Closing summary
So it’s official: the UK economy contracted by 0.2% in the second quarter – a worse performance than stagnation predicted on average by economists beforehand.
Sterling hit new two-year lows against the US dollar on Friday because of the shock, and economists’ attention is turning now to whether the UK is currently in recession.
Matthew Oxenford, Europe analyst at the Economist Intelligence Unit, said:
The next two quarters are likely to be marked by significant uncertainty over Brexit, and this slow rate of growth makes it more likely that the UK will enter a recession, especially in the event of a no-deal exit from the EU on 31 October.
Business investment in the second quarter of 2019 was about 13% lower than it would have been had the pre-referendum trend (from 2010 onwards) continued, according to Berenberg economists. That would weigh on future growth, they said:
The persistent threat of a hard Brexit since June 2016 has weighed heavily on the risk appetite of UK businesses. Unsurprisingly, investment has fared badly.
Somewhat ironically, the latest Brexit deadline could actually save the UK from a technical recession (two quarters of contraction) as companies build up stocks once more.
The same force “boosted” growth in the first three months of the year, but don’t pop the champagne: as Friday’s data demonstrates, any sugar rush is very temporary.
#NIESR quarterly #UK #GDP tracker puts growth around 0.2% quarter-on-quarter in third quarter following 0.2% q/q contraction in Q2. We currently expect Q3 growth of 0.3% q/q assuming that some renewed stockbuilding starts during the quarter ahead of 31 October #Brexit deadline https://t.co/VBhcEwLtif
— Howard Archer (@HowardArcherUK) August 9, 2019
The data put pressure on the government, according to David Owen, chief European economist at Jefferies. He said:
If the need arrives, the next Bank of England governor has to be able to say truth to power, especially when it comes to issues surrounding financial stability and if, like 1976, there is a run on sterling.
And buckle up for another Italian election. Milan’s FTSE MIB index fell by
Imogen Bachra, European rates strategist at NatWest Markets, said the investment bank has stopped buying Italian government bonds. Yields (which move inversely to prices) on Italian government debt rose steeply on Friday to hit the highest in a month.
But Mario Draghi and Christine Lagarde, the current and future heads of the European Central Bank, will prevent a more major Italian debt sell-off with more quantitative easing bond buying, she added:
New elections are now a base case. Markets were not blindsided and have been increasingly pricing election risk, but this is still a step change.
The threat of fresh elections will worry markets, but significant widening should be contained by quantitative easing expectations as markets weigh-up the additional political uncertainty against the prospect of the end of this almost-worst-case government.
Thanks for following our coverage of business, economics and markets today. Join us as ever on Monday. JJ
Sky News reports that the government has agreed to provide financial support to British Steel potentially worth £300m in a bid to secure its future.
Ministers at the business department have signed off on a deal that will allow Ataer, a subsidiary of the Turkish military pension fund, a formal period of exclusivity for its offer of about £70m, Sky reported.
Just in on British Steel: a mystery bidder claims to have entered the fray to buy British Steel, days before a vehicle owned by the Turkish military pension fund was expected to enter exclusive talks with the government.
Sources familiar with the potential buyer said it was a consortium of British and west African investors with ties to the construction industry.
You can read more here:
The world’s demand for oil is growing at the slowest rate since the financial crisis over fears of a global economic slowdown, the International Energy Agency (IEA) said.
The agency said fears about the economic impact of the US trade war with China have caused oil prices to slide despite flaring tensions in the Middle East which would typically cause markets to spike.
You can read more from the Guardian’s Jillian Ambrose here:
Shares on Wall Street have fallen at the opening bell in New York.
The Nasdaq lost 0.5% in early trade, while the S&P 500 lost 0.3% and the Dow Jones industrial average dipped by 0.2%.
Here’s some more on the FTSE 100’s largest riser, WPP. Shares are up by 7.5%.
The advertising firm beat City forecasts, sparking investor hopes that a three-year plan to rejuvenate the beleaguered advertising giant is starting to pay off.
The company, which has been struggling to recover from a string of client losses after the sudden departure of Sir Martin Sorrell last year, limited its revenue decline to 1.4% in the second quarter. This was less than half the fall expected by City, and the rare bit of good news for investors sent WPP’s shares up more than 7%, outperforming the wider FTSE, which was down 0.3%.
Here’s more from the Guardian’s Mark Sweney:
There is a “significant risk” of the UK falling into recession when figures come out in November, according to the influential National Institute of Economic and Social Research (Niesr).
Their forecasts, based on the latest data, suggest that the economy will grow in the the July-September period by 0.2% – meaning the economy would be flat in the middle of the year, not in recession.
However, Garry Young, Niesr’s director of macroeconomic modelling and forecasting, said:
Economic growth in the United Kingdom was negative in the second quarter of 2019 and is set to remain weak in the third quarter in the face of a global slowdown and continuing Brexit-related uncertainty.
Our latest estimate implies that there is a significant risk that the economy is already in a recession that began in April, and the clear possibility of a more material downturn should there be a no-deal Brexit.
Our #NIESRGDP Tracker is out- UK economic #growth grinds to a halt as #Brexit #uncertainty and a global slowdown bite - read our analysis here:https://t.co/AwAQZ2uysn
— NIESR (@NIESRorg) August 9, 2019
Summer is cancelled – at least, it is if you happen to be a special adviser to Boris Johnson’s government.
Johnson’s chief of staff cancelled all leave for government advisers until 31 October in a missive on Thursday night, raising further speculation the government is planning for a forced snap election in the aftermath of the UK leaving the EU with no deal.
Special advisers, or spads, as they are not very affectionately known, will be compensated on a “case-by-case basis” if they have already booked time off. The email to spads said:
There is serious work to be done between now and October 31st and we should be focused on the job.
More here from the Guardian’s Jessica Elgot:
Historic shipyard Harland and Wolff ceased trading on Monday. The Guardian’s Rory Carroll has spoken to workers at the site where Titanic was built.
Job losses have already started. In a statement on Friday, the administrators said some workers have been offered redundancy and have taken it. Others have been laid off until Friday 16 August but are not being paid because the yard has “insufficient funds to cover the current running costs of the business”. The lay-offs, they said, provide a few more days to look for a buyer.
They added: “A number of interested parties/potential bidders have come forward since our appointment and we are expediently following up on these inquiries in an effort to seek a viable commercial solution. This is our focus and we are working closely with interested parties and stakeholders with the aim of securing a positive outcome.”
Yet if a buyer can’t be found it could end centuries of shipbuilding, the industry that put Belfast on the map.
You can read the whole piece here:
Bayer shares rise after report of settlement for 18,000 lawsuits
Bayer shares are up by more than 3% after a report that the German company has proposed to pay up to $8bn (£6.6bn) to settle more than 18,000 US lawsuits related to its weedkiller Roundup.
Bayer acquired Roundup and other glyphosate-based weedkillers as part of its $63bn takeover of Monsanto last year, but the acquisition proved disastrous as a California court ruled that Monsanto should have told customers about alleged cancer risks.
Bayer shares have lost more than a third, or roughly €30bn (£28bn), in market value since August last year, Reuters reported.
Losses for the pound are gaining momentum as the US wakes up.
The new low for today against the US dollar is $1.2061. The next low point is a fair way down, at $1.1979.
Today’s euro low is €1.0770. Two years ago, on 29 August 2017, it traded as low as €1.0743. Anything below that level would be quite something: the worst since October 2009, the depths of the financial crisis.
Holidaymakers are always in the firing line of downward currency moves so imagine the feeling if your whole business relies on buying services abroad.
That’s the sinking feeling that travel operator On The Beach has been feeling today, after it warned on profits. Shares in the FTSE-listed firm are down by 15%.
Here’s a surprising fact from Reuters: Unlike travel groups such as Tui and Thomas Cook, On The Beach does not hedge against currency fluctuations, meaning hotel rooms booked in euros are becoming more expensive for customers who take the hit.
With the increased likelihood of a no-deal Brexit, sterling has significantly devalued.
This [...] leads to a significant increase in On The Beach prices versus full-risk competitors with currency hedges.
Chancellor Sajid Javid has been talking to the BBC in the aftermath of the GDP figures. He said:
No one will be surprised by today’s figures [...] The important thing is that the fundamentals of the economy remain strong.
He added that he is not frightened or worried about a no-deal Brexit, and he is comfortable that the UK can handle leaving without a deal.
However, there is still more to do to prepare for that situation, he said.
Sterling hits 31-month low against the US dollar, two-year low against the euro
The sterling sell-off on currency markets has steepened: the pound is now below $1.21 against the US dollar and below €1.08 against the euro.
That represents a daily decline of 0.5% against the euro, and 0.3% against the dollar: lows of €1.0784 and $1.2078 respectively.
Thank you to Carlito1996 in the comments for dredging this link up from way back in the mists of time – 21 June 2016, just before the Brexit referendum: Boris Johnson promising to apologise if a Brexit vote led to a recession.
Two major caveats: the original question was slightly imprecise, so the new prime minister may have been referring to forecasts of an immediate recession following a vote in favour of leaving. And the UK has not reached recession, and many economists do not expect it to.
Nevertheless, Johnson’s video is worth a watch. His promise came in response to a caller to radio station LBC, who asked the former mayor of London: “If we Brexit and we go into recession, would you have the political courage, to go on TV … and say sorry, I made it wrong and I apologise?”
Of course I will [...] I’m not certain what my political career holds anyway. This is far more important than any individual political career.
Meanwhile, Facebook is reportedly in talks with news publishers to offer “millions of dollars” for the rights to publish their material on its site.
The move follows years of criticism over its growing monopolization of online advertising to the detriment of the struggling news industry.
The Wall Street Journal reported last night that Facebook representatives had told news executives that they’d pay as much as $3m (£2.5m) a year to license stories, headlines and other material.
You can read more here:
A small diversion away from the UK GDP figures to a story from earlier this morning: the crisis caused by the 1MDB at the Goldman Sachs has deepened, with new charges against the US investment bank and bosses.
Malaysia has filed criminal charges against 17 current and former directors at subsidiaries of Goldman Sachs Group in a multibillion-dollar corruption investigation at state fund 1MDB, the attorney general said on Friday.
Goldman Sachs has been under scrutiny for its role in helping to raise $6.5bn through bond offerings for 1Malaysia Development Bhd (1MDB), the subject of corruption and money-laundering investigations in at least six countries.
You can read the full story here:
A spectre is haunting the UK – the spectre of recession.
However, Capital Economics – admittedly among the more bullish forecasters in the City – predicts that the third quarter will be stronger in part because of the rearranged car manufacturing calendar we noted earlier.
“The UK should avoid a recession… unless there’s a no deal Brexit,” said Thomas Pugh, UK economist at the consultancy – despite weak purchasing managers’ index (PMI) data, a leading indicator.
The PMIs have been pretty dire so far, but the fact that many car manufacturers will be working in August when they are normally closed will probably add about 0.2 percentage points to quarter-on-quarter GDP growth in the third quarter. As such, we think the economy will grow in the third quarter, which would mean that the UK economy avoids a recession.
But how the fourth quarter turns out is entirely dependent on whether there’s a Brexit deal or no deal.
The 0.2% q/q contraction in #GDP in Q2 was weaker than the stagnation most predicted. But almost all the weakness was due to the drag from “net” stock building. And car manufacturers will be working in August when they are normally closed. We expect GDP growth to pick up in Q3. pic.twitter.com/RsJzkPaclF
— Capital Economics UK (@CapEconUK) August 9, 2019
We won’t know if the UK is in recession until 11 November, after the 31 October Brexit date.
Is it possible that a governing party could go into a snap election after that point with a “recession” label stamped across it?
That election will have to be very very early in November.
— Matthew O'Toole (@MatthewOToole2) August 9, 2019
Q3 GDP first estimate is 11 November, and there must now be a high possibility of it marking the UK entering recession.
Wonder is that on the campaign grid? https://t.co/pmp3im3MRI
It’s the first GDP data on the watch of Sajid Javid as chancellor – and quite a welcome.
Javid said:
This is a challenging period across the global economy, with growth slowing in many countries. But the fundamentals of the British economy are strong – wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year.
The government is determined to provide certainty to people and businesses on Brexit – that’s why we are clear that the UK is leaving the EU on 31 October.
I’ve announced an accelerated spending round so ministers can focus on delivering Brexit, while also delivering the investment we promised in priority areas like schools, police and our NHS.
Remember: before the financial crisis the trend growth rate was 2% a year, or about 0.5% per quarter.
Here is the long-term view of the GDP figures. As you can see it’s the joint worst since 2009, when the UK economy nose-dived following the banking crash.
The Confederation of British Industry, the lobby group for big business, said that much of the weakness came from “one-off factors”, even if the data was “concerning”.
Alpesh Paleja, lead economist at the CBI, said:
It’s clear from our business surveys that underlying momentum remains lukewarm, choked by a combination of slower global growth and Brexit uncertainty. As a result, business sentiment is dire.
Securing a Brexit deal before the October 31 deadline is the first step to revving up the economy. The second is re-focusing attention on vital domestic priorities – such as pressing ahead with key infrastructure projects – to boost productivity and growth potential over the longer-term.
The business and economics community has been taken by surprise by the extent of the weakness in the British economy in the second quarter.
Tej Parikh, chief economist at the Institute of Directors, said:
Contraction in the second quarter is a rude awakening after the growth in the first three months of the year, and confirmation of the concerns businesses have been expressing about the economy.
With the nature of the UK’s exit from the EU looking likely to be determined at the eleventh hour, the economy is facing a bumpy ride going into the third quarter. Another round of stockpiling is complicated by preparations for Christmas and by firms’ previous experience of spending money to no avail.
While consumers have helped keep the economy afloat, it is increasingly worrying that underlying growth is largely absent. Whatever happens on 31 October, the government needs to give business leaders a significant shot in the arm to return investment and productivity growth to the country after a prolonged period of uncertainty.
As expected, the manufacturing sector has borne the brunt of the economic weakness – in the main because carmakers pulled forward planned shutdown periods.
It’s the worst manufacturing performance since the financial crisis. Manufacturing growth saw the biggest rolling three-month fall since April 2009, at negative 2.3%.
You can see the effects of the shutdowns pretty starkly in the below graph.
There is a good argument that the manufacturing sector could bounce back in the next quarter. Most of those shutdowns were changes to maintenance timetables, meaning car factories are expected to be working at points this summer when they usually would be closed.
However, the car industry is already struggling on multiple fronts – with lower demand for diesel vehicles and weaker sales in the massive Chinese market – so don’t hold your breath for the autos to drive to the rescue of the economy just yet.
The FTSE 100 is now down by 0.26%, while the FTSE 250 (which is generally considered to be more exposed to the UK economy) has reversed earlier gains to trade marginally down for the day.
Sterling is holding lower at just over €1.08 against the euro and $1.21 against the US dollar.
The UK economy contracted, but it is not technically in a recession: a recession is generally considered to be two consecutive quarters of lower GDP.
Nevertheless it is “grim viewing”, said David Cheetham, chief market analyst at online trading firm XTB.
This marks the first time in over six years that we’ve had a quarterly contraction in economic activity and given the growing threat of a no-deal Brexit that looms menacingly overhead, it would not be at all surprising if the current quarter also shows a contraction – therefore meeting the standard definition of a recession with consecutive drops in quarterly GDP.
The solid 1st quarter growth of 0.5% owes a lot to companies stockpiling ahead of the 29th March Brexit deadline that never came and it’s pretty obvious that economic activity is clearly slowing.
It was the worst performance in six and a half years, as growth was held back by Brexit uncertainty and car factory shutdowns.
The ONS data showed that all three main sectors of the economy – services, manufacturing and construction – struggled in the three months to June.
The slowdown – which leaves the annual growth rate at 1.2% – was considerably worse than the Bank of England’s forecast in its quarterly inflation report. Early evidence has suggested slightly stronger activity at the start of the third quarter of 2019.
Here is the full story from the Guardian’s Larry Elliott:
The last time UK economic growth was slower was 2009, the depths of the financial crisis.
Nancy Curtin, chief investment officer of Close Brothers Asset Management, said:
There’s no denying that the UK’s GDP figures are a cause for concern. However, the jury’s still out on the extent of inventory built-up. We are likely to see a similar phenomenon ahead of October, as firms look to mitigate supply chain disruption in the case of a no-deal Brexit, which may provide short-term support for GDP.
On the whole though, there’s no doubt the UK is struggling. The services and automotive sectors have decelerated, construction and manufacturing have declined, and business activity has stalled. The impact of Brexit is no doubt exacerbated by the wider global slowdown. The MPC has already warned on Britain’s growth forecasts, and a rate cut this side of Christmas is looking ever more likely under in a “no deal” Brexit scenario. On the bright side, the Prime Minister’s plans for ‘boosterism’ – government spending to support the UK economy – could serve as a counterbalance to recent stagnation. With uncertainty over Brexit still high, however, the outcome for growth remains uncertain.
Sterling has fallen against the US dollar and the euro in the aftermath of the GDP figures.
The pound is now down by 0.3% against the euro and 0.25% against the US dollar, after UK economic growth came in significantly lower than expected.
Economists had predicted growth to flatline at 0% – but GDP actually contracted by 0.2%, a fairly big miss.
UK economy contracts by 0.2% as Brexit uncertainty bites
The UK economy shrank by 0.2% in the second quarter, according to the Office for National Statistics.
Updated
Sterling is slightly weaker against the US dollar and the euro on Friday morning, after a brutal fortnight under the new prime minister, Boris Johnson.
His determination to leave the EU on 31 October – “do or die”, whether the EU backs down on the backstop (the insurance policy preventing a hard border between the UK and Ireland) or not – has left the pound at about $1.21 against the US dollar, around the lowest levels in two years.
Friday will see a rare diversion from Brexit to the macroeconomy as we get the GDP figures, said Derek Halpenny and Fritz Louw, analysts at MUFG Bank.
The downside risk for the pound is for a contraction in growth, which would likely spur headlines about a possible recession.
Still, attention will inevitably return to Brexit, and when exactly a general election will come. An election shortly after 31 October makes sense for various reasons, Halpenny said.
Halpenny and Louw said:
If the Conservative party does manage to deliver Brexit, it would make sense for them to capitalise on this “victory”, regardless of the means by which it was achieved, before whatever material negative consequences manifest and give the Labour party a stronger platform to campaign on.
In the UK the economy is suffering from its own stockpiling hangover. Building up piles of products causes a boost in the short term, but in reality it just changes the timing of spending.
So in the first three months of the year the economy grew by 0.5% quarter-on-quarter, but many economists expect that was merely dragging activity forward.
The highest forecast for this quarter in the Treasury’s handy collection says a 0.3% gain, so it would be a major shock if there were anything other than a slowdown.
Remember too that before the financial crisis long-term trend growth was about 2% per year, so 0.5% per quarter was not usually described in glowing terms.
Some more on that German trade data (before we lead up to the GDP figures in about 45 minutes).
The trade data gave an end to a “disappointing second quarter”, ahead of the first GDP estimate, said Carsten Brzeski, chief economist at ING Germany. A small contraction is now more likely, he said, after exports dropped in June.
What is hurting German exports currently, is the uncertainty, which has spread across the globe and has also paralysed many European economies.
Brexit also plays a role for German exports. In the run-up to the March deadline, German exporters benefited significantly from UK stockpiling. Now, they are suffering from the hangover of the stockpiling party. In April and May, German exporters sold almost as much to Austria as to the UK.
Looking ahead, the outlook for German exporters is clearly in the hands of the US and China. Not only regarding the ongoing conflict but also regarding a possible conflict between the US and the EU, with President Trump already joking about tariffs on cars, and future trends in the Chinese market for automotives.
WPP is the biggest riser on the on the FTSE 100, up by 7% today after it reported better than expected results.
Boss Mark Read has launched a three-year plan to put the business back on track, after it lost clients following the departure of Martin Sorrell, who turned it into a FTSE 100 company.
Via Reuters:
WPP reported a better-than-expected organic sales performance in the second quarter as its new strategy under boss Mark Read helped the world’s biggest advertising group to win new business and retain clients.
The British company said on Friday organic growth less pass-through costs, its key sales measurement, dropped by 1.4% in the second quarter, an improvement on the first three months of down 2.8% and against a consensus of down 3%.
The FTSE 100 in London has lost 0.2%, while the mid-cap FTSE 250 rose by 0.3%.
Germany’s Dax index fell 0.4% at the open.
Italy's FTSE MIB plunges after Salvini calls for new elections
Italy’s main stock market index in Milan has slumped after deputy prime minister Matteo Salvini called for new elections that would finally end the fragile coalition between his League and the Five Star Movement.
The FTSE MIB fell by 1.6% in early trading, as investors prepared for yet another round of uncertainty in one of the Eurozone’s largest economies.
Italian banks fell by 2.7%, the lowest since June 2018.
Introduction: No UK economic growth expected in second quarter
Good morning and welcome to our rolling coverage of business, markets and economics in the UK and the Eurozone.
And welcome to GDP day in the UK.
After a whipsaw start to the week on global markets thanks to US President Donald Trump’s attack on alleged “currency manipulation” by China, things settled down into a more normal August pattern of fairly muted moves later in the week.
Today, however, all eyes will be on the 9:30am BST health check for the British economy in the second quarter. The economists’ consensus expectations for the GDP growth rate point to... nothing. If the forecasts are to be believed growth will come in at 0%, meaning output was the same in the second quarter as in the first.
That would represent the worst economic performance since the final quarter of 2012, when GDP shrank by 0.2%. It comes after an unexpected bounceback in the first three months of 2019, when the expansion hit 0.5%.
The UK economy probably failed to grow for the first time since 2012 – that's what economists say ahead of today's GDP publication https://t.co/yJXjgEJ6VZ via @Edspencive #tictocnews pic.twitter.com/zHI6T5Dxkf
— Zoe Schneeweiss (@ZSchneeweiss) August 9, 2019
Whatever the reading, it will be seized upon in the political realm immediately, amid an already febrile environment as Boris Johnson aims his fledgling government for a no-deal Brexit.
That threat is thought to be the major factor behind British economic weakness in recent months, as uncertainty prevents businesses from making major spending decisions.
That is thought to be particularly the case in the manufacturing sector. Economists on average believe the sector shrank by 1.1% in the year to July, with out-of-season shutdowns in the car sector a big factor.
The needlessly prolonged #Brexit uncertainty is obviously a key factor behind the deceleration / Q2 weakness. But this will also be payback for activity brought forward to Q1 and other preparations (esp. #auto shutdowns) in case of a disorderly #nodeal on 31st March... (2/4)
— Julian Jessop (@julianHjessop) August 8, 2019
Yesterday Jeremy Corbyn wrote to the UK’s most senior civil servant to intervene to stop Boris Johnson forcing a no-deal Brexit in the middle of an election campaign, amid rising signs the country is heading for the polls again this autumn.
This all comes amid a difficult time for our biggest trading partners as well. Alongside the aforementioned trade war between the US and China, the Eurozone economy is struggling as the German industrial powerhouse stutters.
German trade figures this morning just added to weak picture from the eurozone’s largest economy. German exports dropped by 0.1% month-on-month in June, from 1.3% growth during May. On the year, exports were down by a painful 8%.
The agenda
- 9:30am BST: UK GDP growth rate (second quarter)
- 9:30am BST: UK industrial production (June)
- 9:30am BST: UK manufacturing production (June)
- 9:30am BST: UK construction output (June)
- 9:30am BST: UK business investment (second quarter)
- 10am BST: Italy inflation rate final estimate (July)
- 1:30pm BST: Canada unemployment rate (July)
- 2pm BST: Russia GDP growth rate (second quarter)
- 2pm BST: UK National Institute of Economic and Social Research monthly GDP tracker (July)
Updated
