Introduction: UK economy contracts 0.5% in July; BP boss Looney quits
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The UK economy shrank by 0.5% in July, with all the main sectors declining, partly due to strikes and poor weather.
This came after 0.5% growth in June, the Office for National Statistics said, and was worse than expected. Economists polled by Reuters had forecast a smaller contraction of 0.2%.
The services and construction sectors both declined by 0.5% while production fell 0.7%.
Darren Morgan, director of economic statistics at the ONS, explained:
In July, industrial action by healthcare workers and teachers negatively impacted services and it was a weaker month for construction and retail due to the poor weather. Manufacturing also fell back following its rebound from the effect of May’s extra Bank Holiday.
A busy schedule of sporting events and increased theme park visits provided a slight boost.
In the three months to July, the economy eked out growth of 0.2%, with all three main sectors expanding.
In a surprise move, the chief executive of BP quit last night, less than four years into his tenure, after admitting that he failed to fully detail relationships with colleagues.
Bernard Looney, who spent his entire career with BP, departed the £88bn company immediately. The company informed investors that Looney “did not provide details of all relationships and accepts he was obliged to make more complete disclosure”.
The company said that Looney disclosed “a small number of historical relationships with colleagues prior to becoming CEO” during a review last year, triggered by information from an anonymous source.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said:
BP is one of the biggest players in British business, missteps of this magnitude aren’t what investors expect from one of the country’s most influential C-suites. Strong governance and conduct controls are rightly non-negotiables, and the emergence of a second round of allegations relating to Looney’s improper disclosure of relationships has proved a bridge too far.
BP is now in a position where a permanent replacement needs to be found. A clear path forward needs to be forged sooner rather than later to limit negative sentiment. This of course all lands at a time when oil majors are already grappling to boost their ESG credentials, which adds weight to the problem. Looney has spearheaded an aggressive and green-thinking strategy during his tenure, and replacing him with someone that can convince the market they’re up for carrying the mantle and sprinting with it, isn’t going to be an overnight task.
The recent oil price spike only provides a limited cushion under BP’s valuation, with longer-term forecasters far more concerned about strategy and how well-prepared BP is for the energy transition. In comparison to peers, BP’s net zero targets have cast shadows on other oil players, and the group needs to reconfirm its commitment and ability to get this done if it wants to remain in a preferable position.
Well that’s quite the shocker: one of the biggest names in business quits, BP admitting Bernard Looney “did not provide details of all relationships”. pic.twitter.com/3xGgieExB6
— Alex Lawson (@MrAlexLawson) September 12, 2023
The Agenda
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9am BST: International Energy Agency oil market report
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10am BST: Eurozone industrial production for July
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1.30pm BST: US inflation for August (forecast: 3.6%)
Key events
Ørsted enters first solar project in UK
The Danish energy company Ørsted has entered its first solar power project in the UK, which it says will become one of the largest solar farms, once it is operational.
It is working with UK firm PS Renewables to build the solar farm and hopes to have it up and running before 2030.
Our first solar project in the UK 🇬🇧
We’ve just entered the One Earth solar project, a proposed 740 MW solar farm with associated battery storage which will be co-developed with PS Renewables.
Once operational, it will become one of the largest solar farms in the country.
— Ørsted (@Orsted) September 13, 2023
Redrow warns of sharp drop in sales and profits
Redrow has warned of a sharp drop in sales and profits this year, pointing to the cost of living and mortgage crisis, and said it was using sales incentives to lure house buyers.
The company scaled back its land buying, adding 1,900 plots with panning permission compared with 6,000 in 2022. It closed two if its smaller divisional offices, Thames Valley and Southern, and cut some jobs “to reflect market conditions”.
Matthew Pratt, the chief executive, explained:
Cost of living and mortgage affordability continue to have a negative impact on the market. Where appropriate, we’ve used targeted sales incentives to convert buyer interest into reservations. Following several consecutive Bank of England base rate increases, we remain hopeful that, as inflation eases, we will see some stability in mortgage rates.
As expected, the sales market over the summer has been challenging. This has resulted in sales per outlet per week for the first 10 weeks of the new financial year of 0.34 (2023: 0.61).
Redrow made an underlying profit before tax of £395m in the year to 2 July against £410m in the previous year, and revenue of £2.1bn as it completed 5,436 homes, down 5%.
For the current year, it is forecasting revenue of around £1.7bn and profit before tax of £180m to £200m.
Redrow said it was now installing air source heat pumps and ground floor underfloor heating as standard in detached homes on new developments.
All of Europe’s main stock markets are in the red but losses are muted.
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UK’s FTSE 100 index down 0.05% at 7,524
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Germany’s Dax down 0.3% at 15,671
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France’s CAC down 0.4% at 7,224
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Italy’s FTSE MiB down 0.4% at 28,458
Here in London, BP shares fell 1.7% in early trading and are now down 0.6% as investors digest the news of chief executive Bernard Looney’s surprise departure over his office relationships.
The FTSE 100’s losses end a four-day rally, and come after a bigger-than-expected contraction of 0.5% in the UK economy in July. Goldman Sachs and JPMorgan cut their forecasts for 2023 growth.
JPMorgan economist Allan Monks said:
It may be tempting to downplay the weakness in July as a combination of strike action, poor weather and general payback from the 0.5% GDP rise reported in the prior month. But the source of weakness appears to have rotated more towards private sector services.
When taken in conjunction with the recent slide in the PMI, recent outturns look more concerning – especially with that survey sliding further into August. We have been arguing against the idea that the UK is entering into a proper recession dynamic on the grounds that household real incomes look set for a strong gain in 2H23, while business confidence is generally running above average. That remains the case, but the near term path for growth looks worse and we have revised down our third-quarter GDP forecast from 0.3%q/q to 0.0%.
Back to the GDP data.
Here’s our full story:
Arm to fetch at least $54.5bn valuation in IPO – report
The UK chip designer Arm could fetch a valuation of at least $54.5bn in its flotation in New York, according to reports.
The Cambridge-based semiconductor firm, which is owned by Japan’s SoftBank, received enough backing from investors to secure at least the top end of the price range in its initial public offering, which would give it a $54.5bn valuation, Reuters reported last night.
Arm decided it will only accept the top end of its indicated $47-to-$51-per-share range, or a price that is even higher, Reuters said, citing an unnamed source. This would raise about $5bn for its owner SoftBank. The company is due to price its shares today and the stock is expected to start trading tomorrow.
Bloomberg reported yesterday that the IPO was already oversubscribed by 10 times and bankers planned to stop taking orders.
Arm’s decision to float in New York, rather than London, was “a kick in the teeth” for Rishi Sunak’s government as it attempted to revitalise the City after Brexit, according to Victoria Scholar, the head of investment at stockbroker Interactive Investor.
The pound fell after the 0.5% contraction in the UK economy in July, which was worse than expected.
Sterling lost 0.3% against the dollar to $1.2459, putting it on track for its biggest daily drop in a week, and slipped 0.2% against the euro to €1.1592.
The Liberal Democrats said the figures show Rishi Sunak has lost his grip on the economy.
Lib Dem Treasury spokesperson Sarah Olney said:
The Conservative government’s mismanagement of the economy is a burden on any chance of growth.
Rishi Sunak has utterly failed to get a grip on the cost of living crisis as mortgage costs continue to spiral and the price of a weekly shop goes through the roof.
Mortgage arrears are now at their highest since 2016 and families are wondering if they will once again be forced to choose between heating and eating this winter. This out of touch Conservative government has completely failed on the economy.
UK recession may have begun – Capital Economics
The 0.5% fall in GDP in July could mean that the mild recession we have been expecting has begun, said Paul Dales, chief UK economist at Capital Economics.
Even so, with wage growth still uncomfortably strong, we suspect the Bank of England will still raise interest rates one final time next week, from 5.25% to 5.5%.
It is worth noting that these ONS data do not include any of the upward revisions that the ONS announced the other week. They won’t be fully incorporate into the data until the end of this month. Dales said:
As such, these figures suggest that in July the economy was only 0.3% above the pre-pandemic February 2020 peak. But our estimates suggest that after taking account of the upward revisions, it’s around 1.3% bigger.
Either way, the decline in GDP in July suggests that underlying growth has lost momentum since earlier in the year. Some of the weakness was due to there being almost twice as many working days lost to strikes in July (281,000) than in June (160,000). That contributed to the 2.1% m/m and 1.1% m/m respective falls in health and education output.
The unusually wet weather also played a part in the 0.5% m/m decline in construction output. But with output declining in 11 of the other 16 sectors, there is an air of underlying weakness. That would make sense given that the dampening effect of higher interest rates should be starting to be felt a bit harder now and when other indicators, such as the activity PMIs which exclude the drag on public sector activity from strikes, are also pointing to recession.
These data suggest GDP growth in Q3 as a whole is likely to fall well short of the Bank of England’s +0.4% q/q forecast. Even so, the strength of wage growth and the stickiness of core inflation (next update on this due next Wednesday) suggests to us the Bank will pull the interest rate trigger once more at the policy meeting next Thursday.
Simon French, chief economist at Panmure Gordon, tweeted:
The ONS explained the impact of strikes on the economy:
The main contributor to the fall in monthly services output was the human health and social work activities sub-sector, which fell by 2.1% in July 2023. This was attributed entirely to a 3.4% fall in the human health activities industry.
Industrial action was held in July by NHS senior doctors (two days) and radiographers (two days) for the first time while industrial action by junior doctors increased (five days in July, compared with three in June).
The chancellor of the exchequer, Jeremy Hunt, said:
Only by halving inflation can we deliver the sustainable growth and pay rises that the country needs.
But there are many reasons to be confident about the future. We were among the fastest in the G7 to recover from the pandemic and the IMF have said we will grow faster than Germany, France, and Italy in the long term.
Rachel Reeves, shadow chancellor for the opposition Labour party, said:
Today is another dismal day for growth, and the British economy remains hostage to the Conservatives’ low growth trap that is leaving working people worse off.
After thirteen years of instability, the Conservatives have left the British economy weaker and families having to cope with higher taxes, higher mortgages and higher food and energy bills.
Labour’s plan for the economy is about boosting growth so we can improve wages, bring down bills and make working people in all parts of the country better off.
Introduction: UK economy contracts 0.5% in July; BP boss Looney quits
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The UK economy shrank by 0.5% in July, with all the main sectors declining, partly due to strikes and poor weather.
This came after 0.5% growth in June, the Office for National Statistics said, and was worse than expected. Economists polled by Reuters had forecast a smaller contraction of 0.2%.
The services and construction sectors both declined by 0.5% while production fell 0.7%.
Darren Morgan, director of economic statistics at the ONS, explained:
In July, industrial action by healthcare workers and teachers negatively impacted services and it was a weaker month for construction and retail due to the poor weather. Manufacturing also fell back following its rebound from the effect of May’s extra Bank Holiday.
A busy schedule of sporting events and increased theme park visits provided a slight boost.
In the three months to July, the economy eked out growth of 0.2%, with all three main sectors expanding.
In a surprise move, the chief executive of BP quit last night, less than four years into his tenure, after admitting that he failed to fully detail relationships with colleagues.
Bernard Looney, who spent his entire career with BP, departed the £88bn company immediately. The company informed investors that Looney “did not provide details of all relationships and accepts he was obliged to make more complete disclosure”.
The company said that Looney disclosed “a small number of historical relationships with colleagues prior to becoming CEO” during a review last year, triggered by information from an anonymous source.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said:
BP is one of the biggest players in British business, missteps of this magnitude aren’t what investors expect from one of the country’s most influential C-suites. Strong governance and conduct controls are rightly non-negotiables, and the emergence of a second round of allegations relating to Looney’s improper disclosure of relationships has proved a bridge too far.
BP is now in a position where a permanent replacement needs to be found. A clear path forward needs to be forged sooner rather than later to limit negative sentiment. This of course all lands at a time when oil majors are already grappling to boost their ESG credentials, which adds weight to the problem. Looney has spearheaded an aggressive and green-thinking strategy during his tenure, and replacing him with someone that can convince the market they’re up for carrying the mantle and sprinting with it, isn’t going to be an overnight task.
The recent oil price spike only provides a limited cushion under BP’s valuation, with longer-term forecasters far more concerned about strategy and how well-prepared BP is for the energy transition. In comparison to peers, BP’s net zero targets have cast shadows on other oil players, and the group needs to reconfirm its commitment and ability to get this done if it wants to remain in a preferable position.
Well that’s quite the shocker: one of the biggest names in business quits, BP admitting Bernard Looney “did not provide details of all relationships”. pic.twitter.com/3xGgieExB6
— Alex Lawson (@MrAlexLawson) September 12, 2023
The Agenda
-
9am BST: International Energy Agency oil market report
-
10am BST: Eurozone industrial production for July
-
1.30pm BST: US inflation for August (forecast: 3.6%)
