FTSE 100 falls 0.7pc; Pound rises after GDP beat
Wall Street slumps after inflation tops forecasts
Ambrose Evans-Pritchard: Putin may cut off oil as well as gas to cripple Europe
Some German households will be forced to heat their homes with wood instead of gas as Russia turns off the taps, according to dire warnings from analysts.
Global shortages of gas worsened by Russia’s war on Ukraine have sent prices soaring, with many consumers cutting usage in response.
Analysts at Deutsche Bank said they expect demand for gas in Germany over the next few months will remain 10pc below the level one year ago, driven by savings by households, industry and the services sectors.
They added: “In addition, substitution of gas by other energy sources (hard coal and lignite in the power sector, wood for heating purposes in private households where possible, switch to oil derivatives in the industry, etc.) contributes to lower gas demand.”
Russia has been restricting supplies to Europe and there is mounting concern it will keep the key Nord Stream 1 pipeline closed after maintenance.
The supply crisis threatens shortages and blackouts this winter and could push countries including Germany into recession.
That's all from us today, we shall see you tomorrow! Before you go, have a look at the latest stories from our team:
Electric vehicles start-up Arrival to slash roles too
Talking about job cuts, up to 800 roles at electric vehicles start-up Arrival are at risk after the company said it would cut costs by a third.
The firm, which listed on the Nasdaq last year but has not started production, is looking to protect its cash reserves as it blamed a "unique economic environment”.
It posted $10.4m (£8.7m) losses in the last quarter due to “supply chain issues, an ongoing pandemic, geopolitical tensions and rising inflation”.
The London-based designer of electric buses and vans has 2,700 employees in the UK, US, Germany, Luxembourg and Georgia.
$7bn virtual meeting business cuts a third of staff as remote working falters
A virtual events start-up that soared to a $7.75bn (£6.5bn) valuation after the world was forced to work from home is cutting a third of its staff as demand for digital events falters. Matthew Field has more:
Hopin, a British start-up founded by 28-year-old Johnny Boufarhat, has laid off 29pc of its employees, around 242 people, just months after cutting 12pc.
The fresh round of job cuts, first reported by Business Insider, comes as the virtual events company races to adapt to the post-Covid world.
The company puts on video events that people can join from home and enjoyed huge demand during the pandemic as virtual events became a necessity. More recently, many corporate gatherings have returned to the real world, putting pressure on its business.
On Hopin’s “Explore” service, a library of ongoing and future events, there are only around 200 public events being hosted in July and August, compared to 15,000 per month the company reported in November 2020. This does not include private events for clients.
FTSE 100 slides in the red
The FTSE 100 has fallen after hotter-than-expected US inflation data slammed global markets, while a surprise growth in Britain's economy failed to assuage recession worries. The index dropped 0.7pc to 7,156 as sterling edged higher.
Data showed Britain's economy grew unexpectedly in May, driven by a rise in doctor appointments and demand for holidays, that could reassure the Bank of England about its plans to keep on raising interest rates.
Meanwhile, US inflation data fanned fears that the Federal Reserve might take a more aggressive stance on rate hikes, potentially tipping the world's largest economy into a recession.
"We can now expect a 50bps hike being delivered from the BoE next month and pressure to grow on the ECB (European Central Bank) to do the same," said Stuart Cole, head macro economist at Equiti Capital.
"It puts pressure on both to be more aggressive in their attempts to bring inflation back under control, with 25bps hikes now seen as inadequate. Neither explicitly target the exchange rate in their policy deliberations, but they will both be aware, and likely concerned, about the inflationary consequences of a weaker pound or euro."
UK railway workers to strike on July 27
UK railway workers said they’d walk out for 24 hours on July 27 to protest a “paltry” pay offer, in what would be the second major strike of the summer.
The National Union of Rail, Maritime and Transport Workers said workers rejected the offer from Network Rail, which runs the UK’s rail infrastructure. It proposed a 4pc increase in the first year, followed by a possible 4pc in the second year, which was conditional on members accepting new terms and conditions, the union said.
The threat of further disruption comes after rail travel across the UK was largely halted in June by a three-day rail strike, the biggest in more than three decades. Separately, Britain’s train drivers’ union said this week that members voted to strike over a pay dispute, potentially adding to a wave of industrial action that’s hit the country across a number of sectors.
Record fuel prices force drivers to cut back
Record prices at the pumps have prompted drivers to cut back on filling up, hitting demand for oil from the UK. Matt Oliver reports:
The cost of petrol for a typical family car broke through the £100 mark this summer, with the average price of a litre of unleaded hitting a record 191.05p.
Drivers in wealthier countries have responded by cutting back on fuel spending, according to the International Energy Agency (IEA).
The global energy watchdog said record prices were the most likely cause of the “larger than normal” drop in demand for oil that has been seen among the OECD club of rich nations.
Bill Gates to donate $20bn to Bill & Melinda Gates Foundation
Bill Gates is donating $20bn (£16.7bn) to the Bill & Melinda Gates Foundation this month as the philanthropic behemoth plans to speed up its pace of giving.
“I hope by giving more, we can mitigate some of the suffering people are facing right now and help fulfill the foundation’s vision to give every person the chance to live a healthy and productive life,” said Mr Gates, the world’s fourth-richest person.
The foundation’s new goal of distributing $9bn annually, which it aims to accomplish by 2026, is a 50pc increase from its current rate. Mr Gates’s latest infusion of cash brings the foundation’s total endowment to about $70bn.
Following their tumultuous divorce last year, the foundation’s namesake billionaires jointly committed $15bn to the Seattle-based organisation, which Mr Gates’s most recent contribution would fully cover.
That's all from me today – thanks for following! Giulia Bottaro is taking over from here.
Three charts that show Britain’s economic recovery is a mirage
Britain’s economy put on an unexpected growth spurt in May, sending GDP up 0.5pc. Yet a deeper delve into the numbers shows the UK’s economic recovery is a mirage, with private sector growth still weak.
Tim Wallace and our excellent production team have put together three graphs showing how the cost-of-living crisis is starting to bite, despite what the headline numbers suggest.
Twitter shares rise after Hindenburg takes long position
Twitter shares rose this afternoon after short-seller Hindenburg said it had taken a long position in the company and warned its lawsuit against Elon Musk could pose a threat to his companies.
Shares were up around 6pc on the revelation, which came a day after Twitter sued Musk for violating his $44bn deal and asked a Delaware court to order him to complete the merger.
Musk, who is the chief executive officer at Tesla Inc and heads SpaceX, said he was terminating the deal because Twitter violated the agreement by failing to respond to requests for information regarding fake or spam accounts on the platform.
Read more on this story: Elon Musk’s $44bn Twitter takeover was ‘an elaborate joke’, lawsuit claims
BT union issues strike notice over pay demands
The chaos just keeps coming. On top of more rail strikes, BT is now facing a major walkout.
Staff at the telecoms giant are set to strike nationwide for the first time in 35 years after their pay demands were left unmet.
Members of the Communication Workers Union voted overwhelmingly in favour of industrial action last month and a deadline set by the union for the company to make a better pay offer has now passed.
The CWU said BT boss Philip Jansen had turned down an offer of talks. Some 40,000 workers could walk out.
Sadiq Khan warns Grant Shapps of ‘serious consequences’ after Tube’s latest spending reprieve
In more transport chaos today, Sadiq Khan has threatened Grant Shapps that there will be ‘serious consequences’ for the Tube and buses as a fresh row erupts over a bailout for Transport for London (TfL).
Here's more from Oliver Gill:
The London mayor said that Underground, trains and bus services would need to be placed into "managed decline" because of the Government’s refusal to hand him billions of pounds in funding.
Mr Shapps, the Transport Secretary, accused Mr Khan and TfL of repeatedly failing to answer questions on how the money will be spent.
Officials from City Hall and Westminster have been locked in talks in recent weeks to thrash out a multi-year deal that would put TfL’s funding on a firmer footing.
But with both sides unable to agree terms, a short-term extension until Jul 28 has now been put in place to avoid the transport authority running out of money within days.
RMT boss: Strikes are only option open to us
Here's the full statement from RMT general secretary Mick Lynch after the union voted to strike again following last month's crippling walkout:
The offer from Network Rail represents a real terms pay cut for our members and the paltry sum is conditional on RMT members agreeing to drastic changes in their working lives.
We have made progress on compulsory redundancies, but Network Rail are still seeking to make our members poorer when we have won in some cases double what they are offering, with other rail operators.
The train operating companies remain stubborn and are refusing to make any new offer which deals with job security and pay.
Strike action is the only course open to us to make both the rail industry and Government understand that this dispute will continue for as long as it takes, until we get a negotiated settlement.
The public who will be inconvenienced by our strike action need to understand that it is the Government's shackling of Network Rail and the train operating companies that means the rail network will be shut down for 24 hours.
Rail workers to strike again
Rail workers are to stage a fresh strike, threatening even more travel chaos this summer.
Members of the RMT at train companies and Network Rail will walk out for 24 hours on July 27.
Union leaders made the announcement after rejecting a new offer from Network Rail which they described as "paltry".
The offer was for a 4pc pay rise backdated to January, another 2pc next year and a further 2pc conditional on workplace changes.
The RMT said it has yet to receive a pay offer or guarantees over job losses from the train operating companies.
The RMT said it will be consulting other unions that have delivered mandates for strike action in the coming days, amid talk of coordinated walkouts.
IMF to cut forecasts again as outlook 'darkens'
The International Monetary Fund has warned it will cut the forecast for global economic growth again as countries grapple with Russia’s invasion of Ukraine, Covid lockdowns in China and higher inflation.
Kristalina Georgieva, head of the IMF, said the outlook for this year and next will be downgraded later this month when the group releases its World Economic Outlook Update.
She wrote in a blog post: “The outlook remains extremely uncertain. It is going to be a tough 2022 – and possibly an even tougher 2023, with increased risk of recession.”
The global recovery from the pandemic has been compromised by surging commodities prices on the back of the Ukraine war and a slowdown in China amid sustained Covid-19 restrictions.
Stronger inflation is also forcing policy makers to raise interest rates, moves aimed at cooling price growth but that risk tipping economies into recessions.
Elon Musk’s $44bn Twitter takeover was ‘an elaborate joke’, lawsuit claims
Twitter has accused Elon Musk of treating his $44bn takeover of the company like an “elaborate joke”, as the tech company’s lawyers seek to use the Tesla billionaire’s own tweets against him in court.
Matthew Field has more details:
A 62-page legal filing to the Chancery Court in Delaware, filed overnight, was littered with Mr Musk’s tweets and public statements, which Twitter claims show his “bad faith”.
Mr Musk strong-armed the company into agreeing to a sale, pushing through the deal on “seller friendly” terms, before quickly getting cold feet as tech stocks collapsed, Twitter argues.
“The value of Musk’s stake in Tesla, the anchor of his personal wealth, has declined by more than $100bn from its November 2021 peak,” Twitter’s lawyers claimed in their filing. “So Musk wants out.” Tesla’s shares have fallen close to 40pc since the deal was announced in April.
Twitter now hopes it can use the courts to force Mr Musk to go through with his takeover.
Wall Street slumps on inflation woes
Wall Street's main indices have opened firmly in the red as investors were taken aback by hotter-than-expected inflation figures for June.
The jump in the consumer price index to 9.1pc in June is making markets increasingly worried about aggressive interest rate rises, while the risk of a recession is looming ever larger.
The benchmark S&P 500 fell 1pc, while the Dow Jones was down 0.8pc. The tech-heavy Nasdaq slumped 1.9pc.
Markets bet one-in-three chance of full point rate rise
Traders are already reshuffling their bets on future interest rate rises after the latest inflation numbers.
Swap markets show markets see a rate rise of 75 basis points as a definite, with a one-in-three chance it could be a full percentage point.
The market had already shifted earlier in the day to fully price in a 75-basis-point increase.
Traders also moved to almost fully price in a total of 1.5 percentage points of increases over the July and September meetings, while expectations for where the Fed benchmark will max out in the first part of 2023 jumped to around 3.6pc.
More reaction: Fed can only raise rates further now
Seema Shah, chief strategist at Principal Global Investors, says the Fed will now be forced to raise rates even more quickly as it plays catch-up against inflation.
Inflation keeps heating up, defying expectations for a peak to be reached. With inflation now above 9pc it is simply unthinkable that the Fed could slow its tightening pace and certainly market chatter about a Fed pivot will stop now.
A 0.75pc hike in July is surely a done deal and further increases of that magnitude cannot be ruled out. We see rates moving to 4.25pc next year as the Fed desperately attempts to recover from its earlier erroneous inflation read.
Reaction: 'False dawn' in battle against inflation
Richard Carter at Quilter Cheviot says markets have once again been wrong-footed by inflation.
Today marks another false dawn in the battle against inflation as in the US consumer prices surprised to the upside once again.
This time CPI has breached 9pc, hitting 9.1pc in the year to June, and we now have to question just how close are we to the peak?
This disappointment means that a 0.75pc hike from the Federal Reserve at their next meeting is an absolute certainty and there may even be pressure from some quarters for them to do more.
Central Banks are clearly struggling to get a handle on inflation and if this number continues to grow or hover around this level then more will be required to drive it down, regardless of the economic consequences this may have.
Markets are likely to remain volatile on the back of this although the fall in the oil price in recent days does offer some hope that inflation pressures will begin to ease later in the year. However, there needs to be signs soon of this translating into the inflation rate.
Euro falls below parity
As the dollar rises on the back of the inflation report, there's an instant impact on the euro.
The common currency, which fell to parity with the dollar for the first time in 20 years yesterday, has now slipped below that benchmark.
Stock futures slump and dollar gains
US futures have slumped and the dollar climbed as investors digested the worse-than-expected inflation data.
The 9.1pc surge in CPI will fuel expectations of more aggressive Fed interest rate rises and compound worries about a looming economic slowdown.
Futures tracking the S&P 500 fell 1.2pc, while the Dow Jones was down 0.7pc. The tech-heavy Nasdaq, which is particularly sensitive to higher rates, dropped 1.9pc.
Could the Fed go further?
Prior to the latest inflation numbers, markets were betting on another 75 basis-point interest rate rise by the Federal Reserve at its meeting this month.
But with the figures coming in even hotter than expected, there's already chatter that it could go further.
100 basis points anyone?
Reaction: US economy under significant pressure
Richard Flynn, managing director of Charles Schwab UK, says the Fed risks tipping the US into recession as it tries to halt inflation.
Today’s figures show that inflation continues to run hot. The US economy is under significant pressure as a result of surging food and energy prices.
In response to price hikes, central banks around the world are ratcheting up plans to raise interest rates. The Federal Reserve is no exception. It has committed to raising interest rates and reducing its bond holdings until inflation recedes.
However, the problem for the Fed and other major central banks is that many of the current inflationary pressures stem from supply-side issues – such as component shortages – that monetary policy can’t control.
The only option available to the Fed is to slow economic growth enough to bring domestic demand down to meet constrained supply – possibly tipping the US into recession.
US inflation tops expectations again
It's grim reading in the latest US inflation figures.
The consumer price index has once again exceeded expectations, highlighting the relentless price pressures across the pound.
Inflation jumped to 9.1pc in June – well ahead of the 8.8pc forecast. It's the biggest rise since the end of 1981.
Core CPI, which strips out volatile food and energy prices, came in 5.9pc higher. That's down slightly from last month but still ahead of predictions.
Rhine drought leaves Germany on brink of shipping closure
The Rhine is on the brink of being closed to shipping traffic as water levels plunge towards "extreme" lows in a major blow for the German economy.
Louis Ashworth has more:
Water levels at the town of Kaub, a bottleneck point in one of Europe's most important transport arteries, have fallen beneath one metre as a heatwave grips the continent.
Forecasts suggest levels could soon reach 80cm, which would trigger an extreme alert and mean many vessels can no longer pass through.
The timing is particularly painful because of the energy crisis in Europe. Barges frequently use the Rhine to deliver fuel to factories and coal to German power plants.
Major companies based on the Rhine include chemical giant BASF, which uses it for cooling and transportation at its Ludwigshafen plant south of Frankfurt, and steel behemoth Thyssenkrupp.
The river runs for 766 miles, passing through Switzerland, France, Germany and the Netherlands. It is used by an estimated 6,900 vessels with a transport capacity of 10m tonnes.
RMT says progress made in strike talks
There's been progress in talks between Network Rail and the RMT union in a sign a repeat of last month's huge walkout could be avoided.
RMT assistant general secretary Eddie Dempsey told MPs that the union was considering the track operator's latest pay offer.
Network Rail is offering a 4pc pay rise for 2022 backdated to January 1, followed buy a further 2pc next year and a further 2pc cash lump sum if staff agree to workplace reforms.
It's also proposing discounted tickets for members and their families, as well as a guarantee of no compulsory redundancies.
However, Mr Dempsey said the offer was based on a "deeply concerning" plan to remove a third of front-line maintenance staff and cutting associated tasks. Network Rail chief negotiator Tim Shoveller said it was a proposed reduction of more like 20pc, made by limiting the number of people attending each assignment.
Mr Dempsey added: "We're definitely making progress but whether it's enough progress will be decided by my executive later today."
US futures edge higher ahead of inflation data
US futures have posted tentative gains amid an anxious wait for data that's expected to show inflation surged to another 40-year high in June.
The US consumer price index is expected to hit 8.8pc when the numbers are released this afternoon. That will add to expectations of aggressive interest rate rises by the Federal Reserve.
Markets are already betting on a second consecutive 75 basis-point increase at the Fed's meeting later this month.
Futures tracking the S&P 500 and Dow Jones were up 0.2pc, while the tech-heavy Nasdaq gained 0.3pc.
Germany in talks with Shell to replace Russian gas
Germany is in negotiations with energy companies including Shell as it looks to replace Russian gas imports with alternative supplies.
The Government, which aims to begin importing liquefied natural gas this winter, is currently in talks with several companies for long-term supply contracts, Bloomberg reports.
It's also considering signing more deals with US exporter Venture Global.
Germany is set to become an LNG importing powerhouse within a year as it moves to slash its dependence on Russian energy by building new import terminals.
More than half of the country's gas supply came from Russia last year. Deliveries into the new terminals would cover about a third of its annual needs, but the biggest hurdle is finding enough available supply to fill them.
Watchdog to probe Morrisons takeover of McColl's
Regulators are launching a formal investigation into Morrisons' planned takeover of struggling convenience store chain McColl's.
The Competition and Markets Authority said it had officially kicked off a merger inquiry into the deal to see whether it would result in a lessening of competition in the UK groceries market.
It had previously issued an initial enforcement order to check whether the transaction needed a closer look.
Morrisons snapped up McColl's from insolvency in a rescue deal in May. The UK's fourth-largest supermarket said it would acquire all 1,160 stores, which would continue to operate as normal, and that all 16,000 jobs will be protected.
Traders bet on big Fed interest rate rise
Money markets are now betting on another 0.75 percentage point interest rate rise by the Federal Reserve later this month as the US central bank battles to keep inflation down.
The wagers come ahead of a key inflation report due this afternoon. A 75 basis-point increase would be the second in a row. Last month's was the biggest hike since 1994.
Energy suppliers ordered to take urgent action over unfair direct debits
Energy companies have been ordered to refund any customers overcharged on their direct debits, after finding failings in the way bills are calculated.
Rachel Millard has the details:
More than 7m customers had their monthly direct debits increased by an average 62pc between February and April, with more than 500,000 customers seeing their monthly bills double.
Ofgem said it did not find evidence of "unjustifiably high" direct debits, but has ordered suppliers who have more than doubled bills to review them and make repayments if needed.
It has given suppliers two weeks to submit action plans setting out how they will improve billing services for customers, which Ofgem said it will "scrutinise for effectiveness and comprehensiveness".
Jonathan Brearley, the regulator's chief executive, said raising direct debits can cause "significant worry and concern" and urged suppliers to support customers.
He added: "It’s clear from today’s findings on direct debits that there are areas of the market where customers are simply not getting the service they need and rightly expect in these very difficult times.
“With the urgent changes we are now expecting, the current system will be much fairer for consumers. Bringing down the price of gas is not in Ofgem’s control; however, we will do all we can to have a fair system and ensure suppliers look after their customers.”
Titanic shipbuilder Harland and Wolff surges on defence contract win
Shares in Titanic shipbuilder Harland and Wolff surged this morning after it won a £55m contract from the Ministry of Defence.
The 161 year-old company surged as much as 32pc after it landed the deal to regenerate the M55 mine hunter.
It's a major boost for the firm, which was last month plunged into a row with HMRC amid allegations of an unpaid tax bill.
Analysts at Cenkos said the contract was a "significant breakthrough" for Harland and Wolff as it was its first contract in the defence sector.
Network Rail maintenance workers are less efficient than rivals, study finds
Network Rail's working practices are less efficient than those at comparable organisations, according to new report released at the height of a row with unions.
The way maintenance workers are deployed on the railways is "more restrictive" than in sectors such as water, aviation, energy and roads, the Network Rail-commissioned study by consultancy Nichols found.
It comes a day after the Government-owned rail infrastructure firm made a new pay offer to workers aimed at breaking a deadlocked row over pay, jobs and conditions.
Network Rail's deal for members of the Rail, Maritime and Transport union (RMT) is conditional on savings being made through modernising reforms.
UK trade deficit rises for fourth month as exports slow
Britain's trade deficit widened for a fourth month in May as growth in exports of goods to the EU slowed.
The overall deficit in goods and services reached £27.9bn in the three months to May – up by £8.6bn from the previous three months, according to ONS stats.
The biggest stumbling block was growth in exports of goods to the EU, rising just 2.6pc in May compared to 12.7pc growth in shipments to the rest of the world.
The figures show the UK's trade performance continues to deteriorate, marked by the worst quarterly current account deficit on record.
A weakening pound will do little to boost the UK's trade competitiveness and while exports are rising fast, imports and increasing more.
EDF shares suspended as Macron prepares to take control
Shares in EDF will be suspended from trading until Macron outlines detailed plans to nationalise the company by July 19.
France wants to take the debt-laden utility back into full state ownership amid a huge energy crisis sweeping Europe.
The Government said last week it will acquire the 16pc of EDF shares it doesn't already own, with reports it could spend as much as €10bn (£8.4bn).
The finance ministry said trading will resume once France has given details of how it will acquire the EDF shares.
Gas rises again as Nord Stream repairs put markets on edge
Natural gas prices have gained for a second day as traders remain on edge over what will happen when maintenance work finishes on the Nord Stream pipeline.
The key gas link is shut for planned works for 10 days, but Germany is worried that Russia may not fully retart supplies afterwards. Delays have been curbed for weeks already.
To make matters worse, a halt in production at the Sleipner field in Norway has also been extended until Friday.
Benchmark European prices rose 4.3pc this morning, while the UK equivalent was up almost 5pc.
Recruiter PageGroup cashes in as wages rise
Wetherspoons is blaming its troubles on recent wage rises, but it's a different story over at PageGroup.
The recruiter said the staff it hires for clients are being paid more as candidates are in short supply. That's good news for the business, which takes a fee based on the salary of the person they help employ.
It was a record quarter for PageGroup, with gross profit up by more than a quarter to £280.9m over the three months.
In June it made more than £100m in gross profit for only the second time in a single month.
However, PageGroup also warned of global political uncertainty, and said its business in China is still feeling the heat in the second quarter of the year as Covid-19 restrictions persist.
Chief executive Steve Ingham said:
We delivered increased levels of productivity, with the group continuing to benefit from favourable trading conditions, including wage inflation and increased fee rates resulting from the high demand and short supply of candidates.
BT, Sky and ITV hit with 'cartel' probe over sports coverage
Some of the UK's biggest sports broadcasters are facing an investigation into suspicions of cartel-like behaviour over the way they use freelance services.
The Competition and Markets Authority said it has "reasonable grounds" to suspect that BT, ITV, Sky and IMG Media – which includes Premier League Productions – might have broken competition rules.
The regulator will now decide if there's enough evidence of an agreement between the companies to launch a full probe.
Sky and ITV have both said they're cooperating with the CMA's inquiries.
Wetherspoons warns on bigger losses as wages surge
From GDP to IPA now as JD Wetherspoon has warned annual losses will be bigger than expected after it ramped up wages to attract staff and spent heavily on repairs and marketing.
The no-frills pub chain is now expecting losses of around £30m for the year to the end of July after investing in staff and the business to “strengthen our position” for the new financial year.
Spoons said that although sales were now matchingpre-pandemic levels, staff costs were far higher than before Covid as firms across the sector have had to hike wages to overcome recruitment difficulties.
It added that it was now “with minor exceptions, fully staffed”.
Repair costs have also soared, with the group saying it will have spent about £99m on this in the current year, compared to £76.9m in 2018-19, due to “catch-up” work since Covid restrictions were lifted.
Shares dropped more than 5pc to the bottom of the FTSE 250.
PwC: Take the figures with a pinch of salt
Barret Kupelian, senior economist at PwC, says the latest GDP figures should be taken with a pinch of salt.
The UK economy grew by around 0.5pc on a month-on-month basis in May, beating expectations. Importantly, all three main engines – services, production and construction – grew simultaneously. To date, UK GDP has grown in three out of the five months of this year that data is available for.
However, the devil lies in the details and month-on-month GDP data should be interpreted with a pinch of salt.
Special factors including increased visits to GPs – some of which potentially stimulates wider activity in the medical sector – and upward revisions to historic manufacturing growth flattered overall GDP growth in May.
We expect one-off figures to continue to impact future data releases, including the Jubilee celebrations in June. And there may well be revisions to May’s figures in the future.
Finally, focusing on the services sector of the economy, most sub-sectors are considerably bigger than what they were before the pandemic. We continue to see strong growth in transport and travel because of the summer holidays.
More importantly, we are also seeing a quiet transformation happening in the business sector, which continues to invest in digital technologies to make operations more efficient and resilient. The information and communications sector is now around 8pc bigger than pre-pandemic levels.
FTSE risers and fallers
The FTSE 100 has fallen sharply in early trading as the stronger-than-expected economic growth in May boosted the pound.
The blue-chip index tumbled 0.9pc amid wider negative sentiment across European markets.
Abrdn was the biggest faller, losing 3.8pc after its rating was cut by analysts at Barclays. Other financial stocks including Prudential and M&G also weighed.
The domestically-focused FTSE 250 slipped 0.2pc, with JD Wetherspoon slumping 6.5pc after it warned of deeper losses for the full year.
Investors will also have an eye on US inflation data due out this afternoon.
Reaction: UK still on recession watch
Melanie Baker, senior economist at Royal London Asset Management, says the UK is still on recession watch.
Despite today’s stronger than expected figures, the UK economy remains at risk of recession. I expect at least one quarter of negative GDP growth this year though, after this May data print, but the likelihood of that being the second quarter has slipped.
Pay growth is not keeping up with inflation, consumer confidence is weak, business optimism is falling and the Bank of England continues to hike rates – and I am expecting at least another 75bp of rate hikes by year end.
Energy prices remain an issue and a further large energy bill increase looks set for households in October, though the impact was eased somewhat by previously announced fiscal measures.
Reaction: Immediate outlook for growth is weak
James Smith at the Resolution Foundation warns of weak growth ahead, with the Platinum Jubilee celebrations expected to push down activity in June.
He says a contraction in the second quarter may now be avoided, but the cost-of-living crisis is still casting a big shadow over the outlook and the risk of a recession remains.
ONS: Many businesses not passing on price increases
Darren Morgan at the ONS says a lot of businesses aren't really passing on the price increases they're experiencing.
If that's true, it's good news for consumers (and keeping a lid on inflation), but could spell further trouble for economic growth later in the year.
Speaking on BBC Radio 4's Today programme, Mr Morgan said:
Between May and June, half of businesses reported an increase in the price of goods and services they'd bought, but only just under a fifth said they'd increased the price of goods and services they sell.
A lot of businesses are not really passing on the price increases they are experiencing and they are expecting those price increases to continue.
If we move on to households, nine in 10 people reported that their cost of living continues to increase.
What economic commentators and policymakers will be considering is will the growth in the economy we've seen in May continue?
Or will the headwinds we are hearing about from businesses and households mean the economy will revert to the weaker growth we saw in February, March and April?
CBI: New PM must focus policy on growth
Ben Jones, economist at the CBI, says business surveys are warning of “subdued economic momentum” and urges the next PM to take action.
The priority of the next Prime Minister must be getting the economy growing again. Tax policy is an important part of this, but we need tax changes that drive investment rather than fuel inflation.
Yet growth policy is about more than this and concerns the policies of virtually every department. Only a broad plan can be effective.
FTSE 100 dips after GDP beat
The FTSE 100 has started the day in the red despite encouraging signs of a rebound in the UK economy.
The blue-chip index fell 0.3pc to 7,289 points.
BBC: Growth welcome, but tougher times ahead
David Bharier, head of research at the British Chambers of Commerce, says May's growth is welcome "but masks serious underlying issues of growing imbalances within the economy".
The services sector grew by 0.4pc but the main contributing factor, health and social work activities, was driven by a significant rise in GP appointments. Elsewhere, consumer-facing sectors continue a downward trend with a further 0.1pc contraction.
BCC’s research since the start of the Covid crisis has shown that most small businesses have reported no improvement to cash flow or investment. Uncontrolled inflation has now made it much more challenging to grow back out of the crisis.
Worryingly, our most recent quarterly economic survey also showed that longer term business confidence measures have begun to fall. The present political instability will have only exacerbated uncertainty among small firms.
Alongside this, the economy is still facing massive structural issues – including uncertainty about the UK’s relationship with the EU, continued Covid lockdowns in China, supply chain breakdowns, and rocketing energy costs.
Cutting VAT on businesses energy bills to 5pc would go some way to easing the squeeze on firms' cashflow and give them some room for manoeuvre.
Consumer-facing service decline is 'canary in the coal mine'
FX analyst Viraj Patel points to the 0.1pc decline in consumer-facing services in May, suggesting this could be the "canary in the coal mine".
This is even more evident when the figures are broken down by sub-sector.
The jumps in holiday and travel spending reflect a rebound in demand rather than sustained growth, he says. The decline in other areas such as retail, food and drink and recreation are more concerning.
Reaction: Threat of recession is becoming more real
Tom Stevenson at Fidelity International also strikes a sombre tone about the outlook for later in the year.
Although there was a modest return to growth in May overall, a small decline in consumer facing services shows the threat of recession is becoming more real.
The toxic mix of high inflation, historically low productivity and wage growth, and slowing consumer demand is familiar but unwanted. With price rises looking certain to hit double digits and warnings from Ofgem that energy bills will be higher than originally predicted, the financial pressure that many are already under will increase further in the autumn.
We’re already seeing consumers shifting their buying habits as spending slows overall. Warnings from the CBI about the importance of swift action, and the lack of impact of recent rate rises on inflation showcase the need for new thinking, but instead a summer of political theatre could usher in months of policy standstill.
Pound edges higher after GDP beat
Sterling has pushed higher after the surprisingly upbeat GDP numbers, offering some relief after days of losses.
The pound rose 0.3pc against the dollar to $1.1928. Against the euro it's up 0.2pc at 84.21p.
It's a much-needed boost for the pound, which has been languishing at two-year lows against the dollar amid growing fears about the economic outlook and political chaos in Westminster.
Meanwhile, the dollar has strengthened as the Federal Reserve raises interest rates and investors flock to safe haven assets.
Reaction: Resilient, but recession risk still real
Paul Dales, chief UK economist at Capital Economics, says the bigger squeeze on living standards later in the year means recession is still a risk.
The surprisingly strong 0.5pc rise in real GDP in May more than reversed the 0.2pc drop in April and suggests that the economy is holding up well in the face of high inflation. This may encourage the Bank of England to raise interest rates by 50bps, rather than 25bps, at the next policy meeting in August.
If GDP avoids a fall of more than 0.8pc in June, then it won’t contract in the second quarter as a whole. Our forecast is for a decline in June of around 1pc, but as we think most of that will be due to the effects of the extra Jubilee Bank Holiday, a contraction in GDP in the second quarter of around 0.1pc will be something of a statistical mirage.
Either way, it now looks as though GDP in the second quarter won’t be as weak as the Bank of England’s forecast of -0.3pc.
Of course, it is far too soon to conclude that the economy will be able to get through this period of unusually high inflation largely unscathed. With real household disposable incomes set to fall further in the third quarter, a recession is still a real risk.
That may mean the economy proves to be a poisoned chalice for whoever wins the race to be the next Prime Minister.
Reaction: It's too early to break out the champagne
Don't get over-excited about the GDP numbers, warns UBS economist Dean Turner:
The GDP print for May came in much stronger the than expected, however, it is too early to break out the champagne, as the details in the release still point to an economy under pressure as the cost-of-living crisis squeezes households’ ability to spend.
The key source of upside surprise came from a surge in GP appointments; growth in consumer facing services actually fell over the month, with notable weakness noted in the retail sector. The one bright spot remains the travel sector, with demand for holidays remaining strong.
An economy under pressure, another act of political theatre, and confusion over the Bank of England’s next move have all weighed on sterling against the rampant US dollar.
Albeit, the pound is holding its ground against the euro which is experiencing its own set of challenges. This backdrop suggests that we will have to wait some time before investors once again warm to pound.
Nevertheless, a weak pound should continue to be beneficial for the UK equity market. In our view, investors are savvy enough to know that the FTSE 100 isn’t the UK economy. So, despite the numerous challenges and uncertainties ahead at home, we still believe UK stocks should perform well in the coming months.
Chancellor: I'm not complacent
Today's GDP figures are an early first test for new Chancellor Nadhim Zahawi, who's also vying to become the next Prime Minister.
It’s always great to see the economy growing but I’m not complacent. I know people are concerned so we are continuing to support families and economic growth .
We’re working alongside the Bank of England to bear down on inflation and I am confident we can create a stronger economy for everyone across the UK.
Still signs of trouble ahead
Despite the upbeat figures, there are signs that tax rises and inflation are beginning to bite, warns my colleague Tim Wallace.
Consumer-facing services shrank by 0.1pc and retail sales plunged 0.5pc, as payday at the end of April was hit by the higher national insurance tax raid imposed by Rishi Sunak at the start of this financial year.
The financial and insurance sector's output also shrank by 0.8pc on the month.
Imports of foods and live animals increased by £0.3bn in May, which the ONS said may be due to rising prices. Overall imports and exports of goods both increased by a little over £2bn in the month, leaving the UK with a goods trade deficit of more than £20bn.
ONS: UK economy rebounds
Darren Morgan, director of economic statistics at the ONS, says:
The economy rebounded in May with growth across all main sectors.
Health was the biggest driver with many more people seeing GPs, despite test and trace and the vaccination programmes winding down.
Road hauliers also had a busy month, while travel agencies fared well with pent up demand for summer holidays.
There was widespread growth across manufacturing after several tough months, while construction also fared well with housebuilding and office refurbishment driving growth.
What drove May's GDP beat?
The unexpectedly upbeat GDP figures mainly reflect a strong rebound in health services after a hit from the winding down of the Test and Trace scheme.
Services output grew by 0.4pc over the month as human health and social work activities grew by 2.1pc, mainly because of a large rise in GP appointments, according to the ONS.
That offset the continued scaling down of the Test and Trace and vaccine schemes.
Other key figures:
Output in consumer-facing services fell 0.1pc, driven by a 0.5pc fall in retail trade, and non-consumer facing services grew by 0.5pc.
Production grew 0.9pc, driven by growth of 1.4pc in manufacturing and 0.3pc in electricity, gas, steam and air conditioning supply.
Construction grew 1.5pc in May 2022, following 0.3pc growth in April. That marks construction's seventh consecutive month of growth.
UK economy picks up in May
We start the day with some unexpectedly upbeat figures showing the UK economy grew by more than forecast in May.
GDP rose 0.5pc in May, according to the ONS. That's a sharp improvement on April's 0.2pc fall, which was revised up from 0.3pc previously.
The growth comes despite inflation surging to a 40-year high in May amid surging energy costs driven by Russia's war in Ukraine.
Motorists have been paying record prices at the pumps and household budgets are being squeezed in the biggest drop in living standards in a generation.
But the surprise jump in GDP defies expectations of a contraction in the second quarter and will calm fears that Britain will be tipped into a recession later in the year.
5 things to start your day
1) Europe faces ageing population nightmare in ‘absolute collapse’ As populations shrink, nations are left to cope with the economic strain
2) Families £8,800 worse off due to 'toxic combination' at heart of economy Poorest French households £3,800 better off than British counterparts, data reveals
3) Churchill's tailor Gieves & Hawkes up for sale Retailer also dressed Lord Nelson for the Battle of Trafalgar and the British royal family
4) High interest rates are temporary, says Andrew Bailey Bank of England Governor hints at eventual return to 'low global' rates
5) Putin raids prisons for soldiers after massive losses in Ukraine Kremlin also recruiting heavily from poorest parts of Russia, say Western officials
What happened overnight
Hong Kong stocks were slightly higher this morning after two days of big losses.
The Hang Seng Index added 0.3pc, the Shanghai Composite Index dropped 0.06pc, while the Shenzhen Composite Index on China's second exchange barely moved.
Tokyo stocks opened higher, with the benchmark Nikkei 225 index up 0.5pc in early trade and the broader Topix index rising 0.4pc.
Coming up today
Economics: GDP (UK), manufacturing production (UK), industrial production (UK, EU), consumer price index (US), RICS house price balance (UK), trade balance (China)
Corporate: PageGroup (interim results); JD Wetherspoon, Tullow Oil (trading update)