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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Brexit hopes boost sterling; BoE's productivity fears; Turkey in recession - as it happened

The Bank of England in London this week.
The Bank of England in London this week. Photograph: Stephen Chung/Xinhua/Barcroft Images

Closing summary

Time for a recap

Hopes of a last-ditch breakthrough in the Brexit talks have lifted the pound higher, as Theresa May heads to Strasbourg for talks with EC president Jean-Claude Juncker.

Sterling is close to an 18-month high against the euro tonight:

Here’s the latest:

A Bank of England policymaker has warned that the business investment lost in Brexit uncertainty may not be recovered.

Fears over Germany’s economy have risen, after factory output fell unexpectedly last month.

Turkey has fallen into recession, as last summer’s currency crisis hits growth.

Smart speakers, electric toothbrushes and dog treats have climbed into the basket of goods used to measure UK inflation.

European stock markets have closed higher tonight, with Wall Street also making gains - although Boeing’s shares have sold off heavily following the Ethiopia Airlines disaster.

Goodnight! GW

Updated

Reports that Theresa May has indeed left for Strasbourg for one last heave has pushed the pound a little higher still, to $1.3135.

Still no certainty of a breakthrough, though, so City traders aren’t getting to carried away.

The pound has also risen against the euro this afternoon, up half a eurocent at €1.166.

However, that only claws back most of Friday’s losses, and means one euro is worth 85.8p.

Updated

The German share price index DAX graph at the stock exchange in Frankfurt today
The German share price index DAX graph at the stock exchange in Frankfurt today Photograph: STAFF/Reuters

European stock markets have closed higher tonight, as shares claw back some of last week’s losses.

Germany’s DAX gained 0.7%, as did France’s CAC.

In London, the FTSE 100 ended 26 points higher, or +0.37% -- with the pound’s strength pulling down companies with large overseas earnings.

Rating agency Moody’s weighed in on Brexit today, warning that any new tariffs would hurt the UK car industry badly.

My colleague Jasper Jolly reports:

A no-deal Brexit would cost Japanese carmakers in Britain more than $1bn a year if 10% tariffs were imposed on trade between the UK and EU, new analysis suggests.

Nissan, Toyota and Honda together account for almost half of UK car production, but trade under World Trade Organization terms could cost the companies $1.17bn (£899m) in operating profit, according to calculations published on Monday by Moody’s Investors Service, an influential ratings agency.

Carmakers view the prospect of tariffs on imports and exports between the UK and the EU as the greatest risk to their British operations, above the shorter-term threat of delays at the border causing major manufacturing delays.

David Madden of City firm CMC Markets says:

The pound has rallied against the US dollar today as Prime Minister May is set to fly out to Strasbourg this evening to meet European Commission President Jean-Claude Junker.

Traders are speculating that the two will finalise the deal ahead of the meaningful vote in the House of Commons on Tuesday.

But... traders should also wonder how many MPs will be prepared to back the deal, unless there’s a significant change (which feels very unlikely).

Pound rises on last-ditch Brexit hopes

It’s been a choppy day for the pound, as Brexit rumour and counter-rumour fizzed through the City.

Sterling hit a three-week low of $1.2949 last night, on reports that the government might pull Tuesday’s Meaningful Vote.

But the currency has since rallied, and is up three-quarters of a cent at $1.309, on hopes of a last-minute breakthrough.

This revival was sparked by Simon Coveney, the Irish deputy prime minister, who revealed that Theresa May may fly to Strasbourg tonight to try to finalise a Brexit agreement.

Nothing’s official yet, though.

Robin Walker, the Brexit minister, has just told MPs that negotiations are ongoing “and at a critical stage”, as Labour leader Jeremy Corbyn demands answers about the “shambolic” talks.

Updated

Back in the markets, Wall Street has posted solid gains this morning with the S&P 500 index gaining 0.8%.

The tech-focused Nasdaq is 1.1% higher, as traders take their cue from Asia and Europe (which are both up today too).

However... the Dow is flat, almost entirely due to Boeing. The aircraft maker’s shares have lost 8.6% of their value so far, following yesterday’s Ethiopian air disaster involving a Boeing 737 Max 8 plane.

Business investment is a hot topic in the City right now, so Haskel’s speech is well-timed.

Last week, Japan’s MUFG Bank released a paper arguing that firms could turn on the spending taps again.

MUFG’s Henry Cook wrote that some pent-up cash could be released once we have Brexit clarity, and that firms might need new equipment to replace EU workers.

However, Britain probably won’t recover all the deferred spending -- some has been lost for good.

As Cook put it:

“…if a Brexit deal is reached then we believe there is scope for business investment – which accounts for around 9% of GDP – to bounce back. Companies have built up cash reserves by deferring investment decisions, and ‘no deal’ contingency funds could be released. Importantly, survey measures of investment intentions remain relatively resilient.

There may also be a more fundamental shift away from labour as a factor of production if wage costs continue to increase and skilled workers become harder to recruit once the UK leaves the EU.”

He also produced this chart, which also shows the slowdown in UK business spending recently

UK business investment
UK business investment Photograph: MUFG

More context:

UK business investment

As Jonathan Haskel puts it.

The figure shows the stark fall in business investment during the great recession, a slow recovery that appeared to have gathered momentum in 2014 and 2015 but has tailed off in the most recent years, starting in 2016, with a noticeable dip in 2018.

These two charts, from Jonathan Haskel’s speech, show why the Bank is so concerned about business investment:

Business investment
Transport investment has been particularly weak since 2016 Photograph: Bank of England
UK business investment
UK business investment has weakened compared to other major economies Photograph: Bank of England

Jonathan Haskel is also warning against a no-deal Brexit:

Another good line from the Haskel speech:

You can read Jonathan Haskel’s speech in full, here.

BoE policymaker: Brexit to weigh on business confidence

NEWFLASH: Brexit is likely to have a chilling effect on UK business investment for several years, according to the newest member of the Bank of England’s interest rate-setting committee.

Jonathan Haskel, speaking at Birmingham University, is warning that the fog of Brexit uncertainty is unlikely to lift soon.

He points out that UK business investment has lagged behind the G7 average since the 2016 referendum, as firms have held off spending plans.

And it remains very possible that business investment will remain low in the next few years, Haskel says.

He gives two reasons

1) Even if Theresa May’s deal is passed, the transition deal could last longer than the 21 months currently planned.

Haskel says:

It is conceivable that, like Article 50, the UK will require more time than the 21 months.

Thus, it is possible there might be another round of negotiating and attendant uncertainty.

2) Investors needs so to know the future trade relationship between the UK and the EU, which is not covered in the Withdrawal Agreement (which MPs haven’t approved, anyway).

As Haskel puts it:

For business, the question of whether that is a customs union or free-trade area is vital since that gives more of a steer as to whether there will be relatively frictionless trade with the EU or not.

This has to be decided so that negotiators can get started and firms can, in turn, make investment plans.

Haskel concludes by reminding his audience that the Bank of England’s forecasts show that Britain will enjoy less trade and output growth, in 15 years time, than if it remained in the EU.

If there was a lower level of output and also lower long term growth, there would be even less bounce back. But all of this is a long way off.

At least for the next few years the prospect of low investment seems possible.

Something for MPs to ponder as they decide whether to approve the Withdrawal Agreement on Tuesday, push for no deal, or try to extend the Brexit deadline.

Updated

Capital Economics agree that weak car sales dragged US retail spending back last month;

The modest 0.2% m/m gain in headline retail sales was partly due to a 2.4% m/m drop in motor vehicle sales. Unfortunately, the manufacturers’ data show that sales fell further in February.

Headline sales were also hit by a price-related fall in the value of gas station sales.

Americans spent more on eight of 13 major retail categories last month, points out Bloomberg:

The gains reflected the biggest jump for building materials since late 2017, the best rise for food and beverage stores since early 2016 and the strongest gain for sporting goods and hobby stores since 2013.

Updated

Just in: Americans slammed on the spending brakes even harder than first thought over Christmas.

US retail sales shrank by 1.6% in December, according to new figures from the Commerce Department.

That’s worse than the 1.4% drop first reported, and confirms earlier data showing the US economy weakened at the end of 2018.

But January saw a small recovery; spending inched up by 0.2%, a little better than hoped.

Plus, if you strip out spending on cars and gasoline, retail sales gained 1.2% in January. So it’s not all bad news...

Delving further back into time, to 2011, and the UK inflation basket gained mobile apps and dating website subscriptions, at the expense of fleeces and mobile ringtones...

Back in the stock markets, shares in Boeing are expected to sell off sharply when trading begins in New York.

Boeing are down almost 10% in pre-market Wall Street trading, following Sunday’s Ethiopian Airlines crash in which all 157 people on board died.

This is the second airline disaster involving Boeing’s new Boeing 737 MAX 8 plane.

China and Ethiopia have now grounded their Max 8 jets while the tragedy is investigated.

Dr Neil Robinson, tourism and travel expert from the University of Salford Business School, warns that others could follow.

“In the US, Southwest Airlines flies 31 of the aircraft, while American Airlines and Air Canada each have 24 in their fleet. If they decide to ground their fleets then the knock effects will grow.

Here’s our news story on what’s in and out, of the inflation basket this year.

Over the years, the annual shake-up of the UK’s inflation basket does show how the nation’s spending habits have changed.

Here’s some recent highlights

2019:

  • IN: Smart speakers, baking trays, shop-bought popcorn, dog treats
  • OUT: Washing powder, envelopes, crockery sets

2018:

  • IN: Women’s leggings, soft play centre fees, quiche
  • OUT: Leg waxing, nightclub lager, pork pies,

2017:

  • IN: Gin, cycling helmets, smartphones, non-dairy milks
  • OUT: menthol cigarettes, basic mobile phone handsets

2016:

  • IN: Coffee pods, large chocolate bars, pouches of microwave rice
  • OUT: Gloss paint, rewritable DVDs, nightclub entry fees

2015:

  • IN: Electric cigarettes, craft beer, music-streaming services
  • OUT: Sat-navs, frozen pizza, cut flowers

Here’s the Financial Times’s take on the inflation basket changes:

The ONS, which set out this year’s changes on Monday, said people were now spending more on bakeware, perhaps due to the success of TV cookery programmes. The inclusion of smart speakers is intended to reflect new technology; with other additions reflecting changing eating habits — flavoured tea, which now fills shelves in supermarket aisles, and popcorn, which is no longer confined to cinema trips.

Statisticians are also catching up with changing domestic fashions: sofas replace outdated three-piece suites for lounge furniture; and dinner plates replace traditional matching crockery sets.

Washing liquid and gel have been brought in to replace washing powder in the basket, while dog treats replace dry dog food. Also out are envelopes — no longer a household staple, given the dominance of electronic communication.

Britain’s inflation foot soldiers have also been asked to track the price of children’s fiction suitable for 6 to 12 years of age.

This closes a gap in the coverage of books between illustrated books for infants and teenage literature, says the ONS.

Back in 2017, my (then) colleague Katie Allen wrote about the hundreds of people who monitor prices around the UK, for the ONS inflation data.

They’ll now be adding smart speakers, electric toothbrushes and baking trays to their list, while shunning dog food and envelopes.

Here’s a flavour:

In a shop stacked to the ceiling with toys, Brenda Cleaver is searching for a very specific car. “I am looking for a modern road vehicle, and I am checking the price. Here it is. It hasn’t changed,” she says, comparing the price sticker on the toy car with the information on her handheld computer. She moves on in search of a snakes and ladders game.

Cleaver is one of hundreds of people across the UK who help collect thousands of prices each month to feed into a that keeps track of the country’s inflation rate. These field workers look for the same items in the same stores each month and send their prices to the (ONS) in Newport, Wales.

The exact dates for each month’s price collection is kept secret to avoid risking a change in shop prices on that specific day.

Once complete, the collectors’ reports are used by ONS number crunchers to price a 700-item shopping list that includes food such as sliced bread and other items ranging from hamsters to golf club fees and cinema tickets.

In another break from the past, the ONS has added washing liquid or gel to the inflation basket - chucking out boring old washing powder.

The classic three-piece suite has also been ditched from the inflation basket, along with the crockery set.

The ONS has concluded that consumers no longer plump for the sofa plus armchairs combination of the past:

Lounge furniture is increasingly bought as a combination of single items, such as corner units or settees and not in the traditional three-piece suite format. This might partly reflect the various styles of modern housing.

As a result, non-leather settees have replaced three-piece non-leather suites in the baskets. Similarly, dinner plates have replaced crockery sets with more people buying crockery items individually than as part of traditional sets.

UK inflation basket: Smart speakers elbow envelopes out

Amazon Echo Dot 3rd gen review - Alexa activated
An Amazon Echo Dot Photograph: Samuel Gibbs/The Guardian

Just in: Smart speakers, flavoured tea and electric toothbrushes have all been added to the ‘basket of goods’ used to calculate UK inflation.

The Office for National Statistics has shaken up the list of items it tracks to calculate the cost of living.

This means peanut butter, flavoured tea and shop-bought popcorn are also joining the basket, reflecting changing consumption habits.

They’ve also added baking trays - following the resurgence of home cooking thanks to shows such as Bake-Off.

But while Amazon Echo and Google Home speakers will now be tracked, the ONS is turfing out envelopes from the basket - on the grounds that email, texts and messaging overcame letters long ago.

The ONS says:

As in most years, developments in technology influence the basket update and for 2019, a smart speaker, such as the Amazon Echo or Google Home, has been added.

This type of equipment has not been covered previously and it ensures the baskets remain representative of the latest technology items that consumers are purchasing.

Complete dry dog food is also getting its marching orders, and being replaced with doggie treats.

That’s because “the balance of spending has shifted between the two” says the ONS.

Updated

Turkey’s finance minister says the worst of the economic crisis is behind the country, even though it has just fallen into recession.

In a resolutely upbeat message, Berat Albayrak says there are signs of a ‘moderate recovery’ in 2019, with exports and tourism likely to support growth.

The slide into recession means Turkey has suffered its worst year in a decade.

On an annual basis, GDP only expanded by 2.6% in 2018 - down from 7% in 2017. This is the weakest growth since 2009, after the financial crisis.

Turkey falls into recession

People walk past a campaign billboard of the ruling Justice and Development Party (AKP) bearing a portrait of Turkish President Recep Tayyip Erdogan on March 8, 2019, in Ankara. - Turkish citizens will go to the polls to vote in local elections on March 31, 2019.
People walk past a campaign billboard of the ruling Justice and Development Party (AKP) bearing a portrait of Turkish President Recep Tayyip Erdogan on March 8, 2019, in Ankara. - Turkish citizens will go to the polls to vote in local elections on March 31, 2019. Photograph: Adem Altan/AFP/Getty Images

In another blow to the global economy, Turkey has fallen into recession.

New government data which shows GDP shrank by 2.4% in the fourth quarter of 2018.

That follows a 1.6% decline in July-September, meaning Turkey has now contracted for two quarters in a row.

This recession is clearly home-grown.

Last year’s currency crisis (in which the lira plunged by a third) had a devastating effect on business confidence and exports, as well as driving inflation higher. This forced the central bank to hike interest rates, hurting borrowers and making credit expensive.

Today’s growth figures show the impact - the construction industry shrank by 8.7% in Q4, while household consumption contracted by 9%.

Not great news for president Erdogan, ahead of elections at the end of March.

Updated

One factor behind Germany’s slowdown is the problems in China’s economy.

And the bad news there is that car sales in China fell in February, for the eighth month in a row.

Marketwatch explains:

Vehicle sales in January and February--a period that includes China’s movable Lunar New Year holiday--totaled 3.85 million, down 15% from a year earlier, the government-backed China Association of Automobile Manufacturers said Monday.

Paul Donovan of UBS Wealth Management hopes that the uncertainty that has hurt German factories will soon lift, saying:

Weaker business investment spending has held back global production (and international trade).

With uncertainties fading, companies are more likely to invest, helping production and improve trade.

How could that happen? A US-China trade deal, and some Brexit clarity, would certainly help.

European stock markets are shrugging off growth worries as the new trading week kicks off.

The FTSE 100 has gained 50 points, or 0.7%, in early trading in London, with mining stock including Glencore and Anglo American among the risers.

Germany’s DAX gained 0.4%, while Franc’s CAC 40 is up almost 0.5%.

Mike van Dulken of Accendo Markets says soothing words from Beijing are helping markets stage “a tentative recovery” after their worst trading week since mid-December.

Chinese officials tried to calm investors worried over trade slowdown, pointing to a recovery in China’s exports in early March following a 20% drop in February.

Back in the UK, the battle for troubled department store chain Debenhams has taken another twist.

Debenhams has told the City it is in advanced talks to secure £150m of new funding. Get it, and it could repel Sports Direct, whose founder Mike Ashley wants to take control of Debs.

My colleague Sarah Butler explains:

The arrangement would also repay £40m of short-term debt agreed last month in an effort to facilitate trading through Easter.

Debenhams is also attempting to refinance £320m of loans and £200m of bonds that are due to be repaid next year. A deal is expected to include a debt-for-equity swap and 50 store closures.

Business newspaper Handelsblatt is reporting that Germany’s government has cut its growth forecasts - even before this morning’s weak factory data.

According to Handelsblatt, the federal government had privately cut its in-house growth outlook for 2019 to just 0.8% for 2019.

That follows an early cut from 1.8% to 1%.

A weakening world economy, risks from escalating global trade conflicts, and political factors including Brexit and Italy’s budget row were all blamed for slowing Germany’s growth, the paper adds.

Here’s the full story (in German).

Introduction: Weak German factory production

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

2018 was a tough year for Germany, as Europe’s larget economy was dragged to the brink of recession. 2019 hasn’t started much better.

New figures released this morning show that German industrial output slid, alarming, by 0.8% month-on-month in January. Economists had expected a 0.5% gain.

On an annual basis, output was a chunky 3.3% smaller than in January 2018.

It’s another sign that global trade tensions, the eurozone slowdown and Brexit uncertainty have all hurt demand for German-made products.

Worryingly, the decline was driven by lower demand for heavy-duty machinery and equipment.

Statistics body Destatis says that production of capital goods slumped by 2.5% on the month, while ‘intermediate goods’ production fell by 0.7%.

But consumer goods production rose by 1.5%, suggesting the global slowdown is worrying businesses more than families.


Also coming up today

Brexit looms like a dark cloud over the City, as we enter a crunch week for the UK’s future. With no breakthrough in negotiations with Brussels, MPs are expected to reject Theresa May’s deal tomorrow.

Cue speculation that the PM may not last much longer.

Global investors are still digesting last Friday’s unexpectedly weak US jobs report. It showed just 20,000 new jobs were created last month, down from over 300,000 in January. It may be a blip, or a warning sign that growth is slowing.

Today we get US retail sales figures, which should shed fresh light on the situation. Economists predict spending dipped by 0.1% in January, after a 1.2% slide in December.

In the UK, professor Jonathan Haskel is speaking at the University of Birmingham. He’s the newest member of the Bank of England’s monetary policy committee, so could talk about interest rate moves, and the state of the economy.

European markets are expected to open higher:

The agenda

  • 12.30pm GMT: US retail sales figures for January
  • 1pm GMT: Bank of England policymaker Jonathan Haskel speaks at Birmingham University

Updated

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