Closing post
Time to recap…
The UK’s struggling manufacturing sector recorded its worst month of the year in July, raising fears of a recession in the industrial sector, and beyond.
Factories were hit by higher interest rates and fewer new orders, while weak overseas demand hurt exports. More here.
House prices across the UK have dropped at their fastest rate since 2009, down 3.8% in the year to July.
The UK’s biggest retailers have reported the first monthly fall in shop prices for two years, with food inflation dropping to its lowest level since December.
But…many alcoholic drinks will cost more from Tuesday after Rishi Sunak and the chancellor, Jeremy Hunt, enforced tax rises on booze.
In another Brexit climbdown, the UK will retain the EU’s product safety mark indefinitely as the government bowed to pressure from industry and manufacturers.
HSBC more than doubled its profits in the first half of the year, as rising interest rates increased returns for the London-headquartered lender.
BP has angered climate campaigners by reporting profits of $2.6bn (£2bn) for the second quarter of the year as the climate crisis triggers extreme heatwaves around the world.
Greggs is to open more shops in supermarkets and airports, after the bakery chain reported higher sales thanks to strong demand for its evening pizza deals.
Global manufacturing downturn continues as output and new order fall at faster rates
The upshot of today’s manufacturing reports from Asia, Europe and the US is that the global manufacturing sector remained mired in contraction last month.
July saw output at world factories decline further as the downturn in new order intakes was extended to a thirteenth consecutive month.
The JP Morgan Global Manufacturing PMI, which crunches all the latest polls of purchasing managers, was unchanged at 48.7 in July, a level that shows a contraction.
There was a “sharp downturn in the euro area”, the report shows, while Asia showed signs of weakness and international trade flows deteriorated further.
The report says:
The main drag on output was a severe downturn in activity in the euro area, where production contracted to the greatest extent since the height of the global pandemic in spring 2020.
The performances of Austria, Germany and Italy were especially weak.
There were also signs of weakness developing in Asia. Japan, mainland China, South Korea, Taiwan, Vietnam and Malaysia all saw output contract. North America was a comparative bright spot, with mild growth in Canada and Mexico.
A slight expansion of output in the US represented a stabilisation following June’s marked retrenchment
Speculation is building about what the Bank of England may decide on interest rates on Thursday.
Matthew Ryan, head of market strategy at global financial services firm Ebury, predicts a three-way split on the Monetary Policy Committee, with the majority voting for a small, quarter-point increase in Bank Rate to 5.25%, from 5%.
Ryan explains:
While we don’t see an argument for the MPC to end the tightening cycle just yet, this should provide more than enough ammunition for committee members to justify a return to a 25bp hike this week.
“We expect the Bank of England to revert back to a 25 basis point rate increase this week, with the June inflation miss and signs of a modest slowdown in the UK economy likely to warrant a smaller hike.
“Once again, however, the MPC is unlikely to be in total agreement, and we could see a three-way split vote, where one member (Swati Dhingra) supports no change, while one or two plump for a 50 basis point move.”
“The communications should remain hawkish, and we expect the guidance to once again state that additional tightening is likely should inflation prove persistent. We don’t expect governor Bailey to push back against market pricing for rates, although sterling would undoubtedly sell-off should he do so.”
Updated
Back in the City, the stock market has closed in the red and the pound has extended its loses against the US dollar.
The FTSE 100 index of blue-chip shares has closed down 33 points or 0.43% at 7,666 points, away from Monday’s two-month closing high. Banks and housebuilders were among the fallers.
Sterling is down almost a cent against the US dollar at $1.2743, the lowest in over three weeks.
Michael Hewson, analyst at CMC Markets, explains how the latest economic data weighed on sterling:
The pound has… lost ground after BRC shop prices fell 0.1% on a month-on-month basis between June and July, while annual prices slowed to 7.6%.
UK house prices also slipped -0.2% in July and on an annualised basis by -3.8% as higher rates weighed on demand.
The latest manufacturing PMI numbers also pointed to falling input prices, and slowing orders, thus dragging on expectations of future Bank of England rate hikes.
Updated
Rishi Sunak has weighed in on the “de-banking row’ gipping the UK financial sector, arguing that the focus should be on the “values that are at stake” rather than on individuals.
The Prime Minister said his “primary concern” was the wider impact of the issue and how it affects other people when asked about the fallout following Nigel Farage’s claim that his Coutts account was unfairly shut down, PA Media reports.
Sunak refused to be drawn when asked whether current Natwest chairman Sir Howard Davies should consider his position, telling GB News:
“I think it’s good that Nigel Farage and Coutts are in dialogue resolving the issue there, but Nigel Farage also spoke about the broader issue of this impacting other people, and that’s my primary concern, because ultimately this isn’t about any one individual, this is about values.
“Values that are important to me and important to our country… Rather than the individuals, to focus on the values that are at stake. Values of freedom of expression and privacy. I believe in those values very strongly.
“People need to be able to have lawfully held views that we might not agree with, but they shouldn’t be denied financial services because of them. And they’re entitled for their financial affairs to be kept private.”
Back in the housing sector, three large UK lenders have announced they would cut the costs of home loans this week, the Financial Times reports.
The moves by NatWest, Halifax and Virgin Money followed cuts by Nationwide, Barclays, TSB and HSBC last week, offering further relief to homeowners who are still facing higher borrowing costs than in the wake of last year’s “mini” Budget.
Aaron Strutt, director at Trinity Financial, says:
“More banks and building societies have been lowering their rates in recent weeks as they try to attract more borrowers.
“We are starting to see acceptance criteria changes to make it easier to get mortgages and even the return of lower rates being offered for a week to tempt borrowers to take action.”
Three large UK lenders cut mortgage rates as inflation outlook improves https://t.co/uAtC2Q55MG
— Financial Times (@FT) August 1, 2023
Updated
The number of job openings in America has dropped.
There were 9.58m vacancies on the last business day of June stood at 9.58 million, the US Bureau of Labor Statistics (BLS) reports, down from 9.82m openings in May.
Fewer US workers quit their jobs, suggesting fewer people switched positions for new opportunities elsewhere.
It’s still a high number of vacancies by historical standards, although below the highs set earlier in the pandemic.
The Fed would love Job openings near 7,000,000, but that is still a while away
— Logan Mohtashami (@LoganMohtashami) August 1, 2023
Don't forget who was tweet #JOLTS 10,000,000 in 2020 and 2021 😉 pic.twitter.com/dvDdRMCfeG
The health of the US US manufacturing sector declined in July, according to the latest PMI survey from S&P Global, matching the picture in Europe today.
The downturn stemmed from another monthly contraction in new orders, as domestic and external demand conditions remained muted, the PMI report shows.
Backlogs of work fell sharply as new orders dropped, and with sales more challenging, firms cut back on buying new raw materials and components.
The seasonally adjusted S&P Global US Manufacturing PMI rose to 49.0, up from 46.3, but still below the 50-point mark showing stagnation.
The #US manufacturing sector signalled a further deterioration in operating conditions during July. However, the downturn softened as the #PMI index rose to a three-month high of 49.0 (Jun: 46.3). Read more: https://t.co/zkmn7b7JOq pic.twitter.com/K1DfIiDVjf
— S&P Global PMI™ (@SPGlobalPMI) August 1, 2023
Sarah Breeden appointed Bank of England deputy governor
The newest Bank of England deputy governor has just been announced.
Sarah Breeden, currently the BOE’s executive director of financial stability strategy and risk, will become deputy governor for financial stability on 1 November, succeeding Sir Jon Cunliffe.
Announcing the appointment, Jeremy Hunt, Chancellor of the Exchequer, said:
“I am pleased to appoint Sarah Breeden as the next Deputy Governor of the Bank of England who brings extensive experience to the role including from her work as a member of the FPC and across monetary, economic and financial matters.
Breeden has worked at the Bank since 1991, shortly after leaving Cambridge University. In the financial crisis she was responsible for the design of the Bank’s liquidity assistance to Northern Rock and led the Bank’s work on Northern Rock’s resolution (her CV is online here)
In her new role, Breeden will lead the Bank of England’s work on financial stability, sit on the Financial Policy Committee, chair it when governor Andrew Bailey isn’t avalable, and also sit on the Monetary Policy Committee and the Prudential Regulation Committee.
I think Breeden will become the first female deputy BoE governor since Charlotte Hogg, who resigned after it emerged she hadn’t disclosed her brother worked for Barclays, which is regulated by the BoE.
It also takes the number of women on the interest-rate setting MPC committee to four, out of nine, with Catherine Mann, Swati Dhingra and new member Megan Greene.
Updated
The Bank of England (BoE) will probably be much slower to cut rates than the US Federal Reserve and European Central Bank (ECB) over the next 12-18 months, predicts Michael Saunders of Oxford Economics.
Saunders, a former member of the BoE’s monetary policy committee, predicts that the UK’s current tightening cycle is probably near its end.
But, the UK’s “relatively high pay growth and sticky services inflation” means it will be trickier for the UK to loosen monetary policy, he argues.
In a new research note, Saunders explains that monetary policy acts slower than 10 or 20 years ago due to structural changes in the economy. For example, there has been a “marked drop” in the share of households with a mortgage, a large shift to 5-year fixed rate mortgages rather than variable rate loans, and a higher level of household savings, especially among homeowners.
He says:
These changes have probably reduced the speed and scale with which changes in monetary policy affect demand through the household cashflow channel.
Another factor is that, while higher interest rates lift savers’ incomes, savers don’t typically adjust their spending much to changes in interest rates, whereas debtors do.
Over in the US, ride-hailing and food delivery company Uber has reported its first ever operating profit.
After years of losses (the FT calculates a total of $31.5bn in operating losses since 2014), Uber reported income of $326m for the second quarter of this year, up from a $713m loss a year ago.
Dara Khosrowshahi, Uber’s CEO, says:
“Robust demand, new growth initiatives, and continued cost discipline resulted in an excellent quarter, with trips up 22% and a GAAP operating profit, for the first time in Uber’s history.
“These results also translated into strong driver and courier engagement, with 6 million drivers and couriers earning a record $15.1 billion during the quarter.”
Revenues rose by 14% year-on-year to around $9.2bn, below forecasts of $9.3bn.
Total bookings were up 16% year-on-year in April to June, with mobility bookings (moving passengers around) up 25% and delivery bookings (such as Uber Eats) up 12%.
$UBER earnings.
— Chart Breakout (@chartbreakout) August 1, 2023
- Uber's first ever profit
- Gross booking increased by 16% to $33.6b in q2
- Trips increased by 22% to 2.3b pic.twitter.com/Z9J7tXs1A8
On the weak pound… Chris Turner, head of markets at ING, has aid weak global manufacturing data, driven by China’s faltering economy, is weighing on sentiment and boosting the safe-haven dollar.
Here are some thoughts on the UK housing market from Nicholas Mendes, mortgage technical manager at broker John Charcol, after prices fell by 3.8% in the year to July.
On the back of the Nationwide figures, can you say if now is a good time to buy a house?
Knowing when to purchase a property will come down to personal motivations and circumstances, if you have found a property that fits the bill, and the borrowing is affordable that go for it. It is virtually impossible to second guess when the property market has dipped to and when it has turned a corner in respect to property prices starting to increase.
Purchasing a property should be seen as a long-term investment, and during the period of ownership there will be points where the property market will dip. History shows, property ownership will inevitably increase over the long term.
Are house prices expected to follow further this year?
Property prices are expected to dip further with higher mortgage rates and borrowing constraints still prevalent, these constraints are expected to continue into 2024 which will happen demand.
What do buyers need to keep in mind before committing?
Anyone looking to buy at the moment would be to negotiate hard and don’t feel pressurised to buy because in a falling market buyers have the upper hand. If you find a property that absolutely ticks all your boxes, affordable and you plan to live there for many years buying in a falling market can often prove an excellent decision in the long run.
In better economic news, unemployment across the eurozone has dropped to a record low.
The jobless rate in the single currency bloc was 6.4% in June, the lowest on record, according to statistics body Eurostat.
That indicates that recent increases in eurozone interest rates have not weakened Europe’s jobs market.
Eurostat also revised down its estimate for eurozone unemployment in April and May, to 6.4%, meaning it has been at a record low for three months.
Euro area #unemployment at 6.4% in June 2023, EU at 5.9% https://t.co/6b45KBwqpY pic.twitter.com/MQTl42iJ03
— EU_Eurostat (@EU_Eurostat) August 1, 2023
The pound has weakened today, as the latest economic data has fuelled concerns of a possible recession.
Sterling is down three-quarters of a cent against the US dollar at $1.2761, a three-week low.
The pound has dropped back in recent sessions as traders have concluded that the Bank of England is less likely to agree a large increase in interest rates, of half a percentage point, on Thursday.
A smaller, quarter-point, is more likely, as Fawad Razaqzada, market analyst at City Index and FOREX.com, explains:
Nonetheless, a 25-bps hike to 5.25% is fully priced in, with markets expecting a further 2 rate hikes before year-end.
But policy is now very restrictive, so will the BoE now signal a pause like the ECB did last week? If it does, then the pound could slump.
European manufacturing saw its downturn worsen in July. Output volumes, new orders, employment and purchasing activity all declined at faster rates than in June. The Euro Area and UK PMIs are at their lowest levels since the COVID recession and are at GFC levels. pic.twitter.com/PIC3SU90N2
— Dr Thomas Kevin Swift (@DrTKSwift) August 1, 2023
Make UK: industry now at risk of recession
Fhaheen Khan, senior economist at Make UK, the manufacturers’ body, warns that the lack of an industrial strategy is hurting British factories.
“Today’s [PMI] results show the economy is on the glidepath to anaemic growth with industry now at risk of facing a recession. Despite supply disruptions easing and, industry’s ability to meet demand nearing optimal levels, the extra capacity means little if consumers are no longer in a buying mood.
“It’s clear that manufacturers’ expectation of the future is driving reduced activity today, with inflation and higher interest rates resulting in companies engaging defensive manoeuvres by cutting jobs and investment to protect the viability of their business.
Whilst a slowdown is now more likely, industry’s behaviour is only natural in the absence of a long-term strategy from Government to grow the manufacturing sector.”
Updated
City consultancy Capital Economics have also predicted the UK will fall into recession soon.
Paul Dales, their chief UK economist, told clients today that interest rates will rise by another half of one percentage point, even though inflation is falling:
Despite the easing in CPI inflation from 8.7% in May to 7.9% in June and core inflation from 7.1% to 6.9%, we think strong wage growth and the continued resilience of real GDP will mean interest rates will rise further, from 5.00% now to a peak of 5.50%.
We suspect the downward trends in wage growth and services inflation will be slow and core inflation won’t fall to 2% until the end of 2024.
As such, interest rates will probably stay at their peak until the second half of 2024, even though we expect the economy will be in recession later this year and early next year.
Summary: Why recession fears are rising today
A quick recap.
Fears of a UK recession are swirling after Britain’s manufacturing sector recorded its worst month of the year in July, and as rising interest rates hits the housing sector.
A closely watched gauge of the factory sector dropped to its lowest level in 2023, and its joint-worst since May 2020, continuing a year-long slump for the industry.
The S&P Global / CIPS UK Manufacturing PMI fell to 45.3 in July, showing a sharper downturn than in June.
S&P Global says:
The downturn in the UK manufacturing sector took a turn for the worse in July, as rates of contraction in output, new orders and employment all accelerated.
Thomas Pugh, economist at RSM UK, warned that the UK economy could slip into recession early next year, as the real economy is hit by higher interest rates.
Eurozone factories also struggled last month, with production volumes, new orders, employment and purchasing activity all falling, as customers resisted buying new goods and focused on running down their stockpiles.
The UK property sector is already being cooled by higher borrowing costs. House prices fell at their fastest rate in 14 years last month, down 3.8% year-on-year, according to Nationwide.
Nationwide’s chief economist, Robert Gardner, explained that rising interest rate have made mortgages less affordable:
This challenging affordability picture helps to explain why housing market activity has been subdued in recent months.
There were 86,000 completed housing transactions in June, 15% below the levels prevailing the same time last year and around 10% below pre-pandemic levels.
Mohamed El-Erian, chief economic adviser at Allianz, warned there is a “real risk” that rising interest rates push the UK economy into recession.
He told Radio 4’s Today programme:
People are feeling the pinch from higher mortgages, companies are feeling the pinch from higher borrowing costs, and global activity is not helping.
So yes there is a real risk that we may slip into recession.
In line with other recent data releases, #China’s Caixin manufacturing PMI slipped into contraction territory in July, coming in at 49.2 compared to 50.5 the prior month.
— Mohamed A. El-Erian (@elerianm) August 1, 2023
This unfavorable signal regarding #manufacturing activity
(i) is consistent with those from several other… pic.twitter.com/3TAHaGSmim
But despite these concerns, the Bank of England is widely expected to raise interest rates again on Thursday to a new 15-year high. Many economists expect a quarter-point rise, from 5% to 5.25%.
UK house prices, and sales, will continue to suffer if interest rates stay high, warns Iwona Hovenko, real estate analyst at Bloomberg Intelligence,
“The 0.2% UK house price decline in July, according to Nationwide, may still represent a resilient outcome, especially against expectations for a 0.5% fall, given the rapid surge in mortgage rates which may have spooked many prospective homebuyers.
Even the annual price drop of 3.8% - although the worst in 14 years - nevertheless remains somewhat modest against house prices still being 21% above their February 2020 level.”
“That said, the longer the mortgage rates remain near their current very high level - unseen since at least 2010 - the larger the potential damage inflicted on house prices and transactions going forward. Even the best-buy rates on the relatively cheaper five-year deals start at about 5.5% vs. sub-4% in early May, with cheapest two-year fixes available at about 6% (vs. just over 4% three months ago). Such high rates pose a threat to UK housing outlook and our previous expectations for a 5% decline in house prices in 2023.”
Full story: UK house prices fall at fastest rate since 2009 after interest rate rises
If you’re just tuning in….UK house prices fell last month at the fastest annual rate in 14 years, as higher interest rates hamper people’s ability to buy a property with a mortgage.
Nationwide building society reported that prices fell 3.8% year on year, the sharpest drop since July 2009 when the global economy was in the grips of financial crisis. It compared with a fall in annual prices of 3.5% in June.
The price of a typical home is now £260,828, 4.5% below the peak reached last August. Prices dipped 0.2% in July from the previous month.
The Bank of England has raised interest rates 13 successive times since December 2021 in an attempt to curb soaring inflation. The Bank is expected to raise interest rates again on Thursday, from 5% to 5.25%.
Updated
The drop in UK manufacturing output to its joint-lowest levels since May 2020 will concern the Bank of England, as policymakers prepare to set interest rates on Thursday.
It suggests that the Bank’s previous rate rises – 13 since December 2021 – are weakening the economy.
Richard Flax, chief investment officer at digital wealth manager Moneyfarm, explains:
“Ahead of the Bank of England’s interest rate decision this week, it is unwelcome news that UK manufacturing PMI has hit a seven-month low with factories seeing a sharp decline in output. July’s PMI reading of 45.3, while in line with expectations, came down from 46.5 in June.
The weakness reflects flagging demand and also likely a re-adjustment in inventories as supply chain constraints have eased. The data however puts UK manufacturing at its joint-weakest levels, last seen during the lockdown in May 2020 at the onset of the Covid-19 pandemic. July’s data is also the 12th month in a row that the PMI has been below 50 – the key marker which usually signifies growth in activity.
European stock markets have dropped into the red this morning, as the deterioration at factories across the eurozone and in the UK worries investors.
The UK’s blue-chip index, the FTSE 100, has lost almost 50 points or 0.6% to 7651 points, away from the two-month high seen yesterday.
Germany’s DAX, which hit a record high yesterday, has lost almost 1% today, while Italy’s FTSE MIB is down 1.1%
⚠️BREAKING:
— Investing.com (@Investingcom) August 1, 2023
*EUROPEAN STOCKS SINK ACROSS THE CONTINENT AS MANUFACTURING PMI DATA DISAPPOINTS https://t.co/Cha44a2yEH
🇪🇺🇩🇪🇫🇷🇮🇹🇪🇸🇳🇱🇬🇧 pic.twitter.com/tl6E7C6xX7
Drinks giant Diageo, whose brands include Johnnie Walker and Smirnoff, has swelled its profits through price rises and drinkers turning to more expensive brands.
The spirits giant posted a 7% rise in pre-tax profits to £4.7 billion for the year to June 30, up from £4.4 billion the previous year.
Diageo’s organic net sales grew by 6.5%, driven by a “Price/mix of 7.3 percentage points”, That means it put its prices up, passing on higher costs, and sold more of its more expensive drinks.
New chief executive Debra Crew, who took over in June when former long-standing boss Sir Ivan Menezes died aged 63, said:
In fiscal 23, we drove double-digit organic net sales growth in scotch, tequila, and Guinness, with our premium-plus brands contributing 57% of overall organic net sales growth.
We delivered strong growth in four of our five regions, with Europe and Asia Pacific growing double-digit.
North America delivered stable performance as the US spirits industry continued to normalise post-pandemic, and we lapped strong comparators, particularly in the second half of fiscal 23.
Guinness just enjoyed "its biggest year ever in its 264-year history," says Diageo CEO Debra Crew
— Bloomberg UK (@BloombergUK) August 1, 2023
The world’s largest distiller says demand for its drinks, which also include Johnnie Walker whiskey and Smirnoff vodka, remains resilient in the face of price increases… pic.twitter.com/Bsl1SXKXgZ
Anger as 'cash machine' BP makes £2bn profits
BP has angered climate campaigners by reporting profits of $2.6bn (£2bn) for the second quarter of the year as the climate crisis triggers extreme heatwaves.
The company blamed falling oil and gas markets for the drop in profits from $8.5bn in the same period last year when Russia’s invasion of Ukraine ignited a rise in global energy markets.
BP willincrease its shareholder dividends by 10% to $2.3bn, despite the fall in profits. It will also return a further $1.5bn to investors through a share buyback over the next three months.
The BP chief executive, Bernard Looney, said the payouts reflected the company’s confidence in its strategy and the outlook for its future cashflows.
Common Wealth, the think tank, have warned that BP continues to be “a cash machine for investors”, even as the fossil fuel industry drives “global boiling”.
NEW: As the world boiled, BP distributed $3.3 billion to shareholders, 17 times more than they invested in “low-carbon” in Q2 ($190m).
— Common Wealth (@Cmmonwealth) August 1, 2023
How can we trust Big Oil to deliver a fair energy transition when its priorities are so misaligned with what the public and planet need? pic.twitter.com/5vWML3qb2p
Even as the fossil fuel industry drives “global boiling”, BP continues to be a cash machine for investors.
— Common Wealth (@Cmmonwealth) August 1, 2023
This quarter, it posted a profit of $2.6bn and handed out $3.3bn to shareholders, while the CEO’s pay has doubled to $12mn. pic.twitter.com/ieZpTatlYE
Since 2010 BP has paid shareholders over $100bn.
— Common Wealth (@Cmmonwealth) August 1, 2023
Their priority is clear: maximising returns for their investors. This logic drives their behaviour. We should not expect it to change. pic.twitter.com/Hfzku1c7CW
Meanwhile, their renewables pipeline has barely grown this year - and is dangerously out of line with the pace and scale a successful energy transition would require.
— Common Wealth (@Cmmonwealth) August 1, 2023
It remains - and will remain - overwhelmingly an oil and gas business. pic.twitter.com/A94wN6yB2g
UK mortgage rates rise again
UK mortgage rates have continued to rise today, despite hopes that inflation is easing.
Data provider Moneyfacts reports that the average 2-year fixed residential mortgage rate has risen to 6.85%, up from 6.81% on Monday. That’s the highest level since 26th July.
The average 5-year fixed residential mortgage rate has risen too, to 6.37%, up from Monday’s 6.34% on the previous working day. It was last higher last October, in the turmoil after the mini-budget.
This will put more pressure on UK house prices, and disappoint borrowers given that several major lenders recently annouced rate cuts.
RSM UK: UK economy could slip into recession in early 2024
The slump in UK manufacturing shows the impact that higher interest rate have on the economy, says Thomas Pugh, economist at RSM UK.
Pugh says not hard to see the economy falling into recession early next year, judging by today’s UK factory PMI report:
‘The fall in the manufacturing PMI suggests that momentum and resilience in the private sector are starting to falter and it is not difficult to see the economy slipping into recession in early 2024 as the impact of interest rate hikes continue to feed through into the real economy. Indeed, at 46.8 the employment index suggests that the sector is continuing to shed employees.
‘On the inflation front, goods inflation is clearly starting to ease. The input and output prices balance of the manufacturing PMI were below 50 at 43.8 and 49.0 respectively, indicating that prices in absolute terms, not just inflation, are now falling. In contrast, services inflation will prove stickier. That will be especially concerning for the Bank of England as services inflation is much more related to the labour market and the domestic economy.
Ahead of this week’s Bank of Eng decision, some unwelcome news on inflation. Manufacturers maintained selling prices last month, despite falling costs, as they “recover margins following a period of marked cost inflation”, according to July’s PMI survey https://t.co/8NVjj1vLso
— Mehreen Khan (@MehreenKhn) August 1, 2023
UK factory downturn: what the experts say
Here’s some early reaction to the news that UK factory output shrank at the joint-fastest pace since 2020 in July:
Dr. John Glen, Chief Economist at the Chartered Institute of Procurement & Supply:
“The outlook for the manufacturing sector darkened again in July with a sudden fall in output and one of the worst since the pandemic. Manufacturers have registered a reduction in activity in all-bar one month during the past year as new work and employment levels shrank back.
The lowest orders since last November from overseas customers was particularly surprising, just when signs of improvements in global marketplace activity had started to appear, new work from the Eurozone was subdued just as domestic work dried up.
Although costs for some materials were still being driven higher by inflationary rises, taking a huge bite out of business cashflow, the cost of many more inputs showed sharp drops on the back of weak demand and more availability as delivery times improved for the sixth consecutive month. This opportunity for price reductions for end consumers may take a few months to filter through as firms ensure a more stable footing for their operations for the second half of 2023.
Overall, it seems that recovery has stalled. Concerns about further interest rate rises making borrowing more expensive and customers reluctant to buy had the sector running on empty for another month but more than half of survey respondents kept their chins up and remained hopeful about the next 12 months.”
UK factory output falls at fastest pace in seven months, cost pressures ease -PMI - https://t.co/OcCZtki4rF
— Investing.com UK 🇬🇧 (@uk_investing) August 1, 2023
Actual | 45.3
Forecast | 45.0
Previous | 46.5#UK #manufacturing #PMI pic.twitter.com/jiY15liVjB
Dave Atkinson, SME & Mid Corporates head of manufacturing at Lloyds Bank:
“Manufacturers remain subdued in their outlook for the coming months. Though inflation dropped more than expected last month and specific sectors such as food and beverages are seeing input costs fall, it remains at a level that means manufacturers are having to make difficult operating decisions.
“However, there’s a hope that large manufacturers are starting to turn the key to unlock growth and increase investment across the whole of the industry’s supply chain. Recent announcements concerning new gigafactories and positive financial results among big players should provide some confidence among SMEs to invest in their production capabilities.”
Updated
UK manufacturing PMI hits seven-month low as downturn deepens
The UK’s manufacturing downturn has also deepened last month.
UK factories were hit by a faster fall in output and new orders last month, as export demand was hit by weak global conditions
This pulled the S&P Global / CIPS UK Manufacturing Purchasing Managers’ Index down to 45.3 in July, down from 46.5 in June – showing a sharper contraction. That’s the lowest reading in the year-so-far, and the joint-weakest since May 2020.
As with the eurozone (see earlier post), manufactuters struggled to sell goods because their clients had stocked their inventories when they were more worried about supply chain disruption, so are running them down.
Worryingly, rhe rate of job losses accelerated to a seven-month high as factories reacted to weak demand and tried to cut costs.
There is one upside, though: prices are falling in this environment of sharply deteriorating demand, with cost pressures also falling as supply chains recover.
The #UK followed the #eurozone by posting a steeper downturn in manufacturing activity in July, as rates of contraction in output, new orders and employment all quickened, and the #PMI dropped to 45.3. @cipsnews Read more: https://t.co/uMImCXMuJm pic.twitter.com/oLxaXr7wKq
— S&P Global PMI™ (@SPGlobalPMI) August 1, 2023
Rob Dobson, director at S&P Global Market Intelligence, explains:
Output fell at the quickest pace since January, as overstocked clients, rising export losses, higher interest rates and the cost-of-living crisis coalesced to create a worrying intensification of the slump in demand.
Although manufacturers maintain a generally positive outlook for the sector, with over half still expecting output to rise over the coming year, other forward-looking indicators show the mire that industry is currently facing.
Domestic and export demand are weakening, and backlogs of work are declining sharply, all of which likely presages further cutbacks to production, employment and purchasing in the months ahead.
Manufacturing recession "here to stay" in eurozone as firms struggle
Just in: the downturn at eurozone factories worsened in July, with the sector deteriorating at the fastest pace since the first Covid-19 lockdowns.
The latest survey of purchasing managers at eurozone manufacturing firms has found that prices charged for goods fell at the quickest pace since 2009, as demand plummeted and costs dropped.
Production volumes, new orders, employment and purchasing activity all declined at faster rates than in June.
Manufacturers appear to be stuck in a “classic inventory cycle”, where companies have purchased too many goods during the supply chain disruption, so they don’t want to buy more until they’ve sold them.
This pulled the HCOB Eurozone Manufacturing PMI, compiled by S&P Global, down to 42.7 in July, down from 43.4 in June. Any reading below 50 shows a contraction.
That’s the sixth monthly fall in a row, and the worst reading since May 2020 when pandemic restrictions hit manufacturing.
Excluding pandemic-related and lockdown-hit months, the reductions seen for factory output and demand for eurozone goods were the most severe since the global financial crisis in 2008-09.
Dr. Cyrus de la Rubia, chief Economist at Hamburg Commercial Bank, says:
“It looks like the manufacturing recession is here to stay in the eurozone. Stronger declines in output, new orders and purchase volumes at the start of the third quarter back up our view that the economy as a whole is in for a bumpy ride in the second half of the year.
Goods production in the #eurozone fell at the sharpest pace since the global financial crisis in July (except for pandemic-hit months), contributing to the fastest drop in factory gate prices since Sep 2009. @HCOB_Economics #PMI Read more: https://t.co/EsB6WVnAge pic.twitter.com/eyZmVvqi1n
— S&P Global PMI™ (@SPGlobalPMI) August 1, 2023
Greggs sees inflation slowing as sales jump
Elsewhere today, high street bakery chain Greggs has predicted that inflationary pressures will ease this year.
Greggs told shareholders that cost inflation, particularly in food and packaging commodities, “continued to be a feature of the first half of 2023”, as it reports its latest financial results.
But it should “ease somewhat” in the rest of the year, as we catch up with the “significant mid-year increases seen in 2022”.
Greggs says:
Overall like-for-like cost inflation was 11% in the first half of 2023 and we expect this to reduce to around 7% in the second half, averaging around 9% for the year as a whole, in line with our previously communicated expectations.
Greggs also reported that its total first-half sales grew by 21.5%, swelling its underlying profits by 14.2%.
The company has benefited from extending its trading hours, meaning it captures more sales from people out in the evening – with pizza in high demand.
More customers are using its app too, and plant-based foods are a growing part of its fod range.
Greggs: “in a challenging economic environment, little sign so far of consumers cutting back on sausage rolls and pasties.”
— Douglas Fraser✒️🎥🎙 (@BBCDouglasF) August 1, 2023
Cost inflation down from 12% to 7%: “remains unsavoury”
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, forecasts that prices have further to fall, saying:
“We think that house prices will have to fall by about 8% from their peak before demand and supply come back into balance.”
With the Bank of England poised to raised interest rates again on Thursday, the housing market is likely to continue to cool this year as mortgage rates remain elevated.
So predicts Victoria Scholar, head of investment at interactive investor, who explains:
UK Nationwide house prices fell by 3.8% year-on-year in July and 0.2% month-on-month. The average house price stands at £260,828, down from £262,239 last month. According to Nationwide, a typical first-time buyer with a 20% deposit is required to spend 43% of their take-home pay on mortgage payments, up sharply from 32% last year and above the long-run average of 29%.
The annual reading suffered its largest decline since 2009 as rising mortgage rates and the cost-of-living crisis dampen demand for properties in Britain. The housing market is in the doldrums with sellers struggling to achieve their desired offers and therefore are less willing list their properties.
For buyers, the affordability crisis has intensified after borrowing became significantly more expensive. For homeowners, weaker house prices has resulted in a negative wealth effect by reducing the value of their prized assets. For first time buyers, weaker house prices are a positive, however prices are yet to come down significantly enough to offset the pressures from rising mortgage rates.
🇬🇧 Britain’s house price slump deepened after a jump in borrowing costs and the threat of worse to come held back demand from potential buyers.
— Jack Hoogland (@jack_hoogland) August 1, 2023
Nationwide Building Society said its measure of prices fell 3.8% from a year ago, the most since 2009 and quicker than the 3.5% drop… pic.twitter.com/S27wjn3Vw3
Falling house prices: industry reacts
Getting back to the drop in UK house prices…
Chris Hodgkinson, managing director of House Buyer Bureau, argues that the UK is not experiencing a house price crash:
“The weakest level of annual house price growth since July 2009 is sure to cause alarm for the nation’s home sellers and many will be keen to sell their home quickly before the rot sets in any further.
The good news is that we’re not in the midst of a market crash, albeit we are seeing a downward correction. However, the real challenge at present is the heightened level of market instability, the ability to actually find a buyer in a proceedable position and, once you have, making it through to completion without the transaction falling through.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, points out that some major lenders have recently cut their mortgage rates.
“With another 25 basis points interest rate rise expected from the Bank of England later this week, we are not out of the woods just yet when it comes to rising mortgage costs.
“However, a few lenders, including HSBC, Barclays and Nationwide, have reduced their fixed-rate mortgage pricing on the back of better-than-expected inflation news. This has led to a calming of swap rates, which underpin the pricing of fixed-rate mortgages, after weeks of considerable volatility.”
Nicola Schutrups, managing director at mortgage broker The Mortgage Hut, warns that “the direction of travel is now pretty clear”.
There’s a lot of uncertainty among people looking to purchase a new home, so it’s no surprise prices continued to edge down on both a monthly and annual basis in July.
Further falls in house prices are likely for the rest of 2023 but if inflation continues to come down and the jobs market remains strong, there’s still a chance for a soft landing.”
In the City, shares in HSBC have jumped 2.1% at the start of trading on the London stock market after it more than doubled its profits for the first half of the year.
They’ve hit a four-year high.
Traders are pleased that HSBC has announced its second $2bn share buyback of the year, as it continues to benefit from rising global interest rates.
Richard Hunter, head of markets at interactive investor, has analysed HSBC’s results, and reports:
Overall, the release is a tour de force which has been achieved through a combination of higher income, lower costs, the reshaping of the business, all while driving growth. The announcement of a further share buyback and upgrades to its guidance leave little for detractors to focus on.
Although the recovery of the Chinese economy is currently faltering, prospects remain many and varied for HSBC, which is part of the reason for the recent outperformance of the share price.
Updated
The slowdown in the UK housing market has hit earnings at Travis Perkins, the UK builders’ merchant and home improvement retailer.
Travis Perkins has reported a 31% drop in operating profits in the first six months of this year.
It blames “weak market volumes” in new build housing, and in the private domestic market for renovation, maintenance and improvement, as people cut back at DIY work and home development projects.
Nick Roberts, chief executive officer, says:
“Market conditions have been challenging, which is reflected in both our first half performance and our outlook for the balance of the year.
Roberts adds that near-term trading is expected to remain difficult.
El-Erian warns of real risk of slipping into recession
There is a “real risk” that rising interest rates push the UK economy into recession, warns Mohamed El-Erian, chief economic adviser at Allianz.
El-Erian tells BBC Radio 4’s Today programme that the Bank of England (BoE) risks tipping the economy into recession as it raises borrowing costs to fight inflation.
El-Erian says:
People are feeling the pinch from higher mortgages, companies are feeling the pinch from higher borrowing costs, and global activity is not helping.
So yes there is a real risk that we may slip into recession.
He also predicts that the BoE will raise interest rates at its next meeting on Thursday, and again in September.
El-Erian, who is President of Queens‘ College, Cambridge, warns that raising interest rates risks hurting the economy and the most vulnerable, saying:
I don’t think the Bank of England has much of a choice, given that it has a mission to deliver 2% inflation and we are running at almost four times that level [7.9% in June].
However, if it continues carrying the burden on its own, there will be colateral damage and unintended consequences to economic growth and to the wellbeing of the most vulnerable segments of our society.
House prices: the key charts
These charts from Nationwide show how UK house prices have dropped around 4.5% from their peak last summer, but are still sharply above their pre-pandemic levels.
Updated
Knight Frank: Expects prices to fall 5% this year
Estate agent Knight Frank are hopeful that sentiment in the housing market will improve through the rest of this year.
Tom Bill, head of UK residential research at Knight Frank, explains:
“Higher borrowing costs have knocked sentiment and forced buyers to recalculate their budgets but the property market hasn’t slammed on the brakes. The bank rate is nearing its peak, which means that while sentiment will remain subdued, it will only improve in the second half of this year.
That said, prices and sales volumes will come under pressure as the market descends from the highs of the pandemic and adjusts to the new lending environment.
While we expect UK prices to fall by 5% this year, demand should prove more resilient than expected between now and the general election given the cushioning effect of wage growth, high levels of housing equity, lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed-rate deals in recent years.”
UK house prices were down 3.8% on the year in July, according to latest Nationwide figures. Creeping lower - now down 4.5% from peak in August last year (down more in "real", after-inflation, terms, of course - and importantly, also relative to wage inflation)
— John Stepek (@John_Stepek) August 1, 2023
Property lenders also warn that affordability is hitting house prices.
Tomer Aboody, director of MT Finance, explains:
‘The declining number of transactions, combined with negativity in the market, is pushing down property prices, a trend which has been evident for several months.
‘The constant interest rate increases are making affordability difficult for buyers, as they try to make moves, with many waiting until some stability comes in.
‘With some better news on inflation recently, it will be interesting to see whether the Bank of England postpones the next rate rise or goes for a slight increase, giving the market some breathing space to adjust.’
Jeremy Leaf, north London estate agent, says the drop in house prices in July is disappointing – but point out that it only covers buyers taking out a mortgage.
Leaf also confirms that the housing market has softened:
’These figures are a little disappointing considering they are reflecting what was happening in the early to middle part of this year when we saw a rebound in sales before mortgage rates rose significantly.
‘However, Nationwide’s data, though comprehensive and widely respected, can only cover activity of its customers and won’t include the cash buyers who have been dominating the market recently, trying to take advantage of more favourable prices.
‘Clearly, the softening that we have seen in recent months in our offices can take up to a year to show itself in the figures so it may be some while yet before marked differences emerge.’
The descent from Aug 22 peak is now 4.5% below, leaving house prices at £260,828 in July 23, as annual house price growth shuffles down -3.8% in July - the weakest outturn since July 2009 @AskNationwide pic.twitter.com/hN8K4sHfMV
— Emma Fildes (@emmafildes) August 1, 2023
Nationwide also point out that expectations for UK interest rates have been “volatile in recent months”.
In mid-May, the markets expected UK interest rates to peak at 5%. But by early July, that had jumped to 6.5% after UK inflation remained much higher than expected.
Today, though, the peak is expected to be 5.75% next spring, up from 5% today.
Nationwide’s Robert Gardner says:
There has been a slight tempering of expectations in recent weeks but longer-term interest rates, which underpin mortgage pricing, remain elevated.
This time last year UK house prices were rising at a double-digit pace. Now they're falling at the fastest rate since the financial crisis.
— Ed Conway (@EdConwaySky) August 1, 2023
Nationwide data shows prices dropped 3.8% in the year to July. Biggest fall in house price inflation for 14 years. pic.twitter.com/GJRyOTCu1i
Nationwide: Affordability should improve once interest rates peak
Nationwide adds that “a relatively soft landing” in the housing market is still achievable, if the economy develops as expected.
Chief economist Robert Gardner explains:
In particular, unemployment is expected to remain low (below 5%), and the vast majority of existing borrowers should be able to weather the impact of higher borrowing costs, given the high proportion on fixed rates, and where affordability testing should ensure that those needing to refinance can afford the higher payments.
While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once Bank Rate peaks.”
UK house prices fall at fastest rate since July 2009
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK house prices have fallen at their fastest rate since July 2009 as rising interest rates cool the property market.
Nationwide has reported this morning that the average house price fell by 3.8% year-on-year in July, the biggest drop since the aftermath of the financial crisis.
That’s an increase on the 3.5% annual drop in house prices in June, and takes the price of a typical home down to 4.5% below the August 2022 peak.
Prices dipped by 0.2% in July alone, on a seasonally adjusted basis, to an average of £260,828, down from £262,239.
Robert Gardner, Nationwide’s chief economist, says the increase in interest rates in recent months have made it more challenging for prospective buyers to afford a mortgage on a new home.
Gardner explains:
For example, a prospective buyer, earning the average wage and looking to buy the typical first-time buyer property with a 20% deposit, would see monthly mortgage payments account for 43% of their take home pay (assuming a 6% mortgage rate). This is up from 32% a year ago and well above the long-run average of 29%.
Moreover, deposit requirements continue to present a high hurdle – with a 10% deposit equivalent to 55% of gross annual average income.
This challenging affordability picture helps to explain why housing market activity has been subdued in recent months. There were 86,000 completed housing transactions in June, 15% below the levels prevailing the same time last year and around 10% below pre-pandemic levels.
More timely mortgage approval data showed a slight increase in activity in June, though most of these applications will pre-date the more recent rise in longer term interest rates. Moreover, activity is still c20% below 2019 levels.
Data from the Bank of England yesterday showed that mortgage approvals in the UK rose to their highest level since October 2022 last month.
That indicates borrowers were scrambling to secure home loan deals earlier this year before interest rates rose higher.
Also coming up today
UK food inflation has dropped to its lowest level this year. Food inflation decelerated to 13.4% in July, down from 14.6% in June, according to the British Retail Consortium.
This is the lowest food inflation level since December 2022, with prices falling cross key staples such as oils, fats, fish, and breakfast cereals.
Major blue-chip companies HSBC and BP are reporting results this morning.
HSBC has more than doubled its pre-tax profits to $21.7bn, including a provisional gain of $1.5bn on the acquisition of Silicon Valley Bank UK Limited.
BP’s profits have dropped, though, following the decline in oil and gas prices compared to last year. The oil giant still made underlying profits of $2.6bn for the second quarter of the year, down from almost $5bn BP made in January-March, while it made almost $8.5bn in the second quarter of 2022.
The agenda
7am: Nationwide house price index for July
9am BST: Eurozone manufacturing PMI report for July
9.30am BST: UK manufacturing PMI report for July
10am BST: Eurozone unemployment report for June
3pm BST: US manufacturing PMI report for July
3pm BST: US JOLTS job openings report for June
Updated
