The
latest gross domestic product (GDP) statistics show the UK economy unexpectedly
shrank in April, increasing concerns about future growth prospects.
Data
released by the Office for National Statistics (ONS) revealed that the economy
shrank by 0.3% in April following a fall of 0.1% in March; this was the first
contraction in two consecutive months since the start of the pandemic. April’s
figure was also much weaker than analysts had been expecting, with the
consensus forecast from a Reuters poll of economists predicting a growth rate
of 0.1%.
ONS
said a key driver behind April’s decline was a ‘significant reduction in NHS
Test and Trace activity.’ It also noted some ‘common themes’
reported by firms across different industries, with many saying increases in
the cost of production and supply chain shortages had affected their business.
Commenting
on the UK’s economic outlook the same day as the GDP figures were published,
CBI Director General Tony Danker said the business group was “expecting the
economy to be pretty much stagnant” and that “it won’t take much to tip
us into a recession.”
More
recent survey data from S&P Global’s closely watched Purchasing Managers’
Index also suggests the economy is showing signs of stalling. While the
preliminary headline figure for June was unchanged at May’s 15-month low of
53.1, the index measuring new orders fell to 50.8, the weakest growth rate for
over a year, with manufacturing order books dipping below the 50.0 growth
threshold to 49.6.
Chris
Williamson, Chief Business Economist at S&P Global Market Intelligence said,
“The economy is starting to look like it is running on empty. Current
business growth is being supported by orders placed in prior months as
companies report a near-stalling of demand. Business confidence has now slumped
to a level which has in the past typically signalled an imminent recession.”
BoE ready to act ‘forcefully’
Last month saw the
Bank of England (BoE) sanction another quarter-point increase in its benchmark interest rate as the Bank continues its efforts to contain the spiralling rate of inflation.
After its latest meeting held in mid-June, the
BoE’s nine-member Monetary Policy Committee (MPC) voted by a 6-3 majority to
raise Bank Rate from 1.0% to 1.25%. This was the fifth
consecutive meeting at which the MPC had tightened monetary policy and
pushed rates up to their highest level in 13 years.
For the second meeting in a row, the three dissenting
voices each called for a half-point hike and
the minutes to the meeting stressed that the BoE was ready to take ‘the
actions necessary to return inflation to the 2% target.’ The minutes
concluded, ‘The Committee will be particularly alert to indications of more
persistent inflationary pressures, and will if necessary act forcefully in
response.’
BoE
Governor Andrew Bailey reinforced this message when speaking
at a European Central Bank conference in late June.
Mr Bailey said the Bank needed the option of half-point rate rises in order to
address inflation and added “the key thing for us is to bring inflation back
down to target and that is what we will do.”
When announcing last month’s rate rise, the BoE said it now expects
inflation to peak ‘slightly above’ 11% in the autumn. A
key driver of this anticipated rise
will be higher household energy bills which look set
to increase sharply in October as a result of Ofgem’s forthcoming
price cap review.
The
latest data released by ONS showed that inflation currently stands
at a 40-year high. In the 12 months to May, the rate of
inflation as measured by the Consumer Prices Index, rose
to 9.1%, up slightly from April’s figure of 9.0%.
Markets
(Data compiled by TOMD)
As Q2 drew to
a close, growing concerns of a
global economic downturn weighed on major indexes.
In the UK, the FTSE 100 closed the month on 7,169.28, a loss of 5.76%.
The FTSE 250 and AIM also recorded monthly losses of 8.58% and 10.20%
respectively. The Euro Stoxx 50 closed the month down 8.82% on 3,454.86, as major Eurozone markets prepare for
the European Central Bank (ECB) to hike rates in the face of soaring inflation. The Japanese Nikkei 225 ended the month on
26,393.04, down 3.25%.
At the end of Q2, Wall
Street declined on the back of weak US GDP figures. With the Federal Reserve
also looking at aggressively tightening monetary policy to combat inflation,
fears of a recession have heightened. A disappointing consumer confidence
survey at the end of June also weighed on investor sentiment. The Dow closed the month down 6.71%,
while the technology focused NASDAQ finished down 8.71%.
On the foreign exchanges, sterling closed the month at $1.21 against the US dollar. The euro closed at €1.15 against sterling and at $1.04 against the US dollar.
Brent Crude closed the month trading
at around $109 a barrel, a loss of 7.55%, its first monthly decline since November, as signs emerge
that the US economy is on a weaker footing than expected. At month end, the Organization of the
Petroleum Exporting Countries and allies (OPEC+)
approved an increase in supply
for August. Gold is currently trading at around $1,817 a troy ounce, a
loss of 2.02% on the month.
The latest set of
earnings statistics showed that basic pay continues to lag the rapidly rising
cost of living with real regular wage levels falling at the fastest rate in
more than a decade.
ONS
figures released last month showed that average weekly earnings excluding
bonuses rose at an annual rate of 4.2% across the February–April period, the
same level reported in the previous month’s release. However, when adjusted for
inflation, the latest data shows that basic pay packets actually shrank, with
real regular earnings down by 2.2% in comparison to year earlier levels.
In
contrast, growth in employees’ average total pay (which includes bonuses)
across the latest three-month period slowed to 6.8%, down from a rate of 7.0%
between January and March. Despite the fall, this measure of pay does still
continue to outstrip price rises, with total pay growing by 0.4% in real terms
across the February–April period.
Commenting
on the data, ONS Head of Economic Statistics Sam Beckett said, “The high
level of bonuses continues to cushion the effects of rising prices on total
earnings for some workers, but if you exclude bonuses, pay in real terms is
falling at its fastest rate in over a decade.”
Retailers
report fall in sales
Official retail sales
statistics show consumers have started to cut back on their shopping as the cost-of-living squeeze
bites into household budgets.
The
latest ONS data revealed that total retail sales volumes fell
by 0.5% in May
compared
to April’s level. In addition, the
previous estimate of sales growth in April was downgraded to 0.4%
from an original figure of 1.4%, following a review of the
seasonal adjustments process.
ONS
said May’s fall had been driven by weaker food sales, with feedback
from supermarkets suggesting consumers were spending less on their food shop due to
the rising cost of living. In total, supermarket sales fell
by 1.5% in May, while specialist shops such as butchers and bakers
reported a 2.2% decline.
Other
data also highlights the darkening consumer mood. GfK’s
long-running Consumer Confidence Index, for instance, fell to
-41 in June, a new record low for the second consecutive month, while the CBI’s
Distributive Trades Survey points to continuing weakness
in retail sales growth. The balance of retailers suggesting sales were poor for
the time of year fell to -19 in June from zero in May, while the figure anticipating
that sales this month will remain below
seasonal norms was -25.
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