UK economy shrank by 0.1% in March as cost of living crisis bites – business live

European markets are all in the red, with the pan-European Stoxx 600 dropping around 2%.

🔔 European Opening Bell 🔔

🇬🇧 FTSE 100 down 1.9%

🇪🇺 STOXX 50 down 2%

🇪🇺 STOXX 600 down 2%

🇩🇪 DAX down 2.2%

🇫🇷 CAC 40 down 2.2%

— PiQ  (@PriapusIQ) May 12, 2022

FTSE 100 hits eight-week low

In the City, the FTSE 100 index has hit its lowest since mid-March as markets continue to be hit by recession worries.

The index of blue-chip shares has tumbled 2% in early trading to around 7201 points, down 146 this session.

Mining stocks are among the fallers, with copper producer Antofagasta (-5.7%), Glencore (-4.4%), Anglo American (-3.7%) and Rio Tinto (-3.5%) suffering from concerns that aggressive US interest rate rises this year will hurt the global recovery.

Tech investor Scottish Mortgage Investment Trust (-5%) and online grocery tech business Ocado (-5.3%) are also down heavily again, after the US Nasdaq index fell 3% yesterday.

The tumble in technology stocks this year is quite dramatic now:

Carnage so far in 2022

Netflix -72.4% = worst year on record
Facebook -43.9% = worst on record
Amazon -36.8% = worst since ’08
Tesla -30.5% = worst on record
Microsoft -22.5% = worst since ’08
Google -21.6% = worst since ’08
Apple -17.5% = worst since ’08

— Jonathan Ferro (@FerroTV) May 11, 2022

Financial services provider Hargreaves Lansdown are the top FTSE 100 faller, down 7%, after reporting a slowdown in customer growth and client inflows amid market turmoil and the Ukraine war.

It said “unprecedented macro-economic and geo-political events has impacted markets and investor confidence”.

Pound at two-year low against US dollar

The pound has hit a new two-year low against the US dollar, as recession worries rise.

Sterling sunk below the $1.22 mark for the first time since June 2020, and also touched a seven-month low against the euro at €1.16.

The pound vs the US dollar
The pound vs the US dollar over the last two years Photograph: Refinitiv

Uncertainty over the UK economic outlook hit the pound, while the US dollar continues to benefit from bets of aggressive rate hikes by the Federal Reserve.

Sam Cooper, vice president of Market Risk Solutions at Silicon Valley Bank, warns the pound could remain weak:

“The disappointing GDP reading will add to the pound’s mounting list of concerns. With economic growth slowing, consumer prices spiraling and the fallout from Brexit lingering in the background, it is difficult to envisage sterling reversing its recent bout of weakness any time soon.”

The pound has looked vulnerable since the Bank of England slashes its growth forecasts last week and predicted inflation will hit 10%.

This analysis by Larry Elliott explains how currency speculators are circling the pound, sensing weakness as growth.

As Nick Parsons, head of research at the impact investment firm ThomasLloyd, put it:

“The UK is set for the slowest growth in the G7. It is going to have the highest inflation in the G7. It has the greatest political uncertainty. That’s a pretty unpleasant combination.”

Worryingly, UK business investment fell by 0.5% in Quarter 1 2022, suggesting companies held back from spending on new projects.

That leaves business investment 9.1% below its pre-coronavirus pandemic levels, today’s GDP report shows.

Martin Beck, chief economic advisor to the EY ITEM Club, says it’s a disappointing start to the year:

With the consumers feeling the pinch and the Government tightening its purse strings, the onus is on companies to step up and invest more before the super deduction ends next year.

But with business investment having fallen again in Q1 2022, the year has got off to a disappointing start in that respect.”

Rory Macqueen, principal economist at the thinktank NIESR, is also concerned:

March’s deterioration in consumer confidence translated into a sharp fall in retail and wholesale, which was exacerbated by continuing supply-chain problems in the motor industry.

Offsetting this, the continuing normalisation of GP and hospital activities cancelled out falling Covid-related activity to mean that the health sector returned to month-on-month growth. Falling business investment in the first estimate for the first quarter is a concern: with the government’s tax ‘super-deduction’ expiring in under a year we still still see little sign of a recovery from the Covid shock.”

This chart shows how the recovery in the UK’s service sector faded, with activity down 0.2% in March.

ONS GDP Photograph: ONS

The wholesale and retail trade sectors fared worse, as consumers cut back on spending and the car sector was hit by falling sales.

Human health and social work activities saw the fastest growth, due to a rise in GP appointments, and accident and emergency care (although activity at NHS Test and Trace and the COVID-19 vaccination programme fell).

UK service sector in March
UK service sector in March Photograph: ONS

Full story: UK GDP shrinks in March as consumers cut spending

Larry Elliott

Larry Elliott

Britain’s economy contracted in March as consumers cut back on spending in the face of the rising cost of living, the latest official figures show.

Activity fell by 0.1% after flatlining in February – an even weaker performance than economic experts had been predicting – with spending in shops suffering particularly badly.

Data from the Office for National Statistics showed the economy struggling even before households were hit by higher energy bills and tax increases in April and will increase pressure on Rishi Sunak to ease the inflationary squeeze.

Sunak said:

“The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times.

“Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.”

Rachel Reeves, Labour’s shadow chancellor said the figures for gross domestic product would increase the public’s worries and urged the chancellor to produce an emergency mini-budget – a call echoed by the British Chambers of Commerce.

Here’s the full story:

The UK government must choose between an emergency budget or the growing risk of a recession, says TUC General Secretary Frances O’Grady:

“The Bank of England has warned the government that families are being forced to cut back, and the fall in demand will hit growth. But the Chancellor isn’t doing anything about it.

“The choice now is clear. Either the Chancellor steps up with an emergency budget to get pay rising, help families with soaring bills, and keep the economy moving. Or we risk sliding into recession, with families and businesses paying the price.”

UK faces fight to avoid recession

The UK faces a serious fight to avoid recession this year, warns Ed Monk, associate director for Personal Investing at Fidelity International.

“Soaring energy, fuel and food prices continue to eat into household budgets. And while some are already having to choose between basic necessities, this is unlikely to be the end of the squeeze. With inflation reaching 7% [in March] households are navigating largely unfamiliar financial territory while also trying to prepare for the likelihood that bills will rise still further.

“Despite government promises this week to address the cost of living challenge, the threat of recession appears to be growing. By the end of the second quarter of 2025 the UK economy is expected to be barely bigger than it is today.

The Bank of England has so far been focussed on bringing inflation down in the medium term via rate rises. It must now also factor in an economy at risk of shrinking earlier than it has forecast as well.”

Caroline Simmons, UK Chief Investment Officer at UBS Global Wealth Management, warns the UK could shrink in the current quarter, as soaring energy prices hit consumers.

Today’s figures will only fuel concerns for the growth outlook for coming quarters.

In particular, there is growing potential for UK GDP to be negative in the second quarter, which is in part due to the consumer squeeze from energy price rises.

Economists and business groups are understandably concerned by the UK’s economy slowdown, and the contraction in March.

Rain Newton-Smith, chief economist at the CBI, warns that times are going to get tougher:

“Cost pressures and rising prices have tightened their grip, with both businesses and households feeling the pinch. The end result is a weaker economic outlook.

“It’s clear that the most vulnerable households and energy-intensive businesses may need further support, so the government should keep this under review.

“But the only way to build a resilient economy, one that can withstand price shocks, is a relentless focus on growing productivity and potential output. Business is the solution to both, so should be adequately supported to invest and grow.”

Rachel Reeves MP, Labour’s Shadow Chancellor of the Exchequer, says the government must draw up an emergency budget now, to help address the cost of living crisis.

March’s drop in GDP adds to the worries families already face, as inflation rises faster than wages, explains Reeves.

She urges Boris Johnson’s cabinet, who are holding an awayday in Staffordshire today, to agree to take emergency action on the cost of living crisis, after failing to do so in the Queen’s speech.

Reeves says:

“The Government’s Queen’s Speech this week was out of ideas and out of touch, devoid of any real economic plan for growth or to tackle the cost of living crisis.

“Anything less than coming back urgently with an Emergency Budget to help ease the pressure from the cost of living crisis is a failure by this Conservative government.”

NEW: GDP figures see dramatic drop to -0.1% in March.

This adds to the worries families already face from the cost of living crisis.

If the PM and Cabinet come back from their Away Day in Staffordshire today with anything less than an Emergency Budget, they will have failed.

— Rachel Reeves (@RachelReevesMP) May 12, 2022


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