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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Cost of filling petrol car hits £100 in ‘truly dark day’ for drivers; ECB plans July rate rise – as it happened

United Kingdom United States Economic Growth Inflation BCC Economy European Central Bank Simon Rubinsohn Bank of England British Chambers of Commerce
The BP petrol station in Old Windsor, Berkshire.
The BP petrol station in Old Windsor, Berkshire. Photograph: Maureen McLean/REX/Shutterstock

Closing summary

Time for a recap.

The average cost of filling a typical family car with petrol has exceeded £100 for the first time on what was labelled a “truly dark day” for drivers.

Figures from data firm Experian Catalist show the average price of a litre of petrol at UK forecourts reached a record 182.3p on Wednesday.

Analysts warned that prices are likely to keep rising, with wholesale prices rising and a weak pound making imports pricier.

Here’s our explainer of why prices are so high:

Concerns over the UK economy grew today, after the British Chambers of Commerce predicted growth would stall, and then go into reverce by the end of the year.

The BCC warned that soaring inflation, weak business investment, tax rises and global economic shocks all hit growth.

Alex Veitch, director of policy at the British Chambers of Commerce, said:

“Our latest forecast indicates that the headwinds facing the UK economy show little sign of reducing with continued inflationary pressures and sluggish growth. The war in Ukraine came just as the UK was beginning a Covid recovery; placing a further squeeze on business profitability.

“The forecast drop in business investment is especially concerning. It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment.

Poundland’s owner Pepco reported that UK shoppers were cutting back even on essential items as wages fail to keep pace with inflation.

Furniture chain DFS warned that profits would miss forecasts, after it suffered a drop in orders since April when cost of living pressures intensified.

Rising inflation has prompted the European Central Bank to pledge to raise interest rates for the first time since 2011 next month, and dangled the possibility of a larger rise in September.

This means its headline rate will rise above zero next month, while the era of negative interest rates for banks should be over by the autumn.

The ECB slashed its forecasts for growth, and admitted that inflation would remain over its target until the end of 2024.

Stock markets fell, while the gap between Southern European borrowing costs and those of Germany widened.

In other news..

Pilots have reacted with fury to the suggestion by the boss of Wizz Air that too many crew members were refusing to fly when fatigued.

The airline’s chief executive, József Váradi, told staff in an internal briefing: “We are all fatigued but sometimes it is required to take the extra mile.”

John Lewis has chosen Bromley, Ealing and Reading as the pilot locations for its venture into building branded homes for the rental market, as the staff-owned retailer tries to create new communities around its stores.

Energy regulator Ofgem has reported that thousands of households in Britain faced “appalling conditions” when they were left without power for more than a week after Storm Arwen hit last year.

Three network operators – Northern Powergrid, Scottish and Southern Electricity Networks and Electricity North West – have paid nearly £30m in compensation to affected customers and have agreed to pay a further £10.3m in “redress payments”.

Ofgem said a total of £44m will have been paid by distribution network companies as a result of failures in their response to Storm Arwen.

Indian billionaire Mukesh Ambani’s Reliance Industries has teamed up with US private equity fund Apollo Global Management to make a £5bn bid for the UK’s Boots chain.

Britain’s biggest train operator FirstGroup has rejected a £1.2bn takeover proposal from a US private equity firm, after its board determined the offer was too low.

Drugmakers are being urged to make more antibiotics and antifungal drugs available to low- and middle-income countries as drug resistance rises faster than expected globally.

We’ll be back tomorrow. GW

Here’s a reason for optimism amid the gloom -- UK consumer confidence has picked up, a little:

Here’s more reaction to the European Central Bank’s announcement that eurozone interest rates will start to rise next month, first from Chris Beauchamp, chief market analyst at IG Group:

Given the inflation outlook, we should put this meeting in the hawkish column.

It’s not really about what they will do in July, but what comes next, and there the market expects the ECB to move more quickly. While the ECB might want to move slowly on rates, current inflation levels don’t see to promise that option, and instead the bank now has to play catch-up from here.

Marc Ostwald of ADM Investor Services:

The Trichet and Draghi mantra of not pre-empting rate moves is now officially consigned to history, with the confirmation of a 25 bps July rate hike, and a further hike in September. Most notably, the bar to a 50 bps hike in September has been set very low, given that the statement noted: “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” In other words the inflation outlook will have to improve markedly over the next 3 months to justify a 25 bps move.

2) Critically the ECB has dodged the bullet on the “neutral rate”, with Lagarde saying “ We have deliberately decided not to discuss the neutral rate at this meeting. The neutral rate over time has gone down. But where it stands exactly is not something we have discussed at this meeting.” Though this doubtless reflects quite sharp differences of opinion that have been all too obvious.

And Moody’s Analytics senior economist Kamil Kovar.

“The ECB brought some welcome clarity to its outlook by taking a 50 basis point rate hike off the table for its July meeting. However, it said that unless the inflation outlook improves, a larger hike will follow in September.

Since we see the ECB inflation forecast for 2022 as still too low, we believe that 50 bps hike in September is very likely. This is consistent with market reaction which saw bond yields jump.”

European markets hit by hawkish ECB

Stock markets acrosss Europe have fallen deeper into the red, after the European Central Bank laid out its plans to end the era of ultra-loose money to tackle inflation.

Germany’s DAX, France’s CAC and Italy’s FTSE MIB are all around 1.6% lower.

The ECB showed its determination to raise interest rates in July and September, and probably beyond - which could slow an already weak economy.

Richard Flax, chief investment officer at digital wealth manager Moneyfarm, says:

The key question remains whether now is the right time to begin to tighten monetary policy, given the prospect of an economic slowdown.

Fears of a bloc-wide recession and the high debt levels of some member states may possibly temper the ECB’s appetite to aggressively hike interest rates. A sharp slowdown could force the ECB to take their foot off the tightening pedal before the end of the year, and in this case adding duration to portfolios could be beneficial.

On the other hand, if the current inflationary environment persists, the ECB could be forced to continue tightening monetary conditions, even if it causes a recession. This would explain the jump in rates we have seen, as well as the increased spreads experienced by the less creditworthy member states.

US jobless claims at five-month high

The number of Americans filing new unemployment claims has jumped to its highest level since mid-January.

The initials claims total rose to 229,00 last week, up 27,000 on the previous seven days, and higher than the 210,000 which economists forecast.

That may indicate that more companies have let staff go, after a battle for workers pushed the jobless claims down to the lowest in 50 years earlier in 2022.

Fiona Cincotta of City Index says:

The slight tick higher in claims could be early signs of weakness entering the jobs market, which has so far proved to be resilient.

The total number of Americans on unemployment support (which lags the initial claims by a week) remained historically low, though:

Q: What good will raising interest rates do, given inflation is mainly due to external factors?

Lagarde agrees that most of the eurozone’s inflation problem is imported -- such as higher energy, or rising prices due to supply chain problems.

But she points out that inflation is wider than that: as 75% of the items that make up the inflation basket rising by more than 2%, including services and non-energy industrial goods.

Lagarde also flags that wage increases have picked up since March, but the ECB doesn’t see pay spiralling.

Updated

Q: Why not raise interest rates by 50-basis points in July, rather than just 25bp?

Lagarde explains that after 11 years without a rate rise, it is good practice to start with an incremental move (while keeping a large rate rise as an option for September).

Southern European government bond prices have weakened since the ECB flagged it would start raising interest rates next month.

This has pushed up the yield (a measure of borrowing cost) on Italian, Greek and Spanish debt compared to safe-haven German debt.

Widening yield spreads will concern the ECB, which hopes to avoid fragmentation as it tightens policy.

The ECB has cut its growth forecasts for this year, from 3.7% to just 2.8%, and for 2023 too (from 2.8% to 2.1%).

It has nudged its 2024 growth forecast higher, though, from 1.6% to 2.1%.

Its inflation forecasts have been hiked sharply for 2022 and 2023:

Today’s decision was unanimous, Lagarde tells reporters in Amsterdam, after ‘very productive’ discussions.

She explains that the ECB is on a journey, and today’s decision are an important step on that journey.

Lagarde: War is major downside risk to growth

Risks related to the pandemic have declined, Christine Lagarde continues, but the Ukraine war is a significant downside risk to growth.

A major risk would be further disruption to energy supplies to Europe, she points out.

And if the war escalated, economic sentiment could worsen, supply chain problems could increase, and energy and food prices could remain persistently higher than expected.

The war in Ukraine, and new Covid-19 outbreaks in China, have made supply bottlenecks worse again, ECB president Christine Lagarde warns.

Eurozone firms face higher costs and disruptions, and the outlook for future growth has deteriorated, she says.

Other factors supporting economic growth should strengthen over the coming months, she says. The lifting of pandemic restrictions will help parts of the economy to recover, while the labour market is tight, with unemployment at record lows.

But price rises are becoming more widespread across sectors.

ECB president Christine Lagarde is holding a press conference in Amsterdam* now - it’s being streamed here.

She’s running through today’s statement (which is online here), explaining that the governing council decided to take further steps in normalising its monetary policy after inflation rose again in May.

Lagarde confirms that:

  • The ECB intends to raise the key interest rates by 25 basis points at its July meeting
  • It expects to raise interest rates again in September - and a larger increment may be appropriate if the medium-term inflation outlook persists or deteriorates.
  • Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate.

* - not Frankfurt as I wrote earlier, apologies!

Here’s Gurpreet Gill, macro strategist for global fixed income at Goldman Sachs Asset Management, on the European Central Bank’s announcement:

“Today’s meeting of the Governing Council confirmed the inflation conditions to lift interest rates out of negative territory by the European Central Bank (ECB) have been met.

While markets were divided on whether July would bring a 0.25% or 0.5% rate hike, we now know it will be a 0.25% rise in line with President Lagarde’s forward guidance towards the former. The ECB opened the door for a 0.5% rate hike in September, however. In addition, the central bank’s preparedness to resume asset purchases if necessary has hawkish implications for the medium-term path of policy rates.

Recent data points to higher and more persistent inflationary pressures, particularly the strength of the labour market and inflation expectations, than the ECB projected in March. We expect inflation to remain strong into 2023. However, growth is likely to moderate due to higher energy prices weighing on consumer spending and tighter financial conditions.”

ING: ECB officially ends long era of unconventional monetary policy

Today’s European Central Bank decision shows it’s managed to find a compromise between the doves and the hawks, says Carsten Brzeski, global head of macro at ING:

A 50bp rate hike in July seemed to be fended off by opening the door for 50bp in September.

The era of net asset purchases will come to an end in three weeks, and the era of negative interest rates will come to an end before the autumn. Simply put, the ECB just announced the end of a long era. Whether this will also be the start of a new era of continuously rising interest rates, however, is still far from certain.

The European Central Bank now predicts eurozone inflation will average 6.8% this year, or more than three times its 2% target.

It also estimates inflation will remain over target for the next two years -- dropping to 3.5% in 2023 and 2.1% in 2024 – higher than in the March projections.

Here’s the key line from the ECB:

The Governing Council undertook a careful review of the conditions which, according to its forward guidance, should be satisfied before it starts raising the key ECB interest rates. As a result of this assessment, the Governing Council concluded that those conditions have been satisfied.

Accordingly, and in line with the Governing Council’s policy sequencing, the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting.

ECB: We'll raise interest rates in July

The headquarters of the European Central Bank (ECB)
The headquarters of the European Central Bank (ECB) Photograph: Daniel Roland/AFP/Getty Images

Over in Amsterdam, the European Central Bank has said it intends to raise interest rates next month, for the first time in over a decade.

The ECB’s governing council plans to raise its key rates by 25 basis points (0.25 percentage points) to tackle inflation, which hit record highs over 8% last month.

That would be the ECB’s first rate rise since 2011, just before the eurozone debt crisis intensified.

In a statement following today’s meeting, it says.

High inflation is a major challenge for all of us. The Governing Council will make sure that inflation returns to its 2% target over the medium term.

In May inflation again rose significantly, mainly because of surging energy and food prices, including due to the impact of the war.

But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly. Eurosystem staff have revised their baseline inflation projections up significantly.

Eurozone headline interest rates are currently zero, while banks face negative interest rates of -0.5% on their deposite at the ECB.

The ECB’s governing council has also decided to halt its quantitative easing stimulus, or asset purchase programme (APP). From 1 July it will end new bond purchases, but will continue to reinvest as bonds mature.

The ECB also signalled that it will lift interest rates again in September -- and possibly by more than 25bp.

Looking further ahead, the Governing Council expects to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook.

If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.

Updated

Soaring fuel prices mean the per mile cost of running an electric vehicle (EV) has sunk to around 80% below the bill for petrol and diesel models, according to new analysis.

Green motoring consultancy New AutoMotive calculated that the average annual electricity cost of a popular small EV such as a Nissan Leaf or Renault Zoe is approximately £250.

For a petrol car with typical fuel efficiency of 38 miles per gallon, the annual fuel cost based on current pump prices is around £1,210. More here.

However, drivers may face a wait to get hold of an EV vehicle, as shortages of key components such as computer chips mean manufacturers are struggling to meet demand.

Here’s our news story on Poundland’s customers being forced to cut back on essential purchases in the cost of living crisis:

Last December: An engineer walks down a country lane as he carries out work on power cables in a remote area of Teesdale.
Last December: An engineer walking down a country lane as he carrieed out work on power cables in a remote area of Teesdale. Photograph: Ian Forsyth/Getty Images

Thousands of households in Britain faced “appalling conditions” when they were left without power for more than a week after Storm Arwen hit last year because power companies were underprepared, the industry watchdog said this morning.

Publishing its full report into the response of power distributors to the storm, Ofgem said they provided an “unacceptable service” to customers, with nearly 1m homes losing power and 4,000 of those cut off for longer than a week.

Three network operators – Northern Powergrid, Scottish and Southern Electricity Networks and Electricity North West – have paid nearly £30m in compensation to affected customers and have agreed to pay a further £10.3m in “redress payments”.

Ofgem said a total of £44m will have been paid by distribution network companies as a result of failures in their response to Storm Arwen, which included poor communication with customers.

Jonathan Brearley, the chief executive of Ofgem, said that while the regulator recognised companies faced challenging conditions in the aftermath of the storm...

“it was unacceptable that nearly 4,000 homes in parts of England and Scotland were off power for over a week, often without accurate information as to when power would be restored”.

Record petrol and diesel prices could hurt the UK economy, as it will leave consumers with less disposable income and push up business costs.

Walid Koudmani, chief market analyst at financial brokerage XTB, explains:

“The fact that the cost of filling an average car with petrol has hit £100 is another troubling factor that could contribute to the decline in the UK economy as it continues to struggle with rampant inflation, supply issues and geopolitical tensions.

As the prices of most goods increase, oil is one of the most influential ones as it has a cascading effect due to its necessity across industry.

Today’s news is quite troubling and while it is becoming increasingly urgent to intervene to contain the situation, it does not seem like there will be any easing of price pressure in the near term.”

Both Brent crude and WTI [US crude oil] are trading around the highest levels since 2008 with this year’s surge leading to record prices for petrol and diesel at UK forecourts.

The Brent crude oil price over the last decade
The Brent crude oil price over the last decade Photograph: Refinitiv

Brent crude jumped over $100 per barrel when the Ukraine invasion began, and is currently over $123.

Victoria Scholar, head of investment at Interactive Investor, says rising demand and supply shortages are keeping oil high.

Households and businesses face a rude awakening as the average cost of filling up a tank of petrol in a typical family 55 litre car tops £100 for the first time, exacerbating the already painful cost-of-living crisis and the inflationary cost burden that is creating a squeeze for many companies.

With UK inflation currently at 9%, it is likely that price levels will easily push into double digits underpinned by the surge in commodities, particularly oil and gas as well as food prices.

This is adding to the complex conundrum facing the Bank of England which is desperately trying to bring inflation back under control and closer to its 2% target. However the central bank’s demand side monetary policy tools unfortunately do little to target the imported commodity driven supply side inflation that the UK and many other economies around the world are contending with.

This year’s boom in the commodities complex has been driven by supercharged demand post pandemic as the global economy gets back up and running combined with the war in Ukraine which created severe supply constraints. As long as the geopolitical uncertainty endures and global demand remains robust, oil prices are likely to remain firmly in triple digits.

Full story: Petrol price rises: average cost of filling a car tops £100

Petrol retailers have been accused of profiteering and not passing on the 5p cut to fuel duty introduced by the chancellor, Rishi Sunak, in his spring statement in March.

The business secretary, Kwasi Kwarteng, has urged retailers to pass on the cut and asked the Competition and Markets Authority to examine the issue, with a potential formal investigation looming.

Howard Cox, founder of the FairFuelUK campaign, defended retailers, claiming oil refineries were to blame. He said:

“With what they are paying for crude oil, the numbers do not stack up. The fall in the price of oil is not being passed on.”

A fall in the value of the pound against the dollar has also increased the cost of buying fuel wholesale for retailers.

Here’s the full story:

AA calls for additional fuel duty cut

The AA has called for a further 10p per litre cut in fuel duty to cushion motorists from record prices at the pumps.

The motoring group also wants a “fuel price stabiliser”, which would mean fuel duty would be lowered when prices go up and increased when prices dropped.

AA president Edmund King said:

“Enough is enough. The Government must act urgently to reduce the record fuel prices which are crippling the lives of those on lower incomes, rural areas and businesses.

A fuel price stabiliser is a fair means for the Treasury to help regulate the pump price, but alongside this they need to bring in more fuel price transparency to stop the daily rip-offs at the pumps.

The £100 tank is not sustainable with the general cost-of-living crisis, so the underlying issues need to be addressed urgently.”

Rising petrol prices have hit motorists hard after the half-term/bank holiday break.

AA fuel price spokesman Luke Bosdet explains:

“The £100 petrol tank has been dreaded and been particularly nasty for workers refilling their cars with the post-jubilee return to work.

“The more than 8p-a-litre leap in average petrol costs over a week has been a huge shock.”

Petrol prices are likely to keep rising, and could hit an average £2 per litre, warns the Petrol Retailers Association.

PRA director Gordon Balmer told Sky News that prices were ‘peppering the £2 per litre mark’ at the moment.

He blames rising wholesale fuel prices, which mean retailers have to lift their own prices or suffer a loss.

Our members don’t want to sell at these prices, but they can’t sell at a loss.

Many of our members know their customers personally, they come in on a regular basis, and they know the pressures that this puts on household budgets.

Unfortunately, we buy on a wholesale basis and we have to make money out of it. They’re the facts of life, unfortunately.

Updated

Cost of a full tank of petrol hits £100 for first time

The average cost of filling a typical family car with petrol has exceeded £100 for the first time, after prices at the pump hit yet another record high.

Figures from data firm Experian Catalist show the average price of a litre of petrol at UK forecourts reached a record 182.3p on Wednesday.

That was an increase of 1.6p compared with Tuesday, taking the average cost of filling a 55-litre family car to £100.27 -- a day after prices jumped by the most in 17 years.

The average price of a litre of diesel on Wednesday was 188.1p.

RAC fuel spokesman Simon Williams said it was a “truly dark day” for drivers.

“It’s a truly dark day today for drivers with petrol now crossing the thoroughly depressing threshold of £100 a tank (100.27p). A complete diesel fill-up now costs £103.43.

With average prices so high - 182.31p for a litre of unleaded and 188.05p for diesel - there’s almost certainly going to be upward inflationary pressure, which is bad news for everybody.

While fuel prices have been setting new records on a daily basis, households up and down the country may never have expected to see the cost of filling an average-sized family car reach three figures.

Williams also urged the government to provide more help for motorists, as the 5p/litre fuel duty cut announced in March’s spring statement has been dwarfed

March’s 5p fuel duty cut now looks paltry as wholesale petrol costs have already increased by five times that amount since the Spring Statement (25p).

A further duty cut or a temporary reduction in VAT would go a long way towards helping drivers, especially those on lower incomes who have no choice other than to drive.”

Deutsche Bank’s chief UK economist, Sanjay Raja, predicts the UK economy will contracted over the current quarter -- with last week’s jubilee bank holidays hitting growth.

He writes:

We expect a very marginal rebound in April, with GDP pushing up 0.1% m-o-m. We expect only the services sector to grow in April, with construction activity and industrial production falling marginally, adding to the trend of sluggish growth data seen over the last couple of months. Risks to our nowcast are tilted to the downside.

Looking ahead, we continue to expect a Q2 contraction (-0.3% q-o-q), as the cost of living squeeze bites, and the Platinum Jubilee Bank Holiday hits June activity.

But there is some better news. Raja believes that Rishi Sunak’s £15bn cost-of-living support package should “likely avert a near-term recession”.

Retailers drag FTSE 100 down

In the City, the blue-chip FTSE 100 index has dropped in early trading amid rising gloom about both the UK economy and global growth.

Retail stocks are leading the fallers, following the BCC’s warning that UK growth will grind to a halt this year, and today’s gloom from Poundland’s owner and furniture chain DFS’s profits warning.

DIY chain Kingfisher (-3.8%) and discount retailer B&M European (-2.6%) are down, as is Sainsbury’s(down 5.7% after going ex-dividend this morning).

Online grocer Ocado have dropped 3%, AB Foods, which owns Primark, have lost 2.5% with joinery business Howdens down 2.7%.

Although oil stocks and banks are rising, the FTSE 100 is 43 points lower at 7549, down 0.6%.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, says:

‘’The downbeat assessment of the prospects of the UK economy and warnings of trouble ahead for global growth are set to see a layer of pessimism descend on the London market.

Warnings from the OECD that the world is paying a hefty price for Russia’s invasion of Ukraine are crystallising concerns that the months ahead are set to be very difficult to navigate for many companies and consumers.

Updated

Furniture firm DFS reports slowing demand

The DFS sofa store at the Slough Retail Park in Berkshire.
The DFS sofa store at the Slough Retail Park in Berkshire. Photograph: Maureen McLean/REX/Shutterstock

Sofa retailer DFS has warned that the UK home furniture market has slowed and cut its profit forecasts -- adding to concerns over the economic outlook.

DFS reports that its orders have fallen since April, and are below pre-pandemic levels amid a shift in demand.

In a trading update, it says:

The UK furniture market has seen a change in demand patterns with recent data from Barclaycard suggesting a c. 2.1% reduction in transactions in April relative to pre-pandemic periods. We have seen a similar change in order volumes across our Group.

With Covid-linked supply-chain disruption also continuing, DFS’s production and deliveries have both missed forecasts, meaning profits will be lower than forecast.

The UK’s cost of living crisis intensified in April. Energy price cap soared by 54%, while pensions and benefits failed to rise in line with inflation (which hit 9% that month).

The company also warns that “it is difficult to forecast consumer behaviour over the next twelve months”.

Shares in DFS have dropped 15% in early trading.

Retail analyst Nick Bubb says:

The furniture retailer DFS is normally pretty pleased with itself and bullish in tone, but today’s unexpected trading update strikes a different note.

Headlined “Slowing market-wide demand observed in Quarter 4” it warns hat “the ongoing Covid linked supply-chain disruption, combined with lower order intake since April has led to lower levels of production and deliveries relative to our previous expectations” and that underlying profit before tax and brand amortisation for y/e June is now expected to be only £57m-£62m, which compares to guidance of £66m-85m at the time of the interims in March.

Updated

China's exports jump

A container ship from Japan anchored at Shanghai’s Yangshan Port. China’s trade growth rebounded in May after anti-virus restrictions that shut down Shanghai and other industrial centers began to ease.
A container ship from Japan anchored at Shanghai’s Yangshan Port. China’s trade growth rebounded in May after anti-virus restrictions that shut down Shanghai and other industrial centers began to ease. Photograph: Chen Jianli/AP

China’s exports have picked up sharply, in an encouraging sign that supply chain bottlenecks caused by Covid-19 lockdowns may be easing.

Exports accelerated by 16.9% in May, year-on-year, sharply higher than April’s 3.9% growth, and twice as fast as expected.

That outpaced imports, which rose by 4.1%, and lifted China’s trade surplus to $78.8bn for the month.

The jump in exports suggests that some of the disruption which hit China’s ports earlier this year, amid lockdowns, has ended.

That could help calm inflation, as those supply chain problems have helped push up the cost of imported goods.

However.... slowing economic growth could now mean less demand for China’s goods.

Wei Yao, head of research for Asia Pacific and chief economist at Societe Generale, explained:

We always thought China could quickly resolve supply chain disruptions -- this is even better than our optimistic view on this point.

“The question from here onwards is demand -- western consumers continue to shift from goods to services and are increasingly pressured by inflation. External demand will probably soften from here, which means the recovery of domestic demand will be even more important but challenging given Zero Covid.”

Poundland owner: UK shoppers cut back on essential items

A Poundland store in Slough.
A Poundland store in Slough. Photograph: Maureen McLean/REX/Shutterstock

The owner of discount group Poundland has reported that consumers in the UK are cutting back on essential purchases, due to the cost of living crisis.

Pepco, which also runs the PEPCO and Dealz brands in Europe, reported that its UK customers were scaling back their spending as rising inflation hits budgets.

In ita lastest financial results this morning, Pepco reports:

Specifically in the UK, the cost-of-living crisis has impacted customers’ disposable income as they scale back even on essential purchases in the short term.

Our continued focus on reducing the costs of doing business means that we are able to offset some of our input inflation, allowing us to protect pricesfor all of our cost-conscious customers whilst also absorbing some of the input inflation ourselves as evidenced by the decline in our gross margins.

Average weekly sales at PEPCO stores are up by 13.7% on pre-Covid levels, it says, while at Poundland they’re just 4.3% higher.

The company points out that customers in the UK, and other Western European markets, have suffered falling real incomes:

Whilst the absolute levels of inflationary pressure are greater in Central and Eastern European markets, the degree of wage inflation is substantially offsetting this in the short term.

In Western European markets the acute spike in inflation in a stagnant wage growth environment has quickly resulted in absolute lower spending by consumers.

Pepco also reported that the Ukraine invasion was “exacerbating existing supply chain disruption and inflationary headwinds”, while also leading to an increase in customers in some of its markets in Eastern Europe.

The company expanded its number of stores by almost 14%, from 3,246 to 3,696.

Revenues rose by 18.9% year-on-year in the six months to 31 March, with underlying pre-tax profits up 28.5%.

Updated

UK estate agents report drop in inquiries for new homes

A couple standing outside an estate agent’s window.

Demand from prospective home buyers fell in May, which could be a sign that the heat could be coming out of the housing market.

The Royal Institution of Chartered Surveyors (Rics) said property professionals reported that new buyer inquiries fell in May, with a net balance of 7% reporting falls rather than rises.

This was a turnaround from April when a balance of 8% of estate agents reported rises in buyer inquiries rather than falls, and ends an eight-month run of rising inquiries from new buyers.

This decline may show that the cost of living squeeze, and rising interest rates, are hitting the housing market.

Looking over the next 12 months, a net balance of 24% of professionals expected sales to fall rather than rise.

Simon Rubinsohn, RICS chief economist, said rising borrowing costs were weighing on demand:

“The increase in the cost of mortgage finance alongside growing concerns about the economic outlook is unsurprisingly having an impact, albeit a relatively modest one at this point, on buyer activity in the sales market.

“Despite this, prices are viewed as likely to remain resilient into 2023. But as is often the case in these circumstances, the pressure is likely to felt more visibly in transaction levels which are seen as likely to slow as the year wears on.”

RICS also found that demand for rental properties remained high -- meaning tenants facing rising bills, with fewer rental properties coming onto the market.

Rubinsohn explains:

New instructions of property to let continue to fall according to respondents to the survey while demand is still very strong leading to rental levels being bid higher and greater challenges for tenants who aren’t in the position to compete for the available stock.”

Here are the key points from the BCC’s forecasts for the UK economy:

  • UK GDP growth forecast for 2022 is 3.5%, 0.6% in 2023 and 1.2% in 2024
  • Following Q1 2022 growth of 0.8%, quarter-on-quarter GDP growth is forecast to come to a halt with zero growth in Q2 and Q3, before a 0.2% contraction in Q4 2022.
  • Household consumption forecast is for growth of 4% in 2022, growth of 0.6% for 2023 and 1.2% in 2024.
  • Business investment forecast is to grow by 1.8% in 2022 before more than halving to 0.8% in 2023, amid the end of the super deduction and the corporation tax rise, and then rising to 1.5% in 2024
  • BCC expects export growth of 3% in 2022, 2.3% in 2023 and 1.6% in 2024, compared to import growth of 6.9%, -2.7% and 1.7%
  • BCC expects UK unemployment rate of 3.8% in 2022, 3.9% in 2023 and 2024
  • CPI inflation is forecast to peak at 10% in Q4 2022, before easing to 3.5% by the end of 2023. Inflation is expected to drop back to the Bank of England’s 2% target by Q4 2024
  • UK official interest rates are expected to rise to 2% by Q4 2022 and then to 3% in Q4 2023, ending 2024 at the same level.

Introduction: UK growth to 'grind to a halt'

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

Storm clouds are gathering over the UK economy as soaring inflation, weak business investment, tax rises and global economic shocks all hit growth.

Britain’s economy is expected to grind to a halt this year - and even shrink slightly in the October-December quarter, as the economic outlook deteriorates and inflation hits double-digit levels.

The latest forecast from the British Chambers of Commerce show that quarter-on-quarter GDP is expected to flatline with no growth expected in Q2 and Q3 before contracting by 0.2% in Q4.

Expectations for annual growth in 2022, at 3.5%, are now less than half the 7.5% growth recorded last year. And things are set to get worse, with growth is expected to slow sharply to 0.6% for 2023, before recovering slightly to 1.2% in 2024.

The BCC also cut its forecast for consumer spending this year as the cost-of-living squeeze hits, and almost halved its prediction for business investment.

The downgrade reflects heightened political and economic uncertainty, and rising cost pressures which are limiting smaller firms’ abilities to invest, it says.

Alex Veitch, director of policy at the British Chambers of Commerce, said:

“Our latest forecast indicates that the headwinds facing the UK economy show little sign of reducing with continued inflationary pressures and sluggish growth. The war in Ukraine came just as the UK was beginning a Covid recovery; placing a further squeeze on business profitability.

“The forecast drop in business investment is especially concerning. It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment.

“With inflation forecast to race ahead of wages, we are concerned about a dip in consumer spending which would further impact businesses and hamper growth. We forecast that if trends continue, inflation will only return to the Bank of England’s target rate at the end of 2024, implying a prolonged period of difficulty for the UK.

“Against this backdrop, the government must put in place stable and supportive policies that help businesses pull the UK out of this economic quagmire. Firms must be given confidence to invest, only then can they drive the growth the economy so desperately needs.”

Here’s the full story:

Alarmingly, the OECD is even more pessimistic about Britain’s prospects.

It forecast that economic growth in the UK will grind to a halt next year, and would be the second-worst performing G20 economy after Russia.

And with petrol prices hitting records on a daily basis, there’s no let-up for struggling families.

Coming up today

The European Central Bank’s governing council meets today, after the surging oil price helped to push eurozone inflation at a record high of 8.1% last month.

The ECB is expected to announce the end of its era of ultra-cheap money by ending its bond-buying quantitative easing programme, and signal that interest rates will rise in July for the first time since 2011.

We’ll also get the ECB’s latest economic projections, which will show the impact of the Ukraine war on growth (downward) and consumer prices (upward), given soaring food and energy prices.

Inflation reports from Greece and Mexico, and the latest US weekly jobless report are also on the agenda.

European stock markets are set to open lower, after parts of Shanghai began imposing new lockdown restrictions today in a bid to control COVID-19 transmission risks.

The agenda

  • 10am BST: Greek inflation report for May
  • 12pm BST: Mexico’s inflation report for May
  • 12.45pm: European Central Bank interest rate decision
  • 1.30pm BST: European Central Bank press conference
  • 1.30pm BST: US weekly jobless report

Updated

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