UK economy shrank by 0.3% in April
Breaking: The UK economy shrank in April, for the second month running.
GDP declined by 0.3% in April, adding to the 0.1% drop in March — with services, production 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 ONS says:
- Services fell by 0.3% in April 2022 and these were the main contributors to April’s fall in GDP, reflecting a large decrease (5.6%) in human health and social work, where there was a significant reduction in NHS Test and Trace activity.
- Production fell by 0.6% in April 2022, driven by a fall in manufacturing of 1.0% on the month, as businesses continue to report the impact of price increases and supply chain shortages.
- Construction also fell by 0.4% in April 2022, following strong growth in March 2022 when there was significant repair and maintenance activity following the storms experienced in the latter half of February 2022.
- This is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021.
UK Monthly GDP M/M (Apr) act: -0.3%, exp: 0.1%, prev: -0.1%
UK Monthly GDP 3M/3M (Apr) act: 0.2%, exp: 0.4%, prev: 0.8%
— Michael Hewson 🇬🇧 (@mhewson_CMC) June 13, 2022
Here’s our news story on hopes that the surge in petrol prices could finally abate:
Today’s market moves in two charts:
Extraordinary. Markets now pricing in Fed terminal rate of 3.90% in June next year, up 100 bps in just over two weeks. Deutsche Bank the the first major house to forecast above 4%. pic.twitter.com/M8QeB1K33n
— Jamie McGeever (@ReutersJamie) June 13, 2022
NIESR: UK economy could shrink 0.4% in Q2
The UK economy is likely to stagnate in May and June, meaning a contraction in the second-quarter of this year, predicts economic research institute NIESR.
Here’s their take on this morning’s drop in GDP in April:
- Negative growth of 0.3% in April increases the chances of a recession, though this was largely driven by the end of the government’s Test and Trace programme rather than weakness in private demand.
- The impact of rising energy prices, particularly on manufacturing, is likely to impede recovery in the coming months. We now forecast month-on-month growth to stagnate in May and June, leading to a decline of 0.4% in the second quarter overall.
- Strong April growth in retail and hospitality suggest that some households at least have been able to use Covid-19 savings to weather the initial inflation shock. The government’s latest support package may also help avert a larger and longer-term fall in demand.
The cost of insuring European corporate debt against default has also risen today.
Reuters has the details:
Credit default swap indexes measuring the cost of insuring against European corporate bond defaults jumped on Monday to their highest since 2020 as markets sold off sharply after red-hot U.S. inflation data and a COVID-19 warning in China.
The spread on the iTraxx European Crossover index, which measures the cost of insuring exposure to a basket of sub-investment-grade European companies surged nearly 27 basis points (bps) to 525.6 bps, the highest since May 2020 when markets were gripped by the fallout of the coronavirus pandemic.
It has risen nearly 90 bps over the last week as inflation and growth fears, topped by the European Central Bank laying out its plans to remove stimulus, have hit risk assets.
The spread on the iTraxx European index, which measures the cost of insuring against investment-grade corporate bond defaults rose 5 bps to 104.5 bps, the highest since April 2020.
The US bond market flashed a warning sign today that a recession might be coming.
The yield, or interest rate, on two-year US government debt briefly rose above the equivalent yield on 10-year bonds.
In normal times, the longer-dated Treasury bonds ought to trade at a higher rate than the shorter-dated ones, reflecting the greater risk of handing over your cash for longer.
If shorter-dated debt has a higher yield, it suggests that investors see trouble looming, and are selling short-dated bonds [yields rise when prices fall].
Generally, a flatter yield curve suggests that investors are expecting an economic slowdown, or even a recession, in which longer-term interest rates are subdued.
Here’s Bloomberg’s take:
A closely-watched part of the US yield curve inverted on Monday as investors dumped short-term debt on concerns that aggressive rate hikes will lead to an economic slowdown.
The US two-year yield exceeded the 10-year for the first time since early April. Short-term yields that are higher than long-term yields are abnormal, and are historically seen as heralding a potential recession.
Concern has been mounting that surging inflation will require more rapid Federal Reserve policy tightening, which in turn will reduce consumer spending and business activity. US inflation data on Friday rose to a fresh four-decade high, surprising economists.
The US 2y10y yield curve inverted sometime after this tweet of mine & then went back up after a week
2y10y inversions have preceded last 6/7 recessions in the US
Well ladies & gentlemen it has inverted again today as S&P futures officially re-enter Bear Market territory https://t.co/DIOSsuJkCy pic.twitter.com/8gBCOp8vzW
— Alexei Arora (@AlexeiArora) June 13, 2022
S&P 500 is set to open in a Bear Market territory as futures market point to an extended stock selloff following Friday’s meltdown caused by hotter-than-expected May inflation data
S&P 500 futures are down 2.3% Monday AM. The S&P 500 closed Friday down 19% from its record high
— Mona Salama (@MonaSalama_) June 13, 2022
Wall Street is set for further losses, with the tech-focused Nasdaq index down almost 3% in pre-market trading.
The Nasdaq had already lost around 28% since the start of this year, as surging inflation and rising interest rates punctured the high valuations of growth stocks.
Nasdaq futures are down almost 3% in pre-market trading, sending the year-to-date selloff in the benchmark to almost 30%. The underperformance of Big Tech this year has been historic and it continues today, with the S&P down 18% year to date and down 2.4% ahead of the open.
— Lisa Abramowicz (@lisaabramowicz1) June 13, 2022
Analysis: UK economy’s stagnation increases chances of recession
Stagflation has two elements to it: weak growth and rapidly rising prices. Britain already has the inflation; it is now getting the stagnation, our economics editor Larry Elliott writes:
In its May monetary policy report the Bank of England said it expected the economy to expand by 0.1% in the second quarter of 2022. Even this modest forecast now looks a stretch, since it would take growth of 0.4-0.5% in May and June to be achieved. On past form, the extra day’s holiday to mark the Queen’s platinum jubilee will alone reduce growth in the second quarter by 0.4 percentage points.
It now looks odds on that the economy will contract in the second quarter, and despite the £15bn of extra support provided by Rishi Sunak last month, the chances of a recession – two successive quarters of negative growth – have increased.
Even so, the inflationary part of the stagflation scenario means the Bank of England will still raise interest rates for a fifth time in a row later this week. The weakness of GDP makes it more likely it will opt for a 0.25-point increase rather than the more aggressive 0.5-point jump some in the City had been expecting.
UK fuel prices at new records
Petrol and diesel prices hit fresh record highs over the weekend.
The average price of petrol at the pumps hit 185p per litre on Sunday for the first time ever, while diesel reached a new record of 191.03p on Saturday.
This latest rise piles even more pressure on households and businesses, as pressure mounts on the government to make a further cut to duel duty.
Yesterday, business secretary Kwasi Kwarteng asked the Competition and Markets Authority to conduct an urgent review of the retail fuel sector.
The AA says that there may be some respite for petrol drivers soon.
The wholesale price of petrol heading to the forecourts has been lower than its pre-Jubilee peak for more than 10 days, according to the AA. On 1 June, it hit 100.17p a litre before tax, but is now around 96p a litre.
Diesel on its way to the retailer continues to increase in cost, going up from 93.0p a litre on 1 June to around 103.6p today.
Luke Bosdet, the AA’s fuel price spokesman, says:
Petrol price rises should be grinding to a halt, at least temporarily, by the end of the week. There may still be some forecourts yet to pass on the recent surge in costs.
If they continue to go up substantially afterwards, we will be intrigued to hear what excuses the fuel trade has this time. If prices keep going up, they will give the Government further justification in its call to the Competition and Markets Authority for an investigation.
“Diesel’s relentless surge in costs remains a nightmare, with its knock-on impact for the cost of delivery of goods and services, and therefore inflation.”
Worries about global growth, and China’s latest Covid-19 lockdowns, have knocked oil too.
Brent crude is down 1.6%, or $2 per barrel, at around $120/barrel this morning.
#CommodityPrices have reacted negatively to the news of #China reimposing some of the lockdown conditions that it had started to loosen a few weeks ago. #Brent crude #oil opened 1.4% down in early trade, while #Iron ore futures prices slumped by 3.5%. #ThinkAfrica
— Rand Merchant Bank (@RMBCIB) June 13, 2022
The UK’s FTSE 250 index of mid-sized companies has fallen over 2% this morning.
The FTSE 250 is more domestically focused than the FTSE 100, although the top faller is miner Ferrexpo.
The iron ore producer has slumped almost 10% after reporting that a Russian missile strike in southwest Ukraine has disrupted its barging operations that serve European customers.
