UK economy avoids stagnation with 0.2% growth between April and June – business live | Business

The CEBR thinktank predict the UK economy will decelerate this year, and fall into recession.

Not what Rishi Sunak will be hoping for ahead of the general election.

But Sam Miley, managing economist at the CEBR warns that higher interest rates will hit growth

“Though GDP picked up in Q2, it should be noted that growth remains poor by historic standards. The future outlook is also weak, with the economy continuing to face several headwinds, notably the impact of tighter monetary policy.

Cebr expects quarterly growth to decelerate in Q3. Contractions are then projected for the subsequent two quarters, marking a technical recession.”

This would also be a blow to efforts to catch up with other G7 nations:

The UK economy remains in “a precarious place” despite beating expectations in the last quarter, warned David Bharier, head of research at the British Chambers of Commerce, this morning.

Businesses are continuing to face a worrying mix of high inflation, rising interest rates, a tight labour market, and global economic uncertainty.

While the UK remains on course to avoid a technical recession, small movements in one direction or the another won’t mean much for many firms facing the toughest trading conditions in years, Bharier pointed out, adding:

“Our latest Quarterly Economic Survey shows that most SMEs continue to report no improvement to investment, cash flow, or sales. Worryingly, 41% of businesses are now concerned about the impact of rising interest rates.

“UK businesses are very adaptable, but they are looking for clear direction from the government and the Bank of England, particularly on interest rate policy and a long-term plan to unlock investment.

Analysts at Berenberg Bank are encouraged that UK business investment rose in the last quarter, by 3.4%, as this chart shows:

This has ben a long-running problem for the economy – but they believe a “business investment boom” is now underway:

Holger Schmieding, Berenberg’s chief economist, explains:

Productivity-enhancing business investment stalled badly after the UK voted to leave the EU, and then collapsed during the first wave of COVID-19 in early 2020. The weakness in investment has hurt productivity, harmed supply potential and contributed to inflation pressures.

However, the latest data indicate that the post-COVID snapback in investment may be turning into a genuine investment boom. Business investment has surged by 35% from the Q2 2020 low and is now 6% above its pre-Brexit-vote high.

Despite a rising cost of capital, cash balances worth c25% of GDP and corporate debt-to-GDP at a 25-year low provide businesses with ample space to raise investment spending, while rising labour costs and pricing power in final markets provide an incentive to do so. Fading political uncertainty, combined with economic recovery, can underpin further strong investment gains.

UBS ditches £8bn state backstop for Credit Suisse deal

Kalyeena Makortoff

In the banking world, UBS has terminated a 9bn Swiss franc (£8bn) government lifeline, and repaid billions of pounds worth of loans to the Swiss central bank, as part of efforts to rid itself of taxpayer support following its emergency rescue of rival Credit Suisse in March.

The lender said it had completed a “comprehensive assessment” and “severe” stress test of Credit Suisse assets, which showed it did not need the £8bn loss protection agreement (LPA).

The deal would have seen taxpayers absorb losses beyond the first 5bn Swiss francs, which UBS would have to take on.

UBS said:

“At the time, this was deemed necessary to protect UBS against potential tail risks as there had been very limited time to review respective assets over the rescue weekend. After reviewing all assets covered by the LPA since the closing in June and taking the appropriate fair value adjustments, UBS has concluded that the LPA is no longer required.”

UBS also announced today that it had turned down a 100bn Swiss franc (£89bn) liquidity lifeline from the Swiss National Bank, and that Credit Suisse has paid back 50bn Swiss francs worth of emergency funding to the central bank, bringing an end to the deal’s controversial state support.

Swiss authorities orchestrated UBS’ takeover of Credit Suisse in March, in order to stem a crisis of confidence in the global banking sector that led to the collapse of three US lenders. The merger drew criticism, including from Credit Suisse shareholders, who called for board members to be “put behind bars” following the bank’s failure.

UBS is expected to reveal more details about the progress of the merger on 31 August when it releases its Q2 results.

Reuters has seen an internal memo to UBS staff, saying:

“It should be clear to all of us that we still have a lot of work ahead of us to realize the full potential value from this transaction.”

The good news on UK growth this morning is going down a little badly in the City.

The blue-chip share index, the FTSE 100, has dropped by 1% or 76 points to 7542 points.

Investors appear concerned that the better-than-expected GDP figures could encourage the Bank of England to keep raising interest rates.

John Choong, equity and markets analyst at investing comparison platform, InvestingReviews.co.uk, explains:

“The FTSE 100 opened in the red this morning as markets were spooked by strong services data in the GDP figures. This may spur more rate hikes than markets expected, with the Bank of England handed more room to do so without triggering a recession given the economy’s strength.

As such, housebuilder stocks, which are sensitive to interest rate futures, are on the decline again with gilt yields taking a jump.

AJ Bell investment director Russ Mould says:

“Before we roll out the garlands it is worth observing the UK remains one of the few major economies to reach its pre-pandemic size. This is a story of resilience rather than dynamism.

The durability of the economy is a double-edged sword as it may lead the Bank of England to keep taking a hard line on interest rates. Given the lagged impact of rate increases, which have already seen borrowing costs increase from near zero to more than 5% in a little over 18 months, this could result in a more significant downturn at some point down the line.

“On the other hand, a lower than anticipated inflation number next week could build confidence in a Goldilocks scenario where the economy is blowing neither too hot or too cold and the Bank can start to dial back the pressure on rates and avoid inflicting much more pain without risking losing control of prices again.”

European stock markets are also in the red, with Germany’s DAX and Italy’s FTSE MIB both down 0.5%.

Data from China, showing the new loans plunged to their lowest since 2009, have added to concerns over the world’s second-largest economy.

Rishi Sunak has claimed the government’s plan was working, after this morning’s GDP figures showed the UK economy grew by 0.2% in the second quarter of the year.

Sunak said:

This is good news. At the beginning of the year I made growing the economy one of my top priorities, and we are making progress.

“There’s still more work to do, but today’s figures show the plan is working.”

The PM will obviously be relieved that the downturn that was feared last winter has been avoided, although some economists do predict the economy could still drop into a recession (see earlier post).

Also, quarterly growth of 0.2% is still weak in historic terms. Over 1980 to 2014, for example, real GDP growth averaged 2.2% per year.

Capital Economics, the City consultancy, are sticking with their forecast that the UK is heading for a mild recession later this year.

Ruth Gregory, their deputy chief UK economist, told clients that the 0.5% rise in GDP in June was mostly due to the return to the normal number of working days in June after May’s bank holiday for the King’s Coronation.

Thus, it makes the economy look stronger than it really is.

Gregory added:

Overall, the bank holiday, unusually warm weather and strikes make it hard to judge the true health of the economy. But our sense is that underlying activity is still growing, albeit at a snail’s pace. We still think that with most of the drag from higher interest rates still to come, GDP will fall in Q3 and a mild recession will begin.

That may not prevent the Bank from raising interest rates from 5.25% now to 5.50% in September. But it may mean that rates don’t rise as far as the 5.75-6.00% envisaged by the consensus and investors.