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UK recession fears swirl as factory output falls and house prices slide – business live | Business


Summary: Why recession fears are rising today

A quick recap.

Fears of a UK recession are swirling after Britain’s manufacturing sector recorded its worst month of the year in July, and as rising interest rates hits the housing sector.

A closely watched gauge of the factory sector dropped to its lowest level in 2023, and its joint-worst since May 2020, continuing a year-long slump for the industry.

The S&P Global / CIPS UK Manufacturing PMI fell to 45.3 in July, showing a sharper downturn than in June.

S&P Global says:

The downturn in the UK manufacturing sector took a turn for the worse in July, as rates of contraction in output, new orders and employment all accelerated.

Thomas Pugh, economist at RSM UK, warned that the UK economy could slip into recession early next year, as the real economy is hit by higher interest rates.

Eurozone factories also struggled last month, with production volumes, new orders, employment and purchasing activity all falling, as customers resisted buying new goods and focused on running down their stockpiles.

The UK property sector is already being cooled by higher borrowing costs. House prices fell at their fastest rate in 14 years last month, down 3.8% year-on-year, according to Nationwide.

Nationwide's July 2023 house price index
Photograph: Nationwide

Nationwide’s chief economist, Robert Gardner, explained that rising interest rate have made mortgages less affordable:

This challenging affordability picture helps to explain why housing market activity has been subdued in recent months.

There were 86,000 completed housing transactions in June, 15% below the levels prevailing the same time last year and around 10% below pre-pandemic levels.

Mohamed El-Erian, chief economic adviser at Allianz, warned there is a “real risk” that rising interest rates push the UK economy into recession.

He told Radio 4’s Today programme:

People are feeling the pinch from higher mortgages, companies are feeling the pinch from higher borrowing costs, and global activity is not helping.

So yes there is a real risk that we may slip into recession.

In line with other recent data releases, #China’s Caixin manufacturing PMI slipped into contraction territory in July, coming in at 49.2 compared to 50.5 the prior month.
This unfavorable signal regarding #manufacturing activity
(i) is consistent with those from several other… pic.twitter.com/3TAHaGSmim

— Mohamed A. El-Erian (@elerianm) August 1, 2023

But despite these concerns, the Bank of England is widely expected to raise interest rates again on Thursday to a new 15-year high. Many economists expect a quarter-point rise, from 5% to 5.25%.

Key events

The Bank of England (BoE) will probably be much slower to cut rates than the US Federal Reserve and European Central Bank (ECB) over the next 12-18 months, predicts Michael Saunders of Oxford Economics.

Saunders, a former member of the BoE’s monetary policy committee, predicts that the UK’s current tightening cycle is probably near its end.

But, the UK’s “relatively high pay growth and sticky services inflation” means it will be trickier for the UK to loosen monetary policy, he argues.

In a new research note, Saunders explains that monetary policy acts slower than 10 or 20 years ago due to structural changes in the economy. For example, there has been a “marked drop” in the share of households with a mortgage, a large shift to 5-year fixed rate mortgages rather than variable rate loans, and a higher level of household savings, especially among homeowners.

He says:

These changes have probably reduced the speed and scale with which changes in monetary policy affect demand through the household cashflow channel.

Another factor is that, while higher interest rates lift savers’ incomes, savers don’t typically adjust their spending much to changes in interest rates, whereas debtors do.

Over in the US, ride-hailing and food delivery company Uber has reported its first ever operating profit.

After years of losses (the FT calculates a total of $31.5bn in operating losses since 2014), Uber reported income of $326m for the second quarter of this year, up from a $713m loss a year ago.

Dara Khosrowshahi, Uber’s CEO, says:

“Robust demand, new growth initiatives, and continued cost discipline resulted in an excellent quarter, with trips up 22% and a GAAP operating profit, for the first time in Uber’s history.

“These results also translated into strong driver and courier engagement, with 6 million drivers and couriers earning a record $15.1 billion during the quarter.”

Revenues rose by 14% year-on-year to around $9.2bn, below forecasts of $9.3bn.

Total bookings were up 16% year-on-year in April to June, with mobility bookings (moving passengers around) up 25% and delivery bookings (such as Uber Eats) up 12%.

On the weak pound… Chris Turner, head of markets at ING, has aid weak global manufacturing data, driven by China’s faltering economy, is weighing on sentiment and boosting the safe-haven dollar.

Here are some thoughts on the UK housing market from Nicholas Mendes, mortgage technical manager at broker John Charcol, after prices fell by 3.8% in the year to July.

On the back of the Nationwide figures, can you say if now is a good time to buy a house?

Knowing when to purchase a property will come down to personal motivations and circumstances, if you have found a property that fits the bill, and the borrowing is affordable that go for it. It is virtually impossible to second guess when the property market has dipped to and when it has turned a corner in respect to property prices starting to increase.

Purchasing a property should be seen as a long-term investment, and during the period of ownership there will be points where the property market will dip. History shows, property ownership will inevitably increase over the long term.

Are house prices expected to follow further this year?

Property prices are expected to dip further with higher mortgage rates and borrowing constraints still prevalent, these constraints are expected to continue into 2024 which will happen demand.

What do buyers need to keep in mind before committing?

Anyone looking to buy at the moment would be to negotiate hard and don’t feel pressurised to buy because in a falling market buyers have the upper hand. If you find a property that absolutely ticks all your boxes, affordable and you plan to live there for many years buying in a falling market can often prove an excellent decision in the long run.

In better economic news, unemployment across the eurozone has dropped to a record low.

The jobless rate in the single currency bloc was 6.4% in June, the lowest on record, according to statistics body Eurostat.

That indicates that recent increases in eurozone interest rates have not weakened Europe’s jobs market.

Eurostat also revised down its estimate for eurozone unemployment in April and May, to 6.4%, meaning it has been at a record low for three months.

The pound has weakened today, as the latest economic data has fuelled concerns of a possible recession.

Sterling is down three-quarters of a cent against the US dollar at $1.2761, a three-week low.

The pound has dropped back in recent sessions as traders have concluded that the Bank of England is less likely to agree a large increase in interest rates, of half a percentage point, on Thursday.

A smaller, quarter-point, is more likely, as Fawad Razaqzada, market analyst at City Index and FOREX.com, explains:

Nonetheless, a 25-bps hike to 5.25% is fully priced in, with markets expecting a further 2 rate hikes before year-end.

But policy is now very restrictive, so will the BoE now signal a pause like the ECB did last week? If it does, then the pound could slump.

European manufacturing saw its downturn worsen in July. Output volumes, new orders, employment and purchasing activity all declined at faster rates than in June. The Euro Area and UK PMIs are at their lowest levels since the COVID recession and are at GFC levels. pic.twitter.com/PIC3SU90N2

— Dr Thomas Kevin Swift (@DrTKSwift) August 1, 2023

Make UK: industry now at risk of recession

Fhaheen Khan, senior economist at Make UK, the manufacturers’ body, warns that the lack of an industrial strategy is hurting British factories.

Today’s [PMI] results show the economy is on the glidepath to anaemic growth with industry now at risk of facing a recession. Despite supply disruptions easing and, industry’s ability to meet demand nearing optimal levels, the extra capacity means little if consumers are no longer in a buying mood.

“It’s clear that manufacturers’ expectation of the future is driving reduced activity today, with inflation and higher interest rates resulting in companies engaging defensive manoeuvres by cutting jobs and investment to protect the viability of their business.

Whilst a slowdown is now more likely, industry’s behaviour is only natural in the absence of a long-term strategy from Government to grow the manufacturing sector.”

City consultancy Capital Economics have also predicted the UK will fall into recession soon.

Paul Dales, their chief UK economist, told clients today that interest rates will rise by another half of one percentage point, even though inflation is falling:

Despite the easing in CPI inflation from 8.7% in May to 7.9% in June and core inflation from 7.1% to 6.9%, we think strong wage growth and the continued resilience of real GDP will mean interest rates will rise further, from 5.00% now to a peak of 5.50%.

We suspect the downward trends in wage growth and services inflation will be slow and core inflation won’t fall to 2% until the end of 2024.

As such, interest rates will probably stay at their peak until the second half of 2024, even though we expect the economy will be in recession later this year and early next year.

Summary: Why recession fears are rising today

A quick recap.

Fears of a UK recession are swirling after Britain’s manufacturing sector recorded its worst month of the year in July, and as rising interest rates hits the housing sector.

A closely watched gauge of the factory sector dropped to its lowest level in 2023, and its joint-worst since May 2020, continuing a year-long slump for the industry.

The S&P Global / CIPS UK Manufacturing PMI fell to 45.3 in July, showing a sharper downturn than in June.

S&P Global says:

The downturn in the UK manufacturing sector took a turn for the worse in July, as rates of contraction in output, new orders and employment all accelerated.

Thomas Pugh, economist at RSM UK, warned that the UK economy could slip into recession early next year, as the real economy is hit by higher interest rates.

Eurozone factories also struggled last month, with production volumes, new orders, employment and purchasing activity all falling, as customers resisted buying new goods and focused on running down their stockpiles.

The UK property sector is already being cooled by higher borrowing costs. House prices fell at their fastest rate in 14 years last month, down 3.8% year-on-year, according to Nationwide.

Nationwide's July 2023 house price index
Photograph: Nationwide

Nationwide’s chief economist, Robert Gardner, explained that rising interest rate have made mortgages less affordable:

This challenging affordability picture helps to explain why housing market activity has been subdued in recent months.

There were 86,000 completed housing transactions in June, 15% below the levels prevailing the same time last year and around 10% below pre-pandemic levels.

Mohamed El-Erian, chief economic adviser at Allianz, warned there is a “real risk” that rising interest rates push the UK economy into recession.

He told Radio 4’s Today programme:

People are feeling the pinch from higher mortgages, companies are feeling the pinch from higher borrowing costs, and global activity is not helping.

So yes there is a real risk that we may slip into recession.

In line with other recent data releases, #China’s Caixin manufacturing PMI slipped into contraction territory in July, coming in at 49.2 compared to 50.5 the prior month.
This unfavorable signal regarding #manufacturing activity
(i) is consistent with those from several other… pic.twitter.com/3TAHaGSmim

— Mohamed A. El-Erian (@elerianm) August 1, 2023

But despite these concerns, the Bank of England is widely expected to raise interest rates again on Thursday to a new 15-year high. Many economists expect a quarter-point rise, from 5% to 5.25%.

UK house prices, and sales, will continue to suffer if interest rates stay high, warns Iwona Hovenko, real estate analyst at Bloomberg Intelligence,

“The 0.2% UK house price decline in July, according to Nationwide, may still represent a resilient outcome, especially against expectations for a 0.5% fall, given the rapid surge in mortgage rates which may have spooked many prospective homebuyers.

Even the annual price drop of 3.8% – although the worst in 14 years – nevertheless remains somewhat modest against house prices still being 21% above their February 2020 level.”

“That said, the longer the mortgage rates remain near their current very high level – unseen since at least 2010 – the larger the potential damage inflicted on house prices and transactions going forward. Even the best-buy rates on the relatively cheaper five-year deals start at about 5.5% vs. sub-4% in early May, with cheapest two-year fixes available at about 6% (vs. just over 4% three months ago). Such high rates pose a threat to UK housing outlook and our previous expectations for a 5% decline in house prices in 2023.”

Full story: UK house prices fall at fastest rate since 2009 after interest rate rises

Julia Kollewe

Julia Kollewe

If you’re just tuning in….UK house prices fell last month at the fastest annual rate in 14 years, as higher interest rates hamper people’s ability to buy a property with a mortgage.

Nationwide building society reported that prices fell 3.8% year on year, the sharpest drop since July 2009 when the global economy was in the grips of financial crisis. It compared with a fall in annual prices of 3.5% in June.

The price of a typical home is now £260,828, 4.5% below the peak reached last August. Prices dipped 0.2% in July from the previous month.

The Bank of England has raised interest rates 13 successive times since December 2021 in an attempt to curb soaring inflation. The Bank is expected to raise interest rates again on Thursday, from 5% to 5.25%.

The drop in UK manufacturing output to its joint-lowest levels since May 2020 will concern the Bank of England, as policymakers prepare to set interest rates on Thursday.

It suggests that the Bank’s previous rate rises – 13 since December 2021 – are weakening the economy.

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

“Ahead of the Bank of England’s interest rate decision this week, it is unwelcome news that UK manufacturing PMI has hit a seven-month low with factories seeing a sharp decline in output. July’s PMI reading of 45.3, while in line with expectations, came down from 46.5 in June.

The weakness reflects flagging demand and also likely a re-adjustment in inventories as supply chain constraints have eased. The data however puts UK manufacturing at its joint-weakest levels, last seen during the lockdown in May 2020 at the onset of the Covid-19 pandemic. July’s data is also the 12th month in a row that the PMI has been below 50 – the key marker which usually signifies growth in activity.

European stock markets have dropped into the red this morning, as the deterioration at factories across the eurozone and in the UK worries investors.

The UK’s blue-chip index, the FTSE 100, has lost almost 50 points or 0.6% to 7651 points, away from the two-month high seen yesterday.

Germany’s DAX, which hit a record high yesterday, has lost almost 1% today, while Italy’s FTSE MIB is down 1.1%

Diageo owned whiskies on a bar at their headquarters in Edinburgh.
Diageo owned whiskies on a bar at their headquarters in Edinburgh. Photograph: Andrew Milligan/PA

Drinks giant Diageo, whose brands include Johnnie Walker and Smirnoff, has swelled its profits through price rises and drinkers turning to more expensive brands.

The spirits giant posted a 7% rise in pre-tax profits to £4.7 billion for the year to June 30, up from £4.4 billion the previous year.

Diageo’s organic net sales grew by 6.5%, driven by a “Price/mix of 7.3 percentage points”, That means it put its prices up, passing on higher costs, and sold more of its more expensive drinks.

New chief executive Debra Crew, who took over in June when former long-standing boss Sir Ivan Menezes died aged 63, said:

In fiscal 23, we drove double-digit organic net sales growth in scotch, tequila, and Guinness, with our premium-plus brands contributing 57% of overall organic net sales growth.

We delivered strong growth in four of our five regions, with Europe and Asia Pacific growing double-digit.

North America delivered stable performance as the US spirits industry continued to normalise post-pandemic, and we lapped strong comparators, particularly in the second half of fiscal 23.

Guinness just enjoyed “its biggest year ever in its 264-year history,” says Diageo CEO Debra Crew

The world’s largest distiller says demand for its drinks, which also include Johnnie Walker whiskey and Smirnoff vodka, remains resilient in the face of price increases… pic.twitter.com/Bsl1SXKXgZ

— Bloomberg UK (@BloombergUK) August 1, 2023

Anger as ‘cash machine’ BP makes £2bn profits

BP has angered climate campaigners by reporting profits of $2.6bn (£2bn) for the second quarter of the year as the climate crisis triggers extreme heatwaves.

The company blamed falling oil and gas markets for the drop in profits from $8.5bn in the same period last year when Russia’s invasion of Ukraine ignited a rise in global energy markets.

BP willincrease its shareholder dividends by 10% to $2.3bn, despite the fall in profits. It will also return a further $1.5bn to investors through a share buyback over the next three months.

The BP chief executive, Bernard Looney, said the payouts reflected the company’s confidence in its strategy and the outlook for its future cashflows.

Common Wealth, the think tank, have warned that BP continues to be “a cash machine for investors”, even as the fossil fuel industry drives “global boiling”.

NEW: As the world boiled, BP distributed $3.3 billion to shareholders, 17 times more than they invested in “low-carbon” in Q2 ($190m).

How can we trust Big Oil to deliver a fair energy transition when its priorities are so misaligned with what the public and planet need? pic.twitter.com/5vWML3qb2p

— Common Wealth (@Cmmonwealth) August 1, 2023

Even as the fossil fuel industry drives “global boiling”, BP continues to be a cash machine for investors.

This quarter, it posted a profit of $2.6bn and handed out $3.3bn to shareholders, while the CEO’s pay has doubled to $12mn. pic.twitter.com/ieZpTatlYE

— Common Wealth (@Cmmonwealth) August 1, 2023

Since 2010 BP has paid shareholders over $100bn.

Their priority is clear: maximising returns for their investors. This logic drives their behaviour. We should not expect it to change. pic.twitter.com/Hfzku1c7CW

— Common Wealth (@Cmmonwealth) August 1, 2023

Meanwhile, their renewables pipeline has barely grown this year – and is dangerously out of line with the pace and scale a successful energy transition would require.

It remains – and will remain – overwhelmingly an oil and gas business. pic.twitter.com/A94wN6yB2g

— Common Wealth (@Cmmonwealth) August 1, 2023

UK mortgage rates rise again

UK mortgage rates have continued to rise today, despite hopes that inflation is easing.

Data provider Moneyfacts reports that the average 2-year fixed residential mortgage rate has risen to 6.85%, up from 6.81% on Monday. That’s the highest level since 26th July.

The average 5-year fixed residential mortgage rate has risen too, to 6.37%, up from Monday’s 6.34% on the previous working day. It was last higher last October, in the turmoil after the mini-budget.

This will put more pressure on UK house prices, and disappoint borrowers given that several major lenders recently annouced rate cuts.

RSM UK: UK economy could slip into recession in early 2024

The slump in UK manufacturing shows the impact that higher interest rate have on the economy, says Thomas Pugh, economist at RSM UK.

Pugh says not hard to see the economy falling into recession early next year, judging by today’s UK factory PMI report:

‘The fall in the manufacturing PMI suggests that momentum and resilience in the private sector are starting to falter and it is not difficult to see the economy slipping into recession in early 2024 as the impact of interest rate hikes continue to feed through into the real economy. Indeed, at 46.8 the employment index suggests that the sector is continuing to shed employees.

‘On the inflation front, goods inflation is clearly starting to ease. The input and output prices balance of the manufacturing PMI were below 50 at 43.8 and 49.0 respectively, indicating that prices in absolute terms, not just inflation, are now falling. In contrast, services inflation will prove stickier. That will be especially concerning for the Bank of England as services inflation is much more related to the labour market and the domestic economy.

Ahead of this week’s Bank of Eng decision, some unwelcome news on inflation. Manufacturers maintained selling prices last month, despite falling costs, as they “recover margins following a period of marked cost inflation”, according to July’s PMI survey https://t.co/8NVjj1vLso

— Mehreen Khan (@MehreenKhn) August 1, 2023





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