Closing summary: Steel crisis rumbles on
Time to wrap up. A quick recap:
During an urgent statement in parliament, MPs from across the House warned of the risk that other organisations try to follow suit, potentially hitting millions of workers in the pocket.
During the session, Javid explained that the scheme’s Trustees had proposed shifting the scheme to a lower inflation rate [from RPI to CPI], to cover its £700m deficit.
He also promised not to be hasty, despite giving just four weeks to consult on the proposal.
Jo Stevens, Labour MP for Cardiff Central, said it was a “potentially very risky and precedent-setting proposal”.
Neil Gray, the SNP’s employment spokesman, said the “incredibly sensitive” pensions issue must be “handled with extreme care” by the Government. Otherwise, he fears it could create:
“a very dangerous precedent that undermines workplace pensions and incentives to save to secure dignity in retirement”.
And Frank Field, who chairs parliament’s pensions committee, warned that “thousands of other schemes” are in a similar predicament.
Javid had just returned from meeting with Indian conglomerate Tata. He told MPs that there are seven credible bidders interested in buying Tata’s assets.
But he refused to comment on rumours that Tata is now considering keeping its plants, if the proposal for pension cuts is accepted.
Full coverage of the session, complete with questions from a stream of MPs, starts here.
Unions representing Britain’s workers have welcomed the government’s decision to launch a consultation today. They said it would be an “unmitigated disaster” if the scheme had to be rescued by the Pensions Protection Fund.
Here’s our latest story on the Steel crisis, which will be updated later:
And in other news....
Britain’s EU referendum appears to be partly to blame, along with the financial market turmoil in January and the slowing global economy.
The oil price has fallen back below $50 per barrel, after setting a new 2016 high this morning.
And in the eurozone, French protesters have scuffled with police, as dock workers set off smoke bombs and union activists disrupted fuel supplies and nuclear plants. It’s all part of a new protest against labour market reforms, giving François Hollande’s government another headache.
Updated
Here's what the Steel pension changes would mean in practice
Shifting the British Steel pension scheme from the Retail Prices Index to the Consumer Prices index, as the Trustees have proposed, would wipe £2.5bn of its liabilities.
So says Clive Fortes, Partner at Hymans Robertson, a pensions consultancy firm.
Fortes explains:
“In 2011 the Government changed statutory pension increases from RPI to CPI. If CPI is used, pension entitlements increase by around 1% less per annum than under CPI. Over a 15-20 year period, that’s a 15-20% reduction on the size of an individual’s pension.
“Whether or not a scheme has the flexibility to adopt CPI comes down to how the lawyer wrote scheme rules before 2011. Some schemes, such as British Airways, allow the flexibility to adopt CPI. Others, such as British Steel, clearly don’t. There’s a ‘scheme rules lottery’ in respect of RPI and CPI.
And what would it mean for an individual? Fortes has the answer:
“For a British Steel pensioner with a £5,000 per annum pension, a move to CPI will see them £50 worse in year one, £100 in year two and so in. Over a typical pensioners’ lifetime this is a loss of £15,000 of lifetime savings. On the plus side, this only one third of the average loss on falling in to the Pension Protection Fund.
FT: Brussels might not approve of Steel pension changes
The government’s proposed changes to the British Steel pension scheme could prompt a row with the European Union, according to the Financial Times.
It says:
If the government legislates to amend the rules governing one pension fund — for a struggling industry — it could raise alarm bells in Brussels: it is likely to be seen as state aid by EU officials.
This won’t be a problem, though, if Britain votes to leave the EU next month (on the day the consultation closes).
The FT also flags up the winners and losers from the plan:
In the 40-page consultation document it emerged that not all members of the scheme would be better off under the proposals. Some 5,800 would be worse off, 70,000 would be in the same situation and 40,000 would be in a better situation.
(that’s compared to entering the Payment Protection Fund, which would also prompt a cut to benefits)
Updated
Parliament’s Business, Innovation and Skills committee has just moved a step closer to getting Mike Ashley, boss of Sports Direct, to testify before them.
The committee has written to Askley, declining his invitation to visit his Shirebrook warehouse. Instead, they expected to see the retail titan in their committee room on June 7 to face questions about working conditions at Sports Direct.
Committee chairman Iain Wright also warns Ashley that they may also hear some critical comments about working practices (something the Guardian exposed last year).
Here’s the full letter:
Steel unions welcome government consultation
Britain’s steel union have welcomed the government’s decision to open a consultation on making changes to the British Steel pension scheme.
They confirm that the deficit - now £700m, it appears – is a serious hurdle to finding a buyer for Tata’s operations in the UK.
Crucially, they warn that it would be a disaster if the scheme fell into the Pension Protection Scheme – the lifeboat for failed pension scheme.
Here’s the full statement:
The steel trade unions – Community, Unite and GMB – have been in dialogue with the UK Government and Tata Steel for a number of weeks to secure a sustainable future for our industry. A number of bidders have made it clear that the British Steel Pension Scheme (BSPS) presents a major challenge to any sale. We also fully understand the great importance of this pension scheme to both current and former steelworkers and steel communities across the UK.
There has been a lot of speculation that any sale of Tata’s assets would involve the BSPS going into the Pension Protection Fund (PPF). The trade unions believe that such a move would be an unmitigated disaster. The PPF is a financial safety net but it would see every member of the scheme take an unnecessary cut in pension benefits. The financial health of the BSPS is such that going into the PPF can certainly be avoided.
We welcome the announcement of a government consultation on the future of the BSPS and the trade unions will of course make a full submission in due course. It is important that all stakeholders continue to explore all available options that avoid the need for the scheme to go into the PPF, which would be the worst deal for scheme members. We will seek to work constructively with the UK Government and the scheme trustees to deliver the best possible deal for our members. We need to ensure that there are cast iron safeguards in place so this unique situation does not result in employers dodging their pensions responsibilities.
It is important to remember that Tata Steel remains the employer and sponsor of the BSPS. They have significant legal, social and moral responsibilities with regards to the British steel industry and those men and women who have worked and continue to work within it.
As we have done so throughout this process, we will continue to be led by our members in the steel industry. In the midst of this crisis and great uncertainty, they continue to produce world class steel that supports the UK’s entire industrial base. The steel industry’s highly skilled and dedicated workforce will surely be the foundation on which a sustainable, profitable future for the industry will be built.
BREAKING: Joint statement on British Steel Pension Scheme from the steel trade unions https://t.co/SCuYDL9lIA #SaveOurSteel
— Community union (@CommunityUnion) May 26, 2016
Updated
The proposed pension changes are controversial for another reason.
The prospect of workers’ pension rights being cut has prompted Tata to reconsider selling its UK assets at all!
That’s according to The Times, which reported today that:
The sale of Tata Steel’s UK assets has been thrown into confusion after speculation that the business secretary has offered Tata a deal so attractive that it may yet keep Port Talbot and a dozen other facilities around the country.
One of those sweeteners is said to include an accommodation to downgrade the retirement benefits of members in the British Steel Pensions Scheme to try to keep a lid on the £15 billion fund’s £485 million deficit.
But some ministers are apparently fighting the proposal, fearing that it would open a “Pandora’s Box” and prompt other companies to cut entitlements too.
TIMES BUSINESS: Tata sale in chaos over 'sweetener to stay put' #tomorrowspaperstoday pic.twitter.com/A9jOzSFnV6
— Neil Henderson (@hendopolis) May 25, 2016
My colleague Graham Ruddick sums up the key exchange from the steel session (which starts back at noon BST)
Sajid Javid, the business secretary, said the trustees had asked the government to make the scheme exempt from legislation in the 1995 Pensions Act.
“The scheme’s trustees have come forward and asked us to look at current legislation,” Javid told MPs. “The scheme trustees have put forward this proposal and it is only right that we consider it.”
However, Angela Eagle, the shadow business secretary, said the plans “risk setting a very worrying precedent” and questioned whether the government can ensure that any changes to pension laws are “safely ring-fenced”.
Here’s our latest story on the issue:
Sajid Javid's steel statement: snap verdict
In Yes Minister, Jim Hacker defined a dangerous precedent thus:
“If we do the right thing this time, we might have to do the right thing again next time.”
But several MPs who spoke in parliament this lunchtime are worried that the government’s plans for British Steel could create the wrong sort of precedent, and hurt millions of workers in the pocket.
And I think they’re right to be concerned. As Sajid Javid pointed out, the suggestion to switch inflation linking from RPI to the (lower) CPI rate came from the British Steel trustees themselves.
Other trustees wrestling with similar pension deficits are likely to be pondering whether a similar shift could work for them.
Javid pointed out that the only thing preventing the British Steel trustees is current legislation (pesky laws, eh?). And we must assume that this legislation could be changed, if the consultation backs the plan.
I say if, but the Trustees have already concluded that the change would mean workers are either better off, or no worse off, than other options.
Labour’s Angela Eagle didn’t let Javid off lightly, though – reminding the House of the minister’s failure to fly to Mumbai in March, when Tata decided to pull out of the UK.
Eagle also put her finger on a serious concern -- the government’s consultation closes in four weeks time. Is that really enough time to consider such a serious issue? And how much time will be spent deliberating? Tata are clearly determined to get a sale quickly, so there’s a lot of pressure on the government.
On a brighter note, Javid had just returned to the UK from Mumbai, where he met with Tata’s top brass. He still seems optimistic that a deal will be found, with seven credible bidders showing serious interest.
But still..... the precedent of changing pensions rules to that workers get less than they were promised has clearly worried MPs on both sides of the house.
Several members pushed Javid to confirm that any changes would just be ringfenced to British Steel, not used as a template for other companies.
The business secretary did indeed give that assurance, but some MPs looked pretty concerned. Not just Labour -- Conservative Julian Knight pointed out that there is a fundamental principle here. Pensioners are entitled to receive what they were promised when they paid into a scheme.
Javid also appeared to indicate that steel workers wouldn’t get a ballot on the changes.
Updated
And finally, Labour MP Madeleine Moon of Bridgend says that other companies are already poaching skilled steel workers.
Q: Shouldn’t the government give an assurance that public sector contracts will always demand a high percentage of British steel, to underpin confidence?
Javid says that the government has already allowed economic and social factors to be taken into account.
And he repeats that the government’s promise of financial help has also provided confidence.
And that is the end of the session
Geriant Davies, Labour Co-operative MP for Swansea West, tells the house that he warned the government that minimum carbon pricing would hurt the steel industry.
Javid agrees that energy costs are important, but not the only factor facing steel plants.
Q: Does the government still want to grant China ‘market economy status’ (which the European Parliament voted against this month)
Javid says the European Commission is considering the issue, but it wouldn’t prevent tariffs being imposed on Chinese steel.
Clive Betts MP asks the government to act on energy costs, which mean steel works pay 85% more than German rivals.
Javid repeats that the government has already acted on this issue, and is prepared to do more.
Sue Hayman MP asks the business secretary to reassure steel workers that they will get their full pensions.
Sajid Javid agrees that steel workers have worked hard for their pensions, so the government must do everything possible to find the best outcome.
The SNP’s Margaret Ferrier asks about proposals to change the ‘lesser duty rule’, which allows Chinese steel firms to sell their products in the UK without a hefty tariff.
Javid says there are ways to improve the lesser duty rule, but doesn’t believe it should be scrapped.
Labour’s Paul Flynn says he’ll soon qualify for a pension after 30 years in the steel industry, but it will be dwarfed by House of Commons pension. Isn’t it repugnant that workers in such a dangerous, skilled, industry are being asked to pay to cover their pension deficit?
Javid says the government will leave no stone unturned to find a buyer for Tata’s UK assets.
Richard Fuller, Conservative MP, makes an important point -- could any future surplus be transferred out of the pension fund?
Javid agrees that pension benefits should always go to those who have paid in.
Labour’s David Anderson raises the issue of miners’ pensions, saying retired workers are suffering from government decisions in the past.
Javid says that the proposals on the table today are different to what happened in the 1990s.
[some background: in 1994, the government took half of the surplus in the miners’ pension scheme, but some workers then missed out on their half due to pension rules]
Kevin Foster, Conservative MP, urges the government to ringfence any pension changes
Javid repeats that this is a one-off situation.
Javid then warns that unless changes are made, it’s very likely that the British Steel pension scheme would have to be rescued by the Pension Protection Fund (which would also result in a cut to benefits).
Q: Will any changes to the British Steel pension scheme be put to a ballot of members?
Javid says that the Trustees already have the right to change the indexing, but they are prevented by legislation.
It’s important that full information is provided to members, he adds.
So, no ballot?
Asked again about steel-dumping, Sajid Javid says that British steel is the best in the world - and some companies have come to regret buying inferior foreign alternatives.
Labour’s Jessica Morden asks what the government is doing to reassure companies who buy British steel, such as Nissan (who have a plant in her constituency, Newport East).
Sajid Javid says the government has been speaking to customers and telling them that British steel has a long-term future.
Conservative MP Steve Double asks what impact the climate change levy introduced by Gordon Brown has had on the steel industry.
Sajid Javid says the government is providing support and exemptions to help companies with energy costs.
Kevan Jones MP raises the importance of Britain’s steel industry to the defence sector.
Javid says 95,000 tonnes of British steel will be used in the new Queen Elizabeth aircraft carrier.
Q: Could potential bidders work in partnership to help the steel industry?
Javid says that the field of seven bidders will be narrowed, and he’s confident that Tata would be amenable if bidders wanted to work together.
Asked about timings, Savid Javid says there is no deadline to find a buyer - but Tata want to move quickly.
Redcar MP Anna Turley, says the government has acted disgracefully over the steel crisis and urges Javid not to inflict more pain on workers.
(a steel plant in Redcar closed last autumn with the loss of 1,700 jobs).
Sajid Javid says that more details about the proposed pension plans will be released soon, which should provide reassurance to workers.
Conservative MP Mark Spencer wants reassurances that any deal will work, and that MPs won’t be back discussing this issue in two years.
Javid repeates that there is no deal yet, and any deal depends on the approval of the Pension Regulator.
Dennis Skinner MP raises the issue of the miners’ pension scheme, saying the “lousy rotten Tory government” refused to provide any help.
Javid says this doesn’t have anything to do today’s issue.
Conservative MP Julian Knight says the government must retain the crucial principles that members always have the final say, and that pension promises are delivered.
Javid agrees that the integrity of the pension system must be retained.
He repeats that the pension scheme trustees believe that changing the inflation indexing is in the best interests of its members.
Seema Kennedy, Conservative MP for South Ribble, asks what support is being given to steel workers and their communities.
Javid says that the best support is the confidence that there is a long-term future for the UK steel industry.
That includes the offer of hundreds of millions of pounds of investment, that could see the government buying a 25% stake.
Labour’s Jo Stevens asks what discussions have taken place with the pensions regulator about this “potentially risky and precedent-setting proposal”.
Javid says discussions have taken place, and confirmed that they would need to have the regulator’s full support.
Labour’s Tom Blenkinsop says his father in law is a British steel pensioner.
Q: What would happen if the scheme were taken into the Pension Protection Fund?
Sajiv Javid says that if this happened, workers would still get 100% of their pension but the indexing would probably move to the CPI inflation rate.
Updated
Conservative MP Peter Bone says the government needs to get to the “root of the problem”, the dumping of Chinese steel.
Q: Why can’t the government impose higher tariffs, as the US just did?
Javid says the government has acted when there is evidence of steel dumping.
Labour’s Stephen Kinnock, who represents Port Talbot, raises media reports that Tata could actually retain its UK assets.
Javid declines to comment on these rumours, saying the government wants to work constructively with all potential bidders.
Conservative David Mowat asks whether changing the benchmarking from RPI to CPI inflation will bring the British Steel pension scheme into surplus.
Q: If not, could workers face a “double-whammy” if the scheme later moves into the Pension Protection Fund?
The trustees believe it would bring the scheme into surplus, and make it stable, Javid replies. But the pension regulator would have to be satisfied first.
Updated
Frank Field, who chairs the work and pension committee, points out that many other pension schemes are in deficit. It will be hard to ‘gate’ these plans just to the steel industry.
He asks for a discussion after the recess, to consider the full impact of the proposed changes.
Javid says he’s happy to meet with Field to discuss the issue, and repeats that the government’s plans are restricted to the steel sector.
Tom Pursglove MP asks if the government knows whether more investment could come to steel works in his constituency, Corby.
Javid says commercial details are sensitive, but there are seven serious bids on the table.
Javid: Steel pension problem is unique
Iain Wright MP, who chairs the business, innovation and skills committee,is also worried about the precedent issue.
Q: Is this deal purely for steel, or is it being extended to other strategically important industries? And is the government’s preferred option the 2012 deal for Royal Mail, which distinguished between past and future contributions?
Javid says there is no deal yet, and no preferred option and no decision has been made.
He repeats that the government is keen not to create a dangerous precedent. This is a unique case.
Conservative MP David Davies, of Monmouth, commends Sajid Javid for his efforts to save the UK steel industry.
But he urges the business secretary to proceed carefully
Javid agrees that the government shouldn’t be reckless, but points out that the trustee of the Pension Scheme has announced his support.
SNP MP Neil Gray is disappointed by the lack of detail in the government’s plans.
Q: How would it affect current workers, and could it be a dangerous precedent?
Javid says the government must tread carefully, and avoid creating any precedents that the House would regretted later. But it’s right to listen to the Trustees’ concerns.
Onto questions.
Pauline Latham, Conservative MP, asks about another crisis - the future of BHS.
A company in her constituency, Courtaulds, which supplies the stricken retailer has gone into administration. Can the government help?
Sajid Javid agrees to meet Latham to discuss Courtaulds.
Javid: Trustees have asked for the change.
Sajid Javid defends the short length of the consultation - time is of the essence in the search for a buyer.
He says the trustees of the British Steel pension fund approached the government, asking for changes to be made.
Javid confirms that legislation in the 1995 pension act prevents the trustees from benchmarking pensions against the consumer price index (CPI) rather than the retail price index (RPI). They want the government to allow a change.
The trustees believe that, in almost every case, members would be better off, or no worse off, he says.
But the government must assess whether it is the right thing to do - thus the consultation.
Updated
Eagle demands more details on pensions plan
Labour’s shadow business secretary, Angela Eagle, responds.
She reminds the house that steel workers protested outside parliament yesterday.
She’s disappointed that Sajid Javid didn’t give any more details about the pensions consultation in his statement. And is worried that the consultation will only run for four weeks.
She says the business secretary was right to visit Mumbai this week -- a case of “better late than never” (a reference to his notorious trip to Australia when the steel crisis blew up)
Eagle is worried that moving from the RPI inflation rate to the CPI version “risks creating a very dangerous precedent”. And it is currently illegal.
She asks if the government can ring-fence any such move, to protect other workers.
And finally, has the secretary of state considered the impact on the incentive to save, if pensions rights can be arbitrarily cut.
Updated
The steel crisis is ultimately about the workers who make Britain’s steel industry the best in the world, Javid continues.
We will continue to fight for British steel for a long as it takes, he adds.
Javid: Tata has received several credible bids
Sajid Javid begins by telling MPs that he just returned from Mumbai a few hours ago.
During his trip, he stressed the importance of Tata running a “responsible” sales process for its UK steel operations.
There are several credible bids on the table, which Tata is now considering closely.
The government will continue its dialogue with Tata, and those bidders.
Javid says it’s not the government’s job to pick a winner, but to help with the sales process and remove potential obstacles. That’s why they have launched a consultation into the pension scheme today.
-
Javid: Several credible bids for Tata’s UK steel works
Sajid Javid gives steel statement.
Business secretary Sajid Javid is on his feet, updating the House of Commons on the British Steel pensions consulation.
It’s being streamed on the BBC’s Parliament site.
I’ll cover the main points in this liveblog.
Pensions expert: Steel consultation could threaten fundamental pension principles
One of the City of London’s top experts on pensions is worried about the government’s plan.
Tom McPhail, head of retirement policy at financial service group Hargreaves Lansdown, says:
In this case, a change of escalation rates could be the least worse solution. But the potential deal on British Steel could rip a hole in one of the most fundamental principles of pension provision. It is well-established that pension benefits, once granted cannot be taken away.
The government should be very cautious about sacrificing such a principle in pursuit of short term interests, even if there are tens of thousands of jobs at stake.
McPhail adds that a proper review of final salary guarantees is needed.
Updated
The situation in the British steel pension fund is worse than first thought....
Government statement reveals that British Steel pension fund deficit is now £700m (as of December 2015). Had been estimated at £485m.
— Jim Pickard (@PickardJE) May 26, 2016
Opposition MPs have already criticised the government for suddenly launching this consultation, just before the House of Commons breaks for a recess.
Labour will stand with our Trade Union colleagues to ensure steel pensions as well as steel jobs are protected: pic.twitter.com/1fmBoIZY5b
— Owen Smith (@OwenSmith_MP) May 25, 2016
This one-month consultation is due to end on the same day as the EU referendum....
British Steel pension consultation ends on....June 23. Familiar date? pic.twitter.com/wAjPsFYFMl
— Jim Pickard (@PickardJE) May 26, 2016
The trustee of the British Steel pension fund is backing the government over its plans to potentially cut pension payments to workers.
Allan Johnston believes this would be a better outcome for members than entering the Pension Protection Fund (when there is an automatic 10% reduction to benefits)
My colleague Graham Ruddick explains:
The government believes if it can significantly restructure the pension scheme then Tata Steel can be persuaded to keep the business.
Sajid Javid, the business secretary, has said the government is willing to offer hundreds of millions of pounds to a buyer and is looking at ways to restructure the pension scheme by reducing its liabilities by billions of pounds.
However, there is a row within the government about Javid’s plan to cut the scheme’s liabilities by benchmarking it against the consumer price index (CPI) rather than the retail price index (RPI) and spinning it off into a new financial vehicle. The Department for Work and Pensions is concerned that this could set a dangerous precedent for defined benefit pension schemes, also known as a final salary scheme.
Here’s the full story:
Updated
UK launches consultation on cutting steel pensions
There are important developments in the crisis gripping Britain’s steel industry, which could hit pensioners in the pocket.
The government has announced a new consultation into overhauling the British Steel Pension Scheme.
That scheme, currently in deficit, is a stumbling-block to finding a buyer for several steel plants including the Port Talbot blast furnace.
Pensions minister Stephen Crabb has told parliament in a written statement that:
“The consultation includes a full range of options that consider whether and how the scheme could be separated from the existing sponsoring employer and whether it will be necessary to reduce the benefits within the scheme.”
The Scheme has liabilities of around £15bn, and a deficit of around £700m £485m .
Crabb’s announcement is fuelling concerns that pensioners across the country could suffer, if benefits due to steel workers are cut.
A former pensions minister, Steve Webb, has warned that the government was “going down a very dangerous path” in seeking to change the law.
“Everyone has huge sympathy for steel workers and for efforts to protect jobs, but rushed changes to pension rules risk driving a coach and horses through the pension security of hundreds of thousands of workers, well beyond the steel industry.”
Business secretary Sajid Javid is expected to update the House of Commons shortly...
Updated
We should remember that Britain’s service sector has been becoming increasingly dominant for decades, partly due to the sweeping changes during the Thatcher government:
Just a reminder that the whole lack of rebalancing is not just a post-crisis issue. pic.twitter.com/pUVtMaALdD
— RBS Economics (@RBS_Economics) May 26, 2016
Martin Beck, senior economic advisor to the EY ITEM Club, fears that the UK economy has continued to slow in the current quarter.
“Looking ahead to Q2, the latest Services Index release showed services output falling in March providing a weak starting point for expansion.
While early days, a run of weak activity surveys in April also casts a gloomy note, suggesting that the economy will see a further deceleration in growth. A cloudy international outlook and the prospect of rising inflation at home will present ongoing headwinds.”
Experts: Brexit fears are hurting UK businesses
John Hawksworth, chief economist at PwC, says the 0.5% fall in business investment last quarter is a clear sign that Brexit fears are hurting the Britain’s economy.
He warns:
“Global concerns have eased more recently, but uncertainty related to the EU referendum could lead to a further moderation in growth in the second quarter as some businesses continue to defer investment and hiring decisions. But the economy should rebound in the second half of the year in the event of a vote to Remain.
City traders agree. Joshua Mahony of IG says:
The downward revision of GDP to 2% suggests that perhaps the recovery we have been looking for after 18 months of slowing growth just isn’t there. Perhaps the most telling figure today was the Q1 business investment reading, which contracted for the second consecutive quarter.
This is a clear indication of the fear that firms are experiencing regarding the effects of a Brexit and makes you wonder what this number would look like in the event the UK left the EU.
Tom Floyd of Foenix Partners concurs:
The weaker annual growth rate (2%) is further confirmation of the Brexit related negativity already embedded in the wider economy and aside from recent retail sales, continues a poor run of UK economic indicators.
Anyone remember George Osbornes’ “March of the Makers”? It seems to have taken a wrong-turning.
Britain's feted economic rebalancing pic.twitter.com/Xog4ehzEwv
— Mehreen (@MehreenKhn) May 26, 2016
Ms Lee Hopley, Chief Economist at EEF, says Britain’s economy is suffering from problems overseas, and the EU referendum:
“The data confirms a softer start to the year as households continue in the driving seat with their foot on the gas
Business investment, however, slipped further and net trade again failed to support GDP growth. It’s far from a surprising picture given the wobbly world economy at the start of the year is providing little impetus to export growth or, confidence amongst business to press ahead with big expansion plans.
“While the referendum is just another dampening factor in the mix, on the other side of it we’ll need to see a more supportive external environment and a lot more certainty about the domestic industrial policy agenda to see a return of better balanced growth this year.”
Today’s growth figures also confirm that Britain’s service sector is outperforming everything else.
Services output jumped by 0.6% during the last quarter, but construction shrank by 1.0% and manufacturing declined by 0.4%.
As @samueltombs points out, UK now entirely reliant on the consumer sector for growth. Rest of economy stagnating pic.twitter.com/H6ZtwW2oaD
— Ed Conway (@EdConwaySky) May 26, 2016
The pound has fallen by half a cent against the US dollar, following the news that business investment fell by 0.5% in the last quarter.
UK growth dragged down by weak business investment and trade
Breaking: UK growth slowed to 0.4% in the first quarter of 2016, down from 0.6%, the Office for National Statistics reports.
That’s in line with the first estimate, released last month.
But the annual growth rate has been revised down to 2%, from 2.1% initially.
And business investment has fallen, for the first time in three years.
Business investment fell by 0.5% during the quarter, driven by “falls in non-residential building”, the ONS says.
That may show that companies are more cautious about economic prospects and have been cutting back. That could be due to the recent turmoil in the financial markets, or the EU referendum.
However, gross fixed capital formation growth (another measure of corporate investment) did rise by 0.5% in January-March after shrinking in the previous three months.
The figures also show another deterioration in Britain’s trade with the rest of the world.
Exports declined in the last quarter, while imports rose.
The trade balance deficit widened from £16.4bn in Quarter 4 2015 to £18.0 billion in Quarter 1 2016 .
Following a 0.1% increase in Quarter 4 2015, exports decreased by 0.3% in the latest quarter, while imports increased by 0.8% in Quarter 1 2016 following a 0.9% increase in Quarter 4 2015.
Updated
Nearly time for those UK growth figures....
Upcoming event in 5 min [08:30 GMT] - UK Second Estimate GDP (Quarter on Quarter, cons:0.4%, prev:0.4%) #forex #fx #finance
— Dukascopy Signals (@DukascopyFX) May 26, 2016
Tomas Casasi-Klett, Professor at the University of St Gallen, says the world leaders gatherer in Tokyo have a lot to worry about.
He argues that Shinzo Abe was right to warn of a potential Lehman Brothers moment today:
The G7 will be about keeping all black swans at bay, starting with the Brexit one, we are at a point where the world is evermore fearful of a black swan, a Minsky moment*. A number of events could mirror the Lehmann trigger we saw in 2008, these include a Trump victory in November or unexpected economic volatility in China’s markets.
However, a Brexit is now the most immediate and plausible candidate for such a trigger - it would activate other triggers across the globe, a chain-reaction of sorts originating with British voters.
[* - That’s Hyman Minsky, the economist who showed that financial crises are caused after over-confident investors drive asset prices too high, using cheap credit to fuel speculative trading]
Britain’s EU referendum is just four weeks away, and City traders are getting nervous.
The cost of hedging against wild swings in the value of the pound over the next month has jumped this morning. It hit its highest level since March 2009, in the aftermath of the financial crisis.
Those contracts now cover the referendum day, and the day after, when the pound is likely to be volatile –– whichever side wins.
Shares in miners and oil producers are rallying this morning, following the jump in the oil price.
The sight of Brent crude nudging over $50 per barrel is boosting confidence in the City, while a weakening US dollar is pushing up other commodity prices too.
Mike van Dulken, Head of Research at Accendo Markets, explains:
Energy and Mining stocks are topping the FTSE this morning with gains of 2-3% after Brent Crude broke back above the symbolic $50/barrel 6-month highs overnight and an easing in US Dollar strength benefits the greenback-denominated raw materials space as a whole.
But he also points out that a high oil price could encourage firms to boost oil production:
Sceptics will point to the breakout by oil – inspired by a drop in US oil stockpiles on top of falling US output and global supply problems – as likely attracting shale/frackers back to idle rigs.
Report: Japanese PM warns of Lehman-magnitude crisis
Japan’s PM, Shinzo Abe, has apparently warned G7 world leaders that we could suffer a crisis on the scale of Lehman Brothers in 2008.
That’s according to the Nikkei news agency
Japan’s Abe Warns Of Lehman-Magnitude Crisis - Nikkei
— Livesquawk (@Livesquawk) May 26, 2016
JAPAN PM ABE WARNS OF LEHMAN-MAGNITUDE CRISIS - NIKKEI - oh goody!
— Marc Ostwald (@MOstwald1) May 26, 2016
'Lehman style' is one of Abe's favored rhetorical devices. Previously used as condition not to do sales tax https://t.co/7HwubCNvn5
— Steve Goldstein (@MKTWgoldstein) May 26, 2016
The world economy is high on the agenda for the G7 meeting, with Abe pushing fellow leaders for ‘flexible fiscal spending’ (ie, higher government investment) and structural reforms.
My colleague Claire Phipps is live-blogging the whole G7, here:
Leaders have taken time out to plant a few trees.
Maybe they wanted to show the ‘green shoots of recovery’, but frankly it looks more like a productivity problem -- nine world leaders to plant three trees?!
Here’s an example of the supply disruptions that has pushed the oil price up, from Reuters:
A Nigerian youth group leader confirmed on Thursday that militants had attacked a Chevron oil facility in the Niger Delta.
“The attack truly happened,” Eric Omare, spokesman for the Ijaw Youth Council, said.
A group called Niger Delta Avengers had claimed the attack late on Wednesday.
Brent crude hits $50
Oil prices have hit their highest level of the year, after figures showed that the long-running glut in crude prices could finally be eroding.
Brent crude, sourced from the North Sea, has jumped over the $50 per barrel mark.
This is the highest level since last November, and could herald higher energy costs and petrol prices.
$50 oil is back https://t.co/1FlvxKisbt pic.twitter.com/Bj7F5yttQD
— Bloomberg (@business) May 26, 2016
The move comes after data, released yesterday, which showed that US crude inventories fell last week.
It appears that the industry’s supply problems, particularly wildfires in Canada and outages in Nigeria, are now hitting home.
And analysts are predicting that this means oil reserves will start to be eroded, if demand remains above supply.
Citi explains:
“US oil inventories have largely topped out and should decline through the summer.”
And if they’re right, it will have implications for global inflation rates, and possibly nudge central bankers closer to raising borrowing costs (as cheap energy has been keeping the cost of living down).
The Agenda: UK growth figures in focus
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
We get a proper insight into the state of Britain’s economy this morning, when the second estimate of GDP for the first quarter of 2016 is released, at 9.30am.
The figures should confirm that growth slowed to just 0.4% in January-March, meaning Britain lagged behind the eurozone. But we’ll also get much more detail, on how trade, investment and consumption changed during the quarter.
Economists will be looking for signs that the slowdown in overseas markets, such as China, hurt the UK. We could also see some early impact from June’s EU referendum.
The figures are likely to show that, once again, Britain relied on domestic spending rather than exports to keep the economy moving.
RBC Capital Markets explain:
Private consumption growth is once again expected to make the main contribution to total growth with net trade likely being a drag. Expectations for business investment will also be muted given that the approaching EU referendum became a more high profile source of uncertainty during the period.
Also coming up....
World leaders are gathered in Tokyo for the G7 meeting, so we’ll see what Angela Merkel, David Cameron and the gang say about the global economy:
PM Abe welcomed #G7 leaders to Ise Jingu at start of the Ise-Shima Summit https://t.co/nsFjIsOiib pic.twitter.com/Mck6t92p7f
— G7 (@g7) May 26, 2016
And investors will also be watching Greece, following the agreement hammered out with euro ministers.
Yesterday, the IMF cautioned that it still isn’t yet ready to join the bailout; meaning more uncertainty for Athens over the next few months.
Oops pic.twitter.com/1ie3Zmka45
— Russian Market (@russian_market) May 26, 2016
