will add to concerns that the UK is slow marching towards recession.
Despite the package of support for households, which has just been announced by the government, the cost of living crisis hasn’t magically disappeared. Energy costs are just one part of the equation - food prices, fuel prices and pretty much every single service we use has gone up and, even if inflation doesn’t peak at those eyewatering levels we’d been warned of, budgets are still very tight.
European stock markets are also rallying this morning, as traders digest Ukraine’s success retaining territory in the Kharkiv region in recent days.
In London, the FTSE 100 index has jumped by 85 points, or 1.2%, to 7437 points. Mining companies are among the risers, along with UK retailers, banks and builders.
On the Frankfurt bourse, Germany’s DAX has rallied by 1.5%, while France’s CAC is 1.3% higher in Paris.
The DAX is down 16% this year, with the CAC down 12%, hit by the energy crisis and reession fears. So the positive news coming out of Ukraine, where Russian forces have lost large amounts of territory, is providing a lft.
Jim Reid of Deutsche Bank told clients:
One bit of potentially positive news over the weekend was that a Ukrainian counter offensive operation in the north-east of the country seems to have led to it successfully claiming back land. Although this will be greeted well by markets, the surprise success does increase the chances of a more aggressive response from Russia.
In market terms, actual war developments have been relatively quiet of late with most of the focus on Russian gas (or lack of it) into Europe. So this brings the military progress back in some focus. So all eyes back on the next step from both sides.
This analysis by Dan Sabbagh, our defence and security editor, explains how Russia’s forces have become thinly stretched, while it’s not clear how far Ukraine can sustain its momentum, and where the frontline will stabilise.
Updated
Pound and euro rally after Ukrainian military advances
In the financial markets, sterling has hit its highest level against the US dollar since the end of August.
The dollar, which has been so strong this year, is easing back after Ukraine made rapid gains in recapturing territory from Russia though its counteroffensive in the North-east.
That military success is lifting hopes of a change in Russia’s energy squeeze on Europe, although Moscow did hit back last night by targeting infrastructure facilities in central and eastern Ukraine.
John Hardy, Head of FX Strategy at Saxo Bank, explains how Ukraine’s success has moved the currency markets:
The surprise offensive and the re-capture of a key transport hub in the northeastern sector of the front after recent focus on operations in the south caught the market by surprise and has seen the euro and sterling rebounding versus the US dollar in early trading this week.
It will take some time and further developments to assess whether Ukraine can capitalize on its gains and this in turn triggers a new stance from Russia on its energy policy.
The pound has gained around a cent this morning, to $1.17, away from the 37-year lows aroudn $1.14 hit last week.
The euro is making even more gains, up a cent and a half, to $1.1019, having hit two-decade lows below parity against the dollar last week.
It was boosted by Bundesbank President Joachim Nagel saying the European Central Bank will need to raise interest rate further, if the trend in inflation continues.
The euro rises as reports of Ukraine retaking territory from Russia boosted sentiment while a ECB policy maker said further rate hikes will be needed to curb inflation https://t.co/jAnE4aZbwU
— Bloomberg Economics (@economics) September 12, 2022
The single currency’s strength has briefly knocked the pound to its lowest level against the euro since February 2021, touching €1.1472.
Larry Elliott: UK economic growth remains tepid despite sizzling temperatures
The weather was hot but the economy was lukewarm, our economics editor Larry Elliott writes:
As temperatures in the UK rose above 40 degrees centigrade for the first time, growth in July remained tepid.
To be sure, the economy expanded, but some boost to activity was expected after the hit to growth in June caused by the double bank holiday to celebrate the late queen’s platinum jubilee.
Given that gross domestic product – the official gauge of how big the economy is – contracted by 0.6% in June, the 0.2% bounce back in July was unimpressive, particularly given the boost provided by the Euro 2022 football tournament and the Commonwealth Games.
Over the three months to July, a better guide to the trend than one month’s figures taken in isolation, the economy moved sideways, showing zero growth….
Here’s Larry’s full analysis:
UK economic growth remains tepid despite sizzling temperatures https://t.co/ZpT9Ydvcoq
— Guardian news (@guardiannews) September 12, 2022
Updated
ING’s developed markets economist, James Smith, warns that UK monthly GDP will be volatile for a few more months, after the Platinum Jubilee knocked output in June.
The extra bank holiday this month, which coincides with Queen Elizabeth II’s funeral on Monday, means we’re likely to see similar volatility in the data during September and October.
That means we’ll most likely need to wait until later in the fourth quarter to get a clearer sense of where the economy is headed, at least looking through the lens of the GDP numbers.
For now, it looks like third-quarter growth will be largely flat, and the fourth quarter slightly negative.
The “disappointingly small rebound” in real GDP in July suggests that the economy has little momentum and is probably already in recession, says Paul Dales, chief UK Economist at Capital Economics.
The government’s utility price freeze is unlikely to change that, he told clients.
Full story: UK economy grows more slowly than expected amid cost of living crisis
The UK economy grew more slowly than expected in July as worker shortages and soaring costs weighed on activity amid the heightened risk of recession, my colleague Richard Partington reports.
The Office for National Statistics said gross domestic product (GDP) rose by 0.2% in July, after a sharp fall of 0.6% in June when the additional bank holiday for the Queen’s platinum jubilee led to a decline in activity.
City economists had forecast a stronger 0.4% recovery after the fall a month earlier.
UK GDP up 0.2% in July after 0.6% fall in June. In the last 3 months, GDP flat vs previous 3. The info & comms sector grew strongly in July, thus boosting services which were up 0.4%. Construction fell again, down 0.8% after 1.4% fall in June. Monthly GDP is up 1.1% vs pre-Covid. pic.twitter.com/xtUHbSF0U9
— Gerard Lyons (@DrGerardLyons) September 12, 2022
Reflecting weakness in the economy, GDP growth was flat over the three months to July, with a slump in the UK’s dominant service sector offset by stronger activity in industrial production and construction.
Yael Selfin, the chief economist at KPMG UK, said the “feeble” growth rate in July suggested the economy remained smaller than in May, reflecting a weak summer amid growing concerns over the cost of living.
She said:
“This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses.”
The figures come amid growing concern over the strength of Britain’s economy as soaring living costs weigh on households’ spending power. The Bank of England has warned high inflation fuelled by rising energy bills will probably plunge the economy into a lengthy recession this winter.
Here’s the full story:
Rising interest rates may also hit the economy this winter, warns Suren Thiru, Economics Director for ICAEW (which represents chartered accountants).
Thiru also fears the economy will shrink this quarter, leading to a technical recession.
Here’s his take on this morning’s GDP report:
“Although output rose in July this more reflects a flattering comparison with June where the extra bank holiday limited activity than a meaningful upswing in the fortunes of the UK economy.
“Despite July’s uptick, with warning lights of recession flashing red on most economic indicators and next week’s bank holiday likely to limit September output [see earlier post for details], the chances of the economy slipping into a downturn in the third quarter is growing.
“The support for households and business should mean that any downturn is shorter and shallower than previously expected. However, with such an intervention likely to be accompanied by a punishing rise in interest rates, many are still facing a harsh winter.”
Updated
EY: UK economic outlook remains very challenging.
The UK’s energy bill freeze announed last week will “greatly reduce” the risk of a deep recession, says Martin Beck, chief economic advisor to the EY ITEM Club.
But even so, the next year will still be very challenging for the economy, as inflation will bite into household incomes:
Beck says:
Households still face a further decline in their real incomes during the second half of this year which, even if some can save less and borrow more, will weigh on consumer spending.
And though business investment may be buoyed by firms spending before the super-deduction finishes, their ability to do so will be compromised by rising costs. As things stand, the economy is unlikely to do more than stagnate over the coming year.”
Updated
PwC: UK still on track for recession
Jake Finney, economist at PwC, fears the UK economy will shrink in the July-September quarter – despite the ‘modest’ 0.2% rise in GDP in July.
That would put the economy into recession, he explains:
“The UK economy grew by a modest 0.2% on a month-on-month basis in July, following its 0.6% contraction in June 2022. However, looking beneath the headlines it’s clear this positive growth rate was primarily led by the performance of the services sector. Two of the other main engines of economic growth - production and construction - contracted in July.”
“Consumer-facing services grew by 0.6% in July, following a flat month in June. The sector was helped by record-high temperatures and one-off events, such as the UK’s hosting of the Women’s Euros and the Commonwealth games. This saw the ‘sports activities and amusement and recreation activities’ sub-sector grow by 8.1%.
However, this strong growth rate was partially offset by a fall of 4.5% in other personal service activities, in part owing to the cost-of-living crisis that is starting to weigh on consumer demand.”
“Despite today’s positive growth figures, our expectation is that the UK economy will contract in Q3 2022, following its -0.1% contraction in Q2 2022. This would mean that the UK enters a technical recession for the first time since lockdown restrictions ended.”
Here’s a good summary of today’s GDP report, from Andy Bruce of Reuters:
UK GDP grows 0.2% m/m in July, less than expected (0.4%)
— Andy Bruce (@BruceReuters) September 12, 2022
• Weakness centred on industry, construction
• No big bank holiday effect
• ONS says anecdotal evidence of reduction in demand for power because of cost, but was also a hot month
Big picture: UK economy has run out of steam this year. GDP index has been flat for several months now. pic.twitter.com/4O20djv248
— Andy Bruce (@BruceReuters) September 12, 2022
Women's Euros and Commonwealth Games lifted growth
The Women’s European football championship, and the Commonwealth Games in Birmingham, both gave the UK economy a boost in July.
The ‘sports activities and amusement and recreation activities’ sub-sector grew by 8.1% in July, making it the second-largest driver of growth among consumer-facing services.
The Women’s EURO Championship, hosted by the UK, ran through July. It was a successful event with record crowds at a series of games (before being won, dramatically, by England!).
The first few days of the Commonwealth Games fell within July too, and will also have contributed to the sector’s growth.
Overall, consumer-facing services grew by 0.6% in July, following a flat month in June.
The UK #economy grew by 0.2% in July after a 0.6% fall in June. It’s not much (and below expectation) but it’s positive #GDP
— Danni Hewson (@dannihewson) September 12, 2022
Services up, production and construction down
Car sales and repairs a big driver 🚗
Commonwealth Games and Women’s EUROs also contributed ⚽️
Marcus Brookes, chief investment officer at Quilter Investors says the pick-up in growth in July will ease concerns that a recession is on the immediate horizon.
Services saw a month of positive growth, boosted by the Women’s Euros and the Commonwealth Games, while production and construction fell. However, given this data is from July, the outlook could be bleaker given it comes before a potential slowdown in activity during the period of mourning in the UK.
“Ultimately, the next few months are still likely to be a very difficult environment for everyone – governments, corporates and households alike, Brookes adds.
Updated
Shortages of workers continued to hold back growth in July.
In today’s GDP report, the ONS says:
Businesses… reported staff shortages as being an issue.
Hotels and hospitality services were particularly badly affected, but comments were also received from manufacturers of health and beauty products, sheet metal fabricators, haulage companies, solicitors, and cleaning companies.
Economic growth has been choppy this year, as this chart of monthly GDP shows:
After 0.6% growth in January, the UK economy stagnated in February, then grew 0.1% in March.
April saw a 0.2% fall, before a 0.4% recovery in May – wiped out by June’s 0.6% drop, which meant the economy shrank slightly in Q2.
The big picture – even after July’s modest recovery, is that growth has been mediocre.
Updated
KPMG: economy faces downbeat outlook after 'feeble' recovery in July
The “feeble 0.2% bounce back in July” was driven by weak GDP in June due in part to the loss of working days from the Jubilee long weekend, says Yael Selfin, Chief Economist at KPMG UK:
More concerning, July’s GDP remains below the level seen in May, pointing to an overall contraction over the first two months of summer.
“This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses.
“While nearly £170bn worth of fiscal measures announced last week may be sufficient to avoid a deeper economic slump, these will be partly offset by tighter Bank of England monetary policy focussed on combating the high levels of inflation.”
The UK economy is now 1.1% above its levels in February 2020, before the pandemic hit the economy.
Small uptick for GDP in July: 0.2%. Mainly driven by a boost in services.
— Kate Andrews (@KateAndrs) September 12, 2022
"Monthly GDP is now estimated to be 1.1% above its pre-coronavirus (COVID-19) levels (February 2020)." pic.twitter.com/bNOVp34JoC
UK econony stagnated over the last quarter
The broader picture is that Britain’s economy failed to grow over the last quarter, weighed down by economic headwinds.
GDP was flat in the three months to July compared with the previous three months, the ONS reports.
Updated
The UK’s construction sector shrank again in July too – wth a 0.8% drop in output, after a 1.4% in June 2022.
This was due to a drop in repair and maintenance work.
Updated
Power production fell, hitting industrial output
Manufacturing only expanded by 0.1% in July.
And the wider production sector actually contracted again – by 0.3% after a fall of 0.9% in June 2022, due to a fall in output in the electricity, gas, steam, and air conditioning supply.
The ONS says people may have cut back on electricity use following the surge in prices this year.
According to anecdotal evidence from the Department for Business, Energy and Industrial Strategy (BEIS), demand for electricity was 2.3% lower than seen in July 2021 (that may have been influenced by the higher than usual temperatures).
Anecdotal evidence suggests that there may be some signs of changes in consumer behaviour and lower demand in response to increased prices. This is further shown in our recent Consumer price inflation, UK: July 2022 bulletin where electricity prices rose by 54% in the 12 months to July 2022.
Updated
Britain’s services sector led the recovery in July, growing by 0.4%
The information and communication sector grew by 1.5% and was the largest contributor to the services growth in July.
UK economy grew 0.2% in July
Just in: The UK economy returned to growth in July.
UK GDP rose by 0.2% in July, the latest data from the Office for National Statistics shows, a smaller increase than expected.
That’s a welcome return to growth, after the economy shrank by 0.6% in June – as the extra bank holidays to mark the Platinum Jubilee hit economic output.
But it could only be a temporary respite, with the cost of living crunch hitting households and businesses this autumn and winter.
More details to follow….
Updated
Economy could feel chill from national mourning
Economists fear that next week’s bank holiday for the Queen’s state funeral, and the impact of national mourning, could push the economy nearer to recession.
Growth could be weaker than normal in September, as Monday 19th won’t be a normal working day. That could lead to lost trade at restaurants, bars and concert venues, as people pay their tributes to Queen Elizabeth.
Simon French, chief economist at the City broker Panmure Gordon, said one-off bank holidays in 2002, 2012 and earlier this year had lowered economic output by at least £2bn.
French told the Sunday Times:
“There are few parallels for this moment and that makes forecasting particularly difficult.
We may not simply be talking about an extra bank holiday. There could be a prolonged period of national mourning.”
Some companies, including Selfridges and Liberty, decided to close their stores last Friday as a mark of respect.
Government guidance published last week encourages companies to consider cancelling or postponing events during the period of mourning, especially on the day of the state funeral.
Events, including the TUC Congress , have been postponed, as have some sporting events including last weekend’s football fixtures.
Updated
Introduction: UK's July GDP report in focus
Good morning, and welcome to our rolling coverage of business, the world economy, and the financial markets.
It’s a crunch week for data showing the health of Britain’s economy, and we begin by discovering how the UK performed in July.
The latest UK GDP report, due at 7am BST, is expected to show a return to growth, after the economy contracted by 0.1% in the second quarter of the year.
Some economists are predicting the economy grew by 0.4% in July, after economic activity in June was affected by the Platinum Jubilee, which meant two fewer working days that month.
Alvin Tan of RBC Capital Markets predicts the economy grew by around 0.3% in July:
The fall in UK June GDP of 0.6% m/m from the extended Jubilee bank holiday was considerably less than expected with some sectors, most notably recreation and hospitality, actually benefiting from the holiday weekend.
A large degree of the impact of events such as June’s extra bank holiday tends to be on the timing of activity with most recovering in the subsequent period. We look accordingly for UK July GDP to bounce 0.3% m/m. We also look for UK Q3 GDP growth of 0.2%
Alert UK GDP figures due in 30 mins Potential Large Vol / Market Impact event.#Trading #FTSE
— TradeInflection (@Tradeinflection) September 12, 2022
Data due later this week will show the soaring living costs facing households, as my colleague Zoe Wood explains:
City economists are forecasting a further rise in inflation to 10.2% in August when official figures are published on Wednesday, as the rising price of a weekly shop and sky-high energy bills add to the financial pressure on struggling households.
This would mark a modest uptick from the July reading of 10.1%, which was the first time the consumer prices index had risen above 10% since the early 1980s
We also get the latest UK unemployment data tomorrow, and retail sales figures on Friday which may show a drop in spending, as stretched consumers cut back.
The agenda
7am BST: UK GDP report for July
7am BST: UK balance of trade for July
9am BST: European Central Bank survey of monetary analysts
11am BST: NIESR’s estimate of UK GDP in August
1pm BST: India’s inflation and industrial production data
