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UK GDP falls for second month in a row; recession fear hits markets – business life | Company

UK economy shrank by 0.3% in April

Breaking: The UK economy contracted for the second month in a row in April.

GDP fell 0.3% in April and came on top of the 0.1% decline in March — with services, manufacturing and construction all shrinking in April.

The Office for National Statistics reports that the reduction in NHS Test and Trace activity weighed on the economy, while supply chain problems hit factories.

The US says:

  • Services fell by 0.3% in April 2022 and this was the main driver of the GDP decline in April, reflecting a large drop (5.6%) in human health and social work, where the NHS test and trace activity had decreased significantly.
  • Production declined 0.6% in April 2022, reflecting a 1.0% month-on-month decline in production as companies continue to report the impact of price increases and supply chain shortages.
  • Construction also fell 0.4% in April 2022, after strong growth in March 2022, when there was significant repair and maintenance activity following the storms in the second half of February 2022.
  • This is the first time all major sectors have contributed negatively to a monthly GDP estimate since January 2021.

UK Monthly GDP M/M (April) act: -0.3%, exp: 0.1%, previous: -0.1%

UK Monthly GDP 3M/3M (April) act: 0.2%, exp: 0.4%, previous: 0.8%

— Michael Hewson 🇬🇧 (@mhewson_CMC) June 13, 2022

Stocks hit by recession worries

European equity markets have plunged to three-month lows, hit by fears of rising inflation, slowing growth and Covid-19 outbreaks in China.

In London, the FTSE 100 index fell 1.4% or 103 points to 7213, the lowest in more than three weeks.

Home builders and catering companies such as hotel group White bread (-4.4%), are among the decliners, as the fall in GDP in April hit confidence.

The pan-European Stoxx 600 index has reached its lowest level since early March (when the Ukraine war sent stocks down) by 1.5% to 416.37 points.

This follows heavy losses in the Asia-Pacific markets, where investors caught up on Friday in Europe and the Americas – after US inflation hit a 40-year high.

Investors are increasingly concerned that central banks will aggressively raise interest rates to cool inflation, crushing growth.

The US Federal Reserve is expected to raise borrowing costs by at least 50 basis points on Wednesday as it tries to get a handle on rising consumer prices.

Richard Hunter, Head of Markets at interactive investor, says hopes we’d seen “peak inflation” have been thwarted.

“The latest inflationary pressures proved too hot to handle, leading investors to seek cover ahead of a more aggressive series of moves from the central bank.

In the US, inflation of 8.6% in May compared to 8.3% in April had shattered hopes that inflation had peaked. As such, Wednesday’s Federal Reserve decision takes on added significance. While investors have been relatively comfortable with a likely 0.5% increase, new inflationary pressures have cast some doubt as to whether a 0.75% increase could be on the table.

This, in turn, would rekindle concerns, which had never been far off, that a newly enacted round of aggressive monetary tightening could dampen economic growth to the extent that the specter of recession is looming.

There is also concern over China after nearly 200 Covid infections were linked to a single bar in the capital Beijing. A government spokesman described the outbreak as “furious,” sparking optimism that China could soon fully reopen.

Authorities have launched a three-day mass testing campaign of Chaoyang’s 5 million residents. About 10,000 close contacts of the bar’s customers have been identified and their residential buildings have been sealed off.

Hunter say:

With easing restrictions only announced in recent days, the news inevitably raised concerns that demand and consumer confidence would take another hit, adding to the cocktail of factors that could hold back global growth.

The April contraction increases the risk of the UK slipping into recession, says Paul Dales of Capital Economics:

The 0.3% m/m decline in real GDP in April was not as weak as it seems, but nevertheless increases the chances of the economy sliding into recession.

While this probably won’t stop the Bank of England from raising rates again on Thursday, it does increase the likelihood of a 25 basis point (bps) gain instead of the 50 basis point rise from 1.00% to 1.50% that we predict.

The 0.3% m/m decline in real GDP in April was not as weak as it seems, but nevertheless increases the chances of the economy sliding into recession. This is unlikely to stop the Bank of England from raising rates again on Thursday. https://t.co/MCQiPk9zx0 pic.twitter.com/ON9Mr3Vsjh

— Capital Economy UK (@CapEconUK) June 13, 2022

Environment Secretary George Eustice has called “disappointing” figures showing the UK economy shrank by 0.3% in April.

The minister told BBC Breakfast that the war in Ukraine and other global pressures had a “huge impact” on the global economy (via PA Media).

“As the world comes out of the pandemic there is clearly a lot of global pressure, especially inflation and of course the events in Ukraine and that huge spike in gas prices will have a huge impact on the global economy.

“We’re starting to see that coming through and those are, of course, disappointing numbers.”

Samuel Tombs of Pantheon Macroeconomics hopes the UK will avoid a full-blown recession.

He expects the economy to contract between April and June, but predicts the government’s £15bn cost of living will support the economy later this year.

“A recession – two quarters of negative growth – remains unlikely.

“Household real disposable income should increase in both the third and fourth quarters as the Chancellor has announced an additional £15 billion in subsidies in these quarters, equivalent to almost 2% of their likely income.”

It’s worth recalling that the MPC thought GDP would rise 0.1% q/q in the second quarter. The 0.3% m/m decline in April blows that forecast out of the water – we are now heading for a 0.5 to 0.7% q/q decline in the second quarter (if you factor in the anniversary ). There is now about a 0% chance of the MPC rising 50bp this week

— Samuel Tombs (@samueltombs) June 13, 2022

Mazars: This feels like a recession for consumers

Consumers are quick to cut cost of living ‘once in a generation’, says George Lagariaschief economist at accounting firm Mazars

UK GDP was negative, -0.3% for the second straight month in April.

The number shouldn’t come as a surprise, as a bleak number of retail sales had already set the tone for the month, falling at a pace comparable only to the first lockdown in 2020.

For an economy where consumption is so central, the signs for the future are troubling. Technically, we may not be in a recession yet, but for many consumers it feels that way.

Faced with a once-in-a-generation cost of living crisis, consumers are quickly cutting unnecessary spending, causing a shock to the market.

The pound hit a four-week low against the US dollar this morning, falling half a cent to $1,227

Sam Kuiper, vice president of market risk solutions at sicon valley bank, says April’s disappointing GDP report put more pressure on sterling:

“Another episode of disappointing economic data will add to the mounting downward pressure on the pound.

GBPUSD opens the week trailing as the bleak realities of low growth and ongoing political headwinds continue to take their toll on sterling.”

Ending free Covid-19 testing means: April UK GDP figures would always look “worse than reality”, says James Smith of ING.

But… that pandemic spending also gave GDP an ‘artificial’ boost in recent months, making the economy look stronger.

Smith explains:

Free Covid-19 testing stopped last month and, according to the ONS, that meant a 70% drop in testing and tracking activity. Pandemic-related health expenditures fell by as much as 0.5 percentage point of GDP growth in April.

And if we take that out, the 0.3% nominal decline in monthly GDP should actually have been marginal in the growth zone.

In short, just as health-related spending artificially boosted GDP levels last year, causing the economy to appear to be recovering more quickly to pre-virus levels than it actually did, these categories now make the picture superficially worse.

British GDP
British GDP Photo: ING/US

Chancellor Rishi Altar says the UK isn’t alone in seeing a slowdown….

“Countries around the world are seeing slowing growth, and the UK is not immune to these challenges.

“I want to reassure people, we are completely focused on growing the economy to address the longer-term cost of living, while supporting families and businesses with the immediate pressures they face.”

It is true that the US economy and France both contracted in the first quarter of this year.

But… the OECD has forecast that Britain will be the slowest-growing G7 economy by 2023, hit by higher interest rates, higher taxes, reduced trade and more expensive energy.

Environment Minister George Eustice has admitted there are “some real challenges ahead” after the UK economy contracted in April.

Eustice was asked on Sky News if it was time for the government to “stop claiming it is the fastest growing economy in the G7” after GDP fell 0.3% in April.

He cited recovery from the pandemic and supply chain pressures as causes of the decline.

“We knew for a while that this was going to be a challenge.

“We have unemployment that is at an all-time low, the lowest since 1974, but of course there are some real challenges ahead and these GDP numbers are a reminder of those challenges.”

The NHS Test and Trace and COVID-19 vaccination program negatively impacted GDP growth by 0.5 percentage points in April 2022, the ONS explains:

This was driven by further declines in NHS Test and Trace numbers, which fell by 70%, as a result of the changes to England’s COVID-19 testing policy from April.

Vaccination programs grew 71% on the month as a result of the spring booster campaign.

BUT – GDP would have grown by 0.1% if Test & Trace had not been discontinued

— Andy Bruce (@BruceReuters) June 13, 2022

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