UK GDP REPORT RELEASED
Newsflash: the UK economy stagnated in April, a blow to Rishi Sunak’s claim that it has turned a corner.
UK GDP was unchanged month-on-month in April, new data from the Office for National Statistics shows, following growth of 0.4% in March.
That is in line with City expectations, and shows the economy struggled to maintain momentum in April after leaving recession in the first quarter of 2024.
Although the services sector grew, there was a contraction in production (which include manufacturing) and across the construction sector.
Key events
Fatih Birol, the head of the IEA, has suggests that the surplus in supply over the next decade should prompt oil companies to reassess their strategies:
IEA CHIEF FATIH BIROL SAYS SUPPLY SURPLUS THIS DECADE SHOULD MAKE OIL COMPANIES EXAMINE THEIR STRATEGIES
— First Squawk (@FirstSquawk) June 12, 2024
EU to put tariffs of up to 38% on Chinese electric vehicles as trade war looms
Lisa O’Carroll
Over in Europe, a trade war could be brewing after the EU has notified Beijing that it intends to impose tariffs of up to 38% on imports of Chinese electric vehicles.
The move will trigger duties of more than €2bn (£1.7bn) a year, and will be applied provisionally from next month in line with World Trade Organization rules, which give China four weeks to challenge any evidence the EU provides to justify the levies on imported EVs.
The move follows a nine-month investigation into alleged unfair state subsidies into Chinese battery electric vehicles (BEVs) including top brands such as BYD and Geely, which part owns the Swedish brand Polestar, and Shanghai’s SAIC, which owns the British brand MG.
The EU said in a statement today:
“The provisional findings of the EU anti-subsidy investigation indicate that the entire BEV value chain benefits heavily from unfair subsidies in China, and that the influx of subsidised Chinese imports at artificially low prices therefore presents a threat of clearly foreseeable and imminent injury to EU industry.”
IEA: Oil glut looms with demand set to peak by end of decade
In the energy sector, the world is on track for a major oil surplus later this decade, according to the International Energy Agency.
In its latest monthly report, the IEA – the energy watchdog – predicts that growth in global oil demand will slow in the coming years as “energy transitions advance”.
At the same time, global oil production is set to ramp up, easing market strains and pushing spare capacity towards levels unseen outside of the Covid crisis, it estimates.
The global economy consumed around 102 million barrels of oil per day last year. The IEA predicts this global demand will “level off” near 106 million barrels per day towards the end of this decade.
It says:
Based on today’s policies and market trends, strong demand from fast-growing economies in Asia, as well as from the aviation and petrochemicals sectors, is set to drive oil use higher in the coming years, the report finds.
But those gains will increasingly be offset by factors such as rising electric car sales, fuel efficiency improvements in conventional vehicles, declining use of oil for electricity generation in the Middle East, and structural economic shifts.
At the same time, the IEA adds, there will be “a surge in global oil production capacity” led by the US and other producers in the Americas such as Argentina, Brazil, Canada and Guyana.
The IEA predicts total supply capacity will hit 114 million bpd by 2030, which it calls “a staggering 8 million barrels per day above projected global demand”.
This, the IEA adds, could have significant consequences for oil markets – including for producer economies in Opec, as well as for the US shale industry.
Rob Wood, chief UK economist at Pantheon Macroeconomics, reckons the odds of an August interest rate cut have dipped following today’s growth report:
“These growth data further complicate the MPC’s upcoming interest rate decisions. Rate-setters will keep rates on hold in June, but now a cut in August looks a little less likely.”
UK GDP stagnated in April, following growth of 0.4% in March, matching market expectations. On a rolling three-month basis, GDP rose 0.7% in the three months to April #GDP pic.twitter.com/YZ9dWylndK
— CBI Economics (@CBI_Economics) June 12, 2024
Services output rose 0.2% through April, driven by an expansion in the information & communication and professional services sub-sectors. But this was offset by a 0.9% fall in production, and a 1.4% fall in construction as April’s wet weather dampened activity. #GDP pic.twitter.com/HFgTZD7DIe
— CBI Economics (@CBI_Economics) June 12, 2024
Dutch bank ING are optimistic the UK economy will grow in the current quarter, although not quite as quickly as in Q1 (when it expanded by 0.6%).
ING’s developed markets economist, James Smith, says:
It may be hard to pick out much in the way of a trend from the UK GDP figures right now at an industry level, but the economy does seem to have built up steam so far this year. We expect 0.4-0.5% GDP growth in the second quarter
FTSE 100 rises despite GDP disappointment
The UK growth slowdown in April hasn’t dented the mood in the stock market this morning.
The FTSE 100 share index has jumped by 0.8%, or 63 points, to 8210, recovering most of its losses yesterday after Wall Street hit record highs last night.
Pest control firm Rentokil are the top riser, up 12%, following reports that activist investor Nelson Peltz’s Trian Partners have taken a stake in the business.
AJ Bell investment director Russ Mould points out that Peltz (Brooklyn Beckham’s father-in-law) has turned his attention to Rentokil after losing a battle with Disney:
Mould says:
Having failed to catch a mouse at Disney, Nelson Peltz is now chasing rats at Rentokil. Shares in pest control specialist Rentokil surged as it emerged activist investor Nelson Peltz’s Trian vehicle had acquired a stake in the business.
“Now a top 10 shareholder in the firm, Peltz is likely to pursue a big shake-up of a company which has struggled in comparison with its US peer Rollins, both in share price terms and financial performance.
“Given Rentokil does a large chunk of its business across the Atlantic this could include a push to shift its primary listing to the US, which would be another blow to the prestige of London as a listing venue. Trian pursued a similar approach with Ferguson which made the move in 2022.”
UK banks are also rising, with Lloyds up 1.9%, while retailer Marks & Spencer are up 2%
Here’s a neat thread of the key points from today’s UK GDP report, from James Smith of Resolution Foundation:
Output was flat in April after strong readings in the first three months of the 2024, weaker than even recent historical averages. pic.twitter.com/PZNvLvLQwW
— JamesSmithRF (@JamesSmithRF) June 12, 2024
The picture here is one of decent (if not spectacular) growth in the all-important service sector, with contractions in manufacturing (ONS point to weak pharmaceuticals) and construction (affected by the weather in April). pic.twitter.com/2PSSD8SWVZ
— JamesSmithRF (@JamesSmithRF) June 12, 2024
Digging into that broad sectoral picture you can see that services growth was pushed down by very weak retail sales in April (they were down 2.3% in April). Business services (particularly ICT this month) continue to be the main driver of growth. pic.twitter.com/K78OJVwSbO
— JamesSmithRF (@JamesSmithRF) June 12, 2024
Where do we go from here? Well, the PMIs (a key indicator of the short-term growth outlook) have weakened in May, suggesting momentum from Q1 has not been fully maintained. Next Friday’s June PMI will be one to watch closely… pic.twitter.com/xiUBW2Fj4b
— JamesSmithRF (@JamesSmithRF) June 12, 2024
The big picture, Smith adds, is the UK’s weak productivity over the last 14 years:
The UK’s record on headline GDP growth is avg among G7 countries since 2010 (when the Conservatives came to power). But growth in population and hours worked flatter this picture, and it’s the UK’s weak productivity growth – weaker than all in G7 bar Italy – that stands out. pic.twitter.com/M6WMKNctU6
— JamesSmithRF (@JamesSmithRF) June 12, 2024
When the UK growth report was released at 7am, we flagged that production output fell in April, by 0.9%.
This fall was driven by a 1.4% drop in manufacturing output – and that was principally due to a 6.1% fall in production of basic pharmaceutical products and pharmaceutical preparations.
Pharmaceuticals had grown 7.6% in March, so clearly it’s a volatile part of the economy.
April’s stagnation is, hopefully, a blip in the UK’s economic recovery from last year’s short, shallow recession, City economists say.
Philip Shaw of Investec says that poor weather was “at least partly” the cause of the economy stalling in April, adding:
This follows a run of firmer outturns over Q1 this year (Jan +0.3% m/m, Feb +0.2%, Mar +0.4%), resulting in growth over the quarter of 0.6% as the economy escaped a very mild recession over H2 last year.
We consider though that April’s numbers represent a blip in the recovery story rather than the start of a new downturn and that activity will crank up a gear or two over the coming months as the special negative factors disappear.
Tom Pugh, the chief economist at audit, tax and consulting firm RSM UK, suggests the drop in growth in April is “a bump on the upward path”, rather than a return to stagnation.
Pugh explains:
Overall, today’s data reinforces our view that Q4 last year will represent the nadir of a particularly painful period of stagnation for the UK economy.
But Q1 represented a turning point.
The weakness in April is just a small bump in the road. Interest rate cuts are likely to come in the summer, growth should continue in the first half of this year, and pick up further after the summer and into 2025. Indeed, we’re expecting growth to average 0.3% q/q over the next year, a much stronger performance than the last five.
The Conservative Party point out that the economy did grow in the February-April quarter (as flagged earlier).
They’re also sticking to the PM’s claim the economy is turning a corner (despite April’s stagnation resembling a cul-de-sac rather than a motorway).
A Conservative Party spokesman says:
“Today’s figures show our economy grew by 0.7% in the three months to April.
There is more to do, but the economy is turning a corner and inflation is back down to normal.
This election is choice. Under the Conservatives, we can keep the economy growing with our clear plan to cut taxes on work, homes and pensions, or we can risk all that progress with Labour’s £2,094 of tax rises on every working family.”
Reminder: Sir Keir Starmer has rejected that tax rise claim as “absolute garbage”:
In another sign of economic weakness, furniture retailer DFS has issued its second profit warning of the year this morning.
DFS blamed much of the drop on delays to deliveries and higher shipping costs caused by the Red Sea crisis.
It told shareholders that the upholstery market is “very weak” and that since its last financial results in March:
…consumer demand in the upholstery sector has remained challenging and Red Sea routing issues have persisted resulting in delays to customer deliveries and higher freight costs.
DFS, which owns 118 shops across the UK, said it expected pre-tax profits of £10m-£12m for the year ending 30 June 2024, well down on the £20m-£25m predicted in March.
