September 22, 2023

Enterprise JM

Do the Business

UK economy shrank by 0.1% in March as cost of living crisis bites – as it happened | Business

Afternoon summary

Time to wrap up – here are today’s main stories:

We’ll be back tomorrow… GW

NatWest chair says best way to help poorest is through benefits

Mark Sweney

The chairman of NatWest bank has also weighed in on the cost of living crisis.

Sir Howard Davis argued that changes to the benefits system would be the most effective way for the government to help the poorest families struggling to cope with the cost of living crisis, instead of cutting taxes that also give the wealthy a financial boost.

Davies, a former deputy governor of the Bank of England, said soaring energy bills and rampant inflation were disproportionately affecting the poorest fifth of households and they should be the focus of financial support measures.

“The squeeze on living standards as a result of higher energy prices and higher food prices is really extraordinary,” he said.

“If you look at what people would need to do on their discretionary spending in order to offset those increases it’s massive.

The bottom 20% of the population, they would have to reduce their discretionary spending by 20% to stay even financially.”

Here’s the full story:

UK benefits only rose by 3.1% in April, in line with last September’s inflation rate.

Resolution Foundation explained last week that the easiest way to help to those hardest hit by high inflation would be to uprate benefits by the current inflation rate (which hit 7% in March).

British Prime Minister Boris Johnson has pledged that his government will “do things” to help Britons with the cost-of-living crisis.

However, there’s no hint about new measures could be.

Johnson told reporters that the increase in national insurance thresholds in July will help many workers*, adding:

“We will do things to help people in the short term, of course, and I’m not going to anticipate anything more that we may do, but the crucial thing is to make sure that we have the strong employment situation, because that is the key,”

* – from July, the threshold on earnings where national insurance starts being paid will rise from £9,880 to £12,570. Once you factor in April’s increase in national insurance rates, those earning up to £34,000 per year would pay less NI.

Russia’s second-largest oil producer Lukoil has agreed to buy Shell’s Russian retail and lubricants businesses, as the oil giant pushes on with its exit from the country following the Ukraine invasion.

The sale of Shell Neft includes 411 retail stations, mainly located in the Central and Northwestern regions of Russia, and the Torzhok lubricants blending plant, Shell said in a statement. The value of the deal hasn’t been disclosed.

It’s the first big deal in the oil and gas sector since most western companies pledged to leave the country following the invasion of Ukraine, as the Financial Times points out. It still requires the approval of Russia’s anti-monopoly authorities.

Maxim Donde, a vice-president with Lukoil, said:

“The acquisition of Shell’s high-quality businesses in Russia fits well into Lukoil’s strategy to develop its priority sales channels, including retail, as well as the lubricants business.”

Wall Street selloff continues

In New York, stocks have opened in the red as the selloff gripping Wall Street continues.

The S&P 500 index has dropped by 1%, or 39 points, to 3,898 in early trading, a new one-year low.

Technology stocks are continuing to slide, with Apple down 3.1% and Microsoft losing 1.7%, while Tescla has lost another 4.1% to $703.

The Nasdaq 100 index of leading tech firms is down 1%, taking its losses since the start of the year to 27% – a painful drawdown for tech investors.

If the Nasdaq-100 falls more than 0.8% today (-1.5% pre market), it will be in its largest drawdown going back to the Great Financial Crisis.

— Michael Batnick (@michaelbatnick) May 12, 2022

Worries about how far the Fed and other central banks will have to go to get inflation under control pushed equities back into negative territory again, says Raffi Boyadjian, analyst at XM.

But there are other worries too, he adds:

Aside from monetary tightening and the ongoing lockdowns in China, there are renewed concerns about Russian gas flows to Europe and the UK government is threatening to tear up key parts of the Northern Ireland protocol, all of which are amplifying the doom and gloom in the markets.

Back in the UK, calls for more support for struggling households and businesses continue to grow, after GDP fell in March.

Julie Palmer, partner at accountancy firm Begbies Traynor, said firms face a ‘hostile business environment’

“News that the UK economy contracted in March is no surprise and just highlights the intense pressure that businesses are already under – and it’s only going to get worse.

“Begbies Traynor’s most recent Red Flag Alert revealed a near 20pc jump in the number of companies rated as being in ‘critical distress’ in the first quarter, compared with the same period a year ago.

“The Bank of England is warning that inflation could hit 10pc by the end of the year but we’re hearing anecdotal evidence costs have already gone beyond that for many businesses.

“Soaring energy prices are one of the biggest concerns for many businesses and although the Government is hinting at action, the fear is that it will come too late to be of any help for many.

“I fear that in the current hostile business environment many vulnerable companies will be tipped over the edge unless additional support is provided.”

Economic thinktank NIESR warns that March’s downturn brings a recession closer:

With consumer confidence indicators continuing to weaken we expect growth to be largely flat in April and close to flatlining in the second quarter overall.

The first estimate of GDP expenditure components for the first quarter was for a decline in business investment of 0.5%. With uncertainty from the war in Ukraine likely to weigh on investment further, we may see yet further delays to recovery from the Covid shock, reducing the capital stock and supply capacity yet further.

Sam Freedman, senior fellow at the Institute of Government, has spotted a rise in people seeking information on recessions and help with energy bills….

US producers kept raising their prices last month, as inflationary pressures continued to ripple through America’s economy.

The producer price index, which tracks how much manufacturers and services firms charge for their products, rose 0.5% month-on-month in April.

That followed advances of 1.6% in March and 1.1% in February in the PPI, which tracks price rises that will feed through to consumers.

Producer prices were 11% higher than a year ago, only slightly down on the record 11.5% in March, as firms passed on higher wages and input costs on.

Goods prices rose 1.3% in April, while services prices were flat.

The report adds:

Among prices for final demand goods in April, the index for motor vehicles and equipment advanced 0.8%. Prices for diesel fuel, chicken eggs, jet fuel, electric power, and residential natural gas also increased. Conversely, the index for gasoline fell 3.2%.

#NEW Producer prices rise as expected in April@BLS_gov producer price index jumped 0.5% monthly and 11% year-over-year, down from 11.5% in March

Core PPI rose 0.6% monthly, 6.9% annually

— Greta Wall (@GretaLWall) May 12, 2022

Over in the US, the number of new jobless claims has risen slightly, but remains historically low.

There were 203,000 new “initial claims” for US unemployment support last week, up from 202,000, and higher than forecast.

Although it’s still a low total, the number of Americans seeking jobless aid has been rising since hitting a 50-year low of 166,000 at the start of April.

Initial jobless claims are little changed in the May 7 week, up 1,000 to 203,000 after a small upward revision to 202,000 in the prior week.

— Econoday, Inc. (@Econoday) May 12, 2022

Our energy correspondent Alex Lawson is reporting on BP’s AGM:

Am at BP AGM at the ExCel. Chairman Helge Lund says of ditching Rosneft stake: “Importantly, the decision required no changes to BP’s strategy, financial frame, or shareholder distribution guidance.”

— Alex Lawson (@MrAlexLawson) May 12, 2022

BP chairman Helge Lund pledges not to explore in countries where it does not already have oil and gas activities and explore ‘selectively’ in existing countries #bpagm

— Alex Lawson (@MrAlexLawson) May 12, 2022

Lund urges investors to vote against a resolution convened by a group shareholders co-ordinated by Follow This on climate goals claiming it will “undermine your board’s control of our strategy”.

— Alex Lawson (@MrAlexLawson) May 12, 2022

BP CEO defends profits as windfall tax calls grow louder

The chief executive of BP has told shareholders that a windfall tax on energy profits would not affect its plans to invest £18bn in the UK over the next eight years.

Speaking at the company’s AGM, Bernard Looney defended BP’s profits – which more than doubled in the first quarter of this year – saying it expects to pay more than a billion pounds in tax this year.

Looney said:

First – with higher oil prices and profits – we rightly pay higher taxes. Here in the UK, we expect our tax bill to rise 4 to 5 times this year – to well over £1bn. This will be mostly from the North Sea, which is already taxed at 40% – which is 20% higher than standard corporation taxes.

Second – people have asked if we are increasing investment in the UK. The answer to that is simply – yes. We used to spend roughly 10-15% of our capital in Britain. We expect to increase that to 15-20% this decade – adding up to around £18bn. All of it is focused on improving energy security in Britain, and the majority of it is focused on accelerating the energy transition.

Third – people ask, what are we doing with the profits we make in the North Sea? The short answer is we’re reinvesting all of them. This decade – with our current plans – we expect to reinvest every £1 we make – and hopefully more. This, of course, is just the capital we are investing – we are likely to be spending just as much again running our day-to-day operations.

Looney then turned to windfall taxes, arguing that they would “challenge investment” in UK energy sector…

He confirms that they would not stop its £18bn plans laid out last week, but suggests that it could invest even more in a “stable fiscal environment” (ie, without the risk of windfall taxes?…)

Looney says:

So, what’s our view on windfall taxes? A stable and competitive fiscal environment is an important element in any investment decision. – and that is what we have in Britain today. By definition, windfall taxes are unpredictable – and so would challenge investment in home-grown energy. We know that from past experience for the whole of the North Sea sector and supply chain.

In summary, we are backing Britain.

We’re backing Britain because it has been our home for over 100 years.

We’re backing Britain in what are difficult times for the country. This is exactly why I said our £18bn plans are not somehow contingent on whether or not there is a windfall tax.

We’re also backing Britain because it is a great place to invest your money. We would love to invest even more – and one of the key foundations of any such decisions will be a stable fiscal environment.

Bernard Looney, BP boss, confirms its £18bn planned UK investment would be unaffected by a windfall tax but says it would “love to invest even more” and a stable fiscal environment will be a key foundation for this

Windfall taxes “would challenge investment in home-grown energy”

— Emily Gosden (@emilygosden) May 12, 2022

The windfall tax issue is becoming a hot potato for both energy companies and the UK government, which has refused to implement an additional levy on North Sea profits to fund help for strugging families with enery bills.

Overnight, the Financial Times reported that chancellor Rishi Sunak is demanding North Sea oil and gas companies agree to a significant boost to their energy investments in the UK to avoid being hit by a windfall tax.

On Tuesday, the chairman of Tesco added his support, saying there was an “overwhelming case” for a windfall tax on profits for energy producers to help those most in need.

Swati Dhingra to join Bank of England’s MPC

London School of Economics academic Dr Swati Dhingra has been appointed to the Bank of England’s committee setting interest rates.

Dhingra, an associate professor at the LSE, will join the Bank’s monetary policy committee in August, after Michael Saunders’ term ends.

Dhingra’s academic focus is on international economics and applied microeconomics. She will join the MPC as inflation heads to a 40-year high and the economy teeters on the brink of recession.

Dhingra says

The work of the committee is of great importance as the UK faces an exceptional cost of living crisis amid the global challenges of the pandemic and the war.

It will be an honour to learn from the Bank’s vast expertise and regional visits, “to listen and to explain”, and to bring evidence to bear on the crucial policy decisions of the committee.

Dhingra will take the number of women on the MPC to three (out of nine).

She received her undergraduate degree from the University of Delhi, her MA from the Delhi School of Economics, and her MS and PhD from the University of Wisconsin-Madison.

LSE academic Swati Dhingra will take over from Michael Saunders on the Bank of England’s MPC in August.
Worth noting that this now means all 4 external MPC members will have a primarily academic (rather than markets/industry) background.

— David Milliken (@david_milliken) May 12, 2022

Dhingra will replace one of the more hawkish members of the committee. Saunders was one of three MPC members who pushed for a larger rate rise last week, and on Monday he argued that the Bank must raise rates quickly or the inflation crisis will get worse.

There is a word for what is about to hit the UK economy and it is stagflation, my colleague Phillip Inman writes:

It feels like the strength of the economy has drained away since February at an alarming pace. And the situation would have been much worse were it not for the 1.7% month-on-month rebound in construction output after the drag faded from Storm Eunice in February.

Kristin Forbes, the former Bank of England policymaker, told MPs on the Treasury select committee on Wednesday that the UK found itself in a bad place at the moment.

If a country has higher energy prices, a falling exchange rate, trade restrictions that push up goods prices, expectations among businesses and consumers of much higher inflation in a year’s time and a tight labour market, forcing wages higher, though not as high as inflation, the outlook was especially tough. Add into the mix a decade of modest inflation going into the pandemic, which most other countries have not had, pointing to a lack of underlying inflation in their economies, and you have an even worse situation.

“The UK is the only country to tick every box,” she said.

Full story: John Lewis boss calls for Covid-style cost of living aid package

Mark Sweney

Mark Sweney

The boss of John Lewis has urged the government to intervene with a financial package of support to protect families from the cost of living crisis on the same scale as it did to help the nation deal with the Covid pandemic.

Dame Sharon White, a former second permanent secretary at the Treasury, said the government needed to act urgently as families struggle to pay utility and food costs as energy bills and inflation soars.

“The time has absolutely come for action whether it is an emergency budget or whether it is another vehicle,” said White, speaking on ITV’s Peston show on Wednesday night.

The chair of John Lewis Partnership, which also owns the Waitrose supermarket chain, said that action needed to be taken before summer with consumers facing another increase in energy bills of as much as £1,000 annually from October.

She said:

The decisive action we saw, I thought the government did incredibly well at the pace and scale during Covid, I think we need to see the same decisive action taken at speed and at pace.

White added that the UK faces “at least as pressing a challenge with the cost of living crisis” as it did with the pandemic, making the cost to public finances an “imperative”.

BoE’s Ramsden: We’ve not finished raising interest rates

Bank of England deputy governor Dave Ramsden has warned that further interest rate rises will be needed to get inflation under control.

In an interview with Bloomberg, published this morning, Ramsden was clear that last week’s rise in Bank rate, to a 13-year high of 1%, will not be the last in this cycle.

He said:

Certainly on the basis of my current assessment of prospects, we’re not there yet in terms of how far monetary policy has to tighten.

I‘m still very, very supportive of the forward guidance that there may well need to be further tightening in the coming months.

Ramsden also warned there is a risk that UK inflation remains high for longer than hoped, with CPI expected to hit 10% this autumn

He suggested wages growth could be strong, with firms telling him that they are struggling to hire and retain staff.

Given what we know about the UK labor market, I wouldn’t be surprised if it turned out to be a bit tighter.

I think there are upside risks on inflation the medium term.

How Apple lost title of the world’s most valuable company to Saudi Aramco

The sight of Apple handing its crown as the world’s biggest company to Saudi Arabia’s oil giant last night is a vivid example of how the economic outlook has changed this year.

The tech selloff pulled Apple’s market value down to $2.37 trillion last night, data from Refinitiv shows.

Apple started 2022 by becoming the world’s first three-trillion-dollar company, but expectations of rising inflation and higher interest rates have pushed Apple’s shares lower.

Apple’s shares fell 5% on Wednesday, taking its losses in 2022 to almost 18%, as the Wall Street selloff continued.

In contrast, Saudi Aramco’s value has soared by over a quarter during 2022, after the Ukraine war drove up up energy prices. Its market capitalisation was over $2.42 trillion on Wednesday night, giving it the top spot.

There’s “something symbolic in tech being overtaken by oil”, says Neil Wilson of

Victoria Scholar, head of investment at interactive investor explains why tech stocks have struggled:

A combination of rising oil prices and tech sector turmoil have sent both stocks in opposite directions with Apple losing its top spot. Earlier in the year Apple became the first company ever to reach a valuation of $3 trillion but with concerns about inflation and Fed tightening and a sell-off in tech, the iPhone maker has been dragged down amid the turmoil, slumping 5% yesterday and shedding nearly 20% since the March high.

Although the Fed’s tightening path poses a risk to the more debt-dependent stocks in the tech sector, broader uncertainty has unfairly punished tech stalwarts like Apple and Microsoft which have strong fundamentals and cash positions. Once inflation passes its peak and the growth outlook improves perhaps later this year, arguably these stocks have the potential to outperform as the tech sector looks beyond its trough.”

Saudi Aramco’s share prices has dipped 2% today, while Apple are down 1.2% in pre-market trading, so the title could yet switch back and forth in the sessions ahead….

European markets are all in the red, with the pan-European Stoxx 600 dropping around 2%.

🔔 European Opening Bell 🔔

🇬🇧 FTSE 100 down 1.9%

🇪🇺 STOXX 50 down 2%

🇪🇺 STOXX 600 down 2%

🇩🇪 DAX down 2.2%

🇫🇷 CAC 40 down 2.2%

— PiQ  (@PriapusIQ) May 12, 2022