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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

London’s economic recovery shows ‘levelling up’ struggles; stagflation fears rise – as it happened

Boris Johnson United States United Kingdom Australia Economy Inflation Germany RBA World Bank
The London skyline, including the Square Mile and the Shard.
The London skyline, including the Square Mile and the Shard. Photograph: Dan Kitwood/Getty Images

Closing post

Time to wrap up...

The World Bank has slashed its growth forecasts, and warned of a rising risk of stagflation, as the latest economic data continues to show economies are slowing.

The World Bank now expects global growth of just 2.9% this year, down from 4.1% previously, and fears many countries could fall into recession.

David Malpass, the Bank’s president, said:

“The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid.”

London’s economy is outpacing the rest of the UK, with new data showing the capital was the fastest growing region in the first quarter of the year.

But the UK’s services sector has slowed, as inflation hits consumer spending. And with petrol prices hitting new highs in the UK, again, households face further pressures.

Germany’s economy is feeling the strain too. Factory orders dropped for the third month in a row, as the Ukraine war, supply chain problems, high energy prices and China’s lockdowns hit demand in April.

The pound came under pressure, with analysts warning that political instability would weigh on sterling after Boris Johnson narrowly won last night’s confidence vote among Conservative MPs.

Activity at eurozone construction firms has fallen for the first time in nine months, another sign that Europe’s economy is slowing.

But South Africa beat forecasts with 1.9% growth in th first quarter of 2022, as it recovered from the disruption caused by the Omicron variant last autumn.

In other news....

Car retailer Cazoo is cutting 700 jobs.

US retailer Target has announced it will slash prices to shift surplus stock, showing the pressure on retailers as the pandemic spending boom fades.

Britain’s competition watchdog has found that JD Sports and Elite Sports, along with Rangers Football Club, broke competition law by fixing the prices of some Rangers-branded clothing to keep them high at the expense of fans.

UK retail spending fell in May, although retailers did get a boost over the jubilee weekend.

PricewaterhouseCoopers has been fined a total of £5m for failures in its audit of the construction firms Galliford Try and Kier, in the latest fines imposed on a “big four” accounting firm.

The cost of food is a big worry for the vast majority of Britons while the number of people who skip meals or use a food bank has jumped in the past year, according to the Food Standards Agency (FSA).

The British Gas owner, Centrica, has warned that Rishi Sunak’s windfall tax will “damage investor confidence” as Britain attempts to build up green energy supplies.

And pressure is building for an international agreement on a rescue mission for Ukraine’s grain, which is desperately needed to feed the world, and which Kyiv urgently wants to sell to get its hands on vital foreign currency.

UK petrol prices have hit another record high, as the increase in crude prices continues to hurt motorists.

Petrol prices set a new record of 178.5p a litre, while diesel increased to 185.2p a litre.

It is the third time in six days that a new high has been hit.

Simon Williams, a spokesperson for the RAC, says:

“The cost of filling a 55-litre family car with petrol has now topped £98 for the first time in history.

The RAC believes prices will continue rising, to £2 a litre which would mean a fill-up would rise to “an unbelievable £110,” Williams said.

Louise Haigh MP, Labour’s Shadow Transport Secretary, called on ministers to take action to support motorists:

“The Conservative government are too busy tearing themselves apart to tackle the brutal price hikes facing working people.

“Motorists are being taken for a ride, and this hapless government are too distracted to do anything about it.

“The Conservative government needs to tackle the brutal petrol hikes, and support Labour’s call to put money back in the pockets of working people with an emergency budget.”

World Bank slashes global growth forecast and warns of 'stagflation'

The World Bank has slashed its global growth forecast, warning that Russia’s invasion of Ukraine has compounded the damage from the COVID-19 pandemic and could push many countries into recession.

In its Global Economic Prospects report, the World Bank cut its forecast for world GDP growth this year to 2.9%, from 4.1% previously, and warned there is a considerable danger of stagflation.

Our economics editor Larry Elliott writes:

The global economy faces a protracted period of weak growth and high inflation reminiscent of the 1970s as the impact of a two-year pandemic is compounded by Russia’s invasion of Ukraine, the World Bank has warned.

In its half-yearly economic health check, the Washington-based Bank said echoes of the stagflation of four decades ago had forced it to cut its growth forecast for this year from 4.1% to 2.9%.

David Malpass, the Bank’s president, said:

“The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid.”

The Bank said its global economic prospects (GEP) report was the first systematic attempt to compare the current state of the world economy with those during the stagflation of the 1970s.

Here’s the full story:

Wall Street drops after Target's profit margin cut

Stocks have opened lower in New York, as Target’s plan to cut prices to shift surplus stock raises worries about the strength of the economy.

The broad-based S&P 500 index has dropped by 0.6%, or 25 points, to 4,096 in early trading, with the Nasdaq Composite down 0.9%.

Target is down 6%.

A ship seen parked at the port of Oakland, in the San Francisco Bay Area.
A ship seen parked at the port of Oakland, in the San Francisco Bay Area. Photograph: Michael Ho Wai Lee/SOPA Images/REX/Shutterstock

The bigger than expected drop back in the US trade deficit in April suggests that net trade will be a large boost to second-quarter GDP growth, predicts Michael Pearce, Senior US Economist at Capital Economics:

The survey evidence suggests that US exports remain on track for continued growth, albeit at far slower rates than seen in April.

With inventories of some key imported goods now back close to more normal levels, the survey evidence suggests that import growth will continue to slow. That suggests net trade is likely to be more neutral for growth over the rest of this year, having been a persistent drag over the past 18 months.

British Gas owner says windfall tax will dent investor confidence

The British Gas owner, Centrica, has warned that Rishi Sunak’s windfall tax will “damage investor confidence” as Britain attempts to build up green energy supplies.

The Centrica chairman, Scott Wheway, and its chief executive, Chris O’Shea, hit out at the chancellor’s 25% levy on oil and gas operators’ excess profits, which will be used to pay for measures to reduce soaring energy bills.

Centrica – Britain’s biggest energy supplier – reported that its annual operating profits doubled to £948m in 2021, aided by a surge in earnings from its North Sea oil and gas arm. It expects to make a healthy profit again this year.

Speaking at Tuesday’s annual shareholder meeting in Leicester, Wheway said:

“We’ve got every empathy with the plight of many customers presently, that are facing difficulties in managing their energy bills, and we welcome action to help those customers.

“But we also share a lot of concern around choices that may be made to apply taxes to energy production, which – although they may derive short term benefits – can cause medium and long term problems, because we know that the industry that we’re in is a very long term industry. And we’d urge everyone thinking of those things to strike the right balance.”

The U.S. trade deficit narrowed sharply in April thanks to a drop in imports.

The gap between US imports and exports fell by 19.1% to $87.1bn in April, with imports of goods and services falling 3.4% to $339.7 billion, while exports rose 3.5%.

Net trade has dragged on US GDP in recent quarters, but this could aid a return to growth (after US GDP shrank in Q1).

Exports of goods increased by $6.1bn to $176.1bn in April, including a rise in food products, industrial supplies and materials, natural gas and oil.

But imports of goods decreased by $13.0bn to $283.8 bn, including a fall in consumer goods, industrial supplies and materials, and capital goods (such heavy-duty machinery and equipment).

Updated

The cost of food is a big worry for the vast majority of Britons while the number of people who skip meals or use a food bank has jumped in the past year, according to the Food Standards Agency (FSA).

Its research shows food prices are a “major future concern” for more than three-quarters of UK consumers (76%), and the number using a food bank has risen from almost one in 10 in March 2021 to nearly one in six this March.

More than one in five (22%) of those surveyed in March said they skipped a meal or cut down the size of meals because they could not afford to buy food.

Car retailer Cazoo to cut 750 jobs over recession fears

Around 750 jobs are being axed at online car seller Cazoo across the UK and Europe as it looks to cut costs by more than £200m by the end of next year, PA Media reports.

The British group, which is listed in America, has said it plans to slash its workforce by about 15% and also slow down on hiring new staff under a major cost-savings drive, as it warned over recession fears and consumer cut backs.

Cazoo did not give a breakdown of where the jobs will go, but it is understood the bulk will be across its UK operations - its biggest division - as well as in its European bases in Germany, France and Italy.

The group said the “business realignment” was needed to protect profits in the face of tougher economic times.

But it also comes as firms such as Cazoo have seen online car sales dwindle as pandemic restrictions have been lifted, with used car dealer Carzam collapsing late last week.

Updated

Target to cut prices to shift surplus stock

Over in the US, retailer Target has announced an aggressive plan to clear out unwanted stock by slashing prices.

The move will hit profitability, with Target also cutting its profit margin expectations for the fiscal second quarter as it tries to shift excess inventory as consumer spending patterns change.

Just three weeks ago, Target warned that rising costs would hit its profits this year -- and it is now taking further steps to clear its shelves.

CEO Brian Cornell has told CNBC that Target wants to make room for merchandise that customers do want, such as groceries, beauty items, household essentials and seasonal categories like back-to-school supplies.

“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,”

Target’s shares have fallen over 8% in pre-market trading:

Updated

Oil prices are likely to extend their recent gains, adding to inflationary pressures, according to new forecasts from Goldman Sachs.

Goldman analysts estimate that Brent crude will need to average $135 a barrel in the 12 months from July, up $10 from its previous forecast, for global inventories to normalize by late next year

Brent is trading around $120/barrel today, up from under $80/barrel at the start of this year.

Higher prices would help global crude stockpiles to be rebuilt in the face of rebounding Chinese demand and reduced production from Russia.

The FT’s Valentina Romei says London’s faster growth shows the challenges of the government’s regional “levelling up” drive.

She writes:

The capital’s economy benefited from its reliance on higher productivity services jobs that mostly continued throughout the pandemic with employees working from home.

This is in contrast with the West Midlands, which is more reliant on manufacturing, where first-quarter output was 10.4 per cent below pre-pandemic levels and growth was 0.5 per cent in the period.

The figures suggest that the pandemic and recovery have contributed to widening the UK’s economic inequalities.

London's economic recovery outpaces other UK regions

London’s economy is outpacing the rest of the UK, according to new official data which shows the government’s levelling up agenda is struggling.

The Office for National Statistics reports that London’s GDP rose by 1.2% in January-March, much faster than the UK average of 0.8% during the first quarter of 2022.

Wales, at 1%, and the East Midlands, at 0.9%, were the only other regions to grow faster than average.

Northern Ireland was the slowest with 0.4% growth, while the North East, Yorkshire and The Humber, and the South West all matched the average.

The East of England, North West, Scotland, and the South East were all slightly slower with 0.7% growth.

The report also shows that London, and Northern Ireland, are the only economies larger than their pre-pandemic levels in Q4 2019.

The West Midlands’ GDP is still 10% smaller than before Covid-19. That suggests its manufacturing base has been harder hit by the pandemic than the capital, where many employees shifted to home-working.

Updated

South Africa beats forecasts with Q1 growth

South Africa’s economy grew faster than expected in the first quarter of this year, lifting it back to pre-pandemic levels.

A strong performance by the factory sector helped South Africa’s GDP increase by 1.9% in January-March, and by 3% more than a year ago, as it emerged from the disruption of the omicron variant.

That beat forecasts of 1.2% quarter-on-quarter growth and 1.7% year-on-year growth.

Statistics South Africa said manufacturing grew 4.9% quarter-on-quarter, while the trade, catering and accommodation category expanded 3.1% and agriculture, forestry and fishing 0.8%.

Mining and quarrying contracted 1.1%.

Updated

Investor morale in the euro zone has risen this month for the first time since Russia’s invasion of Ukraine.

Sentix’s index of eurozone investor confidence has rise to -15.8 points in June from -22.6 in May -- which was the weakest figure since June 2020.

Although it’s an improvement, it shows the economy is still in a downturn.

Sentix managing director Manfred Huebner has cautioned that:

“As impressive as the improvement in the situation and expectations values may appear at first glance, this is unlikely to mark a turnaround.”

UK service sector slowdown - what the experts say

UK services firms suffed a worrying combination of slower growth and higher prices in May, says Tim Moore, Economics Director at S&P Global Market Intelligence (which compiled the PMI report).

“There were bright spots in customer-facing parts of the economy during May, buoyed by a rapid recovery in consumer spending on travel, leisure and entertainment.

However, hospitality businesses widely reported constraints on recovery from a lack of candidates to fill vacancies and difficulties meeting demand due to ongoing global supply chain disruption.

“Service providers are increasingly concerned about the near-term business outlook, with price resistance among consumers and escalating cost of living pressures set to dampen spending during the second half of 2022.

Growth expectations have dropped in each month since the invasion of Ukraine and are now the weakest since October 2020.”

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, says firms faced rising fuel and food prices, and salaries.

Though there was a glimmer of hope with export orders which were not as flat as in previous months, Brexit customs restrictions and war in Ukraine continued to impact overseas confidence still further.

“One bright spot was strong employment levels. Job seekers still had the pick of the bunch in terms of roles and requested salaries but as capacity levels are reached and new order gaps appear, the window of opportunity is starting to close.

“The sudden fall in the overall index is a cause for worry and was reflected in the sector’s optimism which was the lowest since the height of the pandemic in October 2020.

Recessionary fears are growing bigger and stronger amid the realisation that 2022 as the year of stable recovery has not materialised yet.

Sam Cooper, Vice President of Market Risk Solutions at Silicon Valley Bank, says:

“Despite beating expectations, today’s PMI print is unlikely to move the needle for sterling.

With a deluge of bad news in the form of political tensions, worrying BRC sales data and a chronic labor shortage paired with rampant inflation, long term forecasts for the pound are likely to be revised lower as pressure continues to mount”

UK services firms hit by rising inflation

Growth across the UK’s service sector slowed sharply last month as rising inflation hits customer demand.

Services firms saw the weakest growth since February 2021, when many businesses were locked down in the pandemic, according to the latest purchasing manager’s survey.

It found that business activity growth eased considerably in May, while profit margins were squeezed by rising prices.

Many firms reported that worries about the economic outlook and heightened risk aversion hit customer demand. But, the hospitality sector had a strong month, helped by the easing of pandemic restrictions.

UK services sector PMI

This dragged the Services PMI down to 53.4 in May, from 58.9 in April -- the biggest jump since the survey began in 1996, apart from during Covid-19 lockdowns.

However, it is better than the ‘flash’ reading of 51.8 taken during May.

The survey shows that the cost of living squeeze didn’t abate -- firms were hit by a record increase in input costs, and lifted their own prices at an unprecedented speed in response.

Firms were gloomier too, with growth projections lowest since October 2020.

The report says:

The weakest headline index reading since February 2021 mostly reflected subdued business and consumer confidence, with worries about the economic outlook also contributing to softer demand patterns in May.

Travel, leisure and entertainment was the main exception, with hospitality businesses widely commenting on strong consumer demand due to the removal of pandemic restrictions.

MUFG: UK political instability not good for GBP

The UK’s political instability is not good for the pound, writes Derek Halpenny of Japanese bank Mitsubishi UFJ.

The stance of the PM and his supporters is that a victory is a victory and that it is time to “draw a line” and “move on”. That could prove difficult to do. Two bi-elections on 23rd June are likely to reveal huge swings in favour of Labour and the Lib Dems while the conclusions of an enquiry into whether Johnson lied to parliament and an enquiry into the government’s handling of covid are likely to come after the summer recess.

With 41% of sitting MPs now wishing him to go the outlook does not look good and a divided party is not favourable for getting policies through parliament. The difficult economic outlook that lies ahead will be far more difficult to get through with a PM that lacks support. Difficult policies like altering the framework of the Northern Ireland Protocol that is integral to the relationship with the EU and the Withdrawal Agreement points to further divisions down the road.

We already have GBP forecasts that indicate underperformance and weaker GBP/USD levels than the current spot level through Q3 and the outcome of last night’s vote is consistent with our bearish GBP view.

Boris Johnson emerged wounded after his narrow victory in no-confidence vote, writes Modupe Adegbembo, G7 Economist at AXA Investment Managers:

Adegbembo also believes Johnson could use government spending to shore up support:

We do not expect that the vote will have a significant impact on the macro environment in the near term.

Fiscal policy and the outlook for monetary policy is likely to remain unchanged (we expect the Bank of England to hike 4 more times this year). However we do see the risks that a weakened PM seeks to shore up support amongst the public and MPs using fiscal giveaways.

It also increases the risk of more populist policies to try and regain lost support. This may include more extreme action with regards to Northern Ireland. All of this will add to an already uncertain macroeconomic background.

RBC Wealth Management’s Frédérique Carrier also predicts that the UK govenment could roll out further stimulus measures as the PM “attempts to improve his popularity”.

If so, that could spur the Bank of England to raise interest rates even faster, Carrier explains:

Chancellor Sunak’s recent £15bn stimulus package led expectations for the year end Bank Rate to reach 2.3%.

Any further such supportive measures would likely boost further the Bank Rate year end expectations.”

Eurozone construction activity falls as demand weakens and costs soar

Eurozone construction activity has fallen for the first time in nine months, another sign that Europe’s economy is weakening.

S&P Global’s eurozone construction PMI, which tracks activity in the sector, has fallen into contraction territory, as supply chain problems due to the Ukraine war led to raw material shortages and higher prices.

The index dropped from 50.4 in April to 49.2 in May, showing the sector shrank last month, for the first time since last August.

Homebuilding, commercial work and civil engineering activity all fell last month, with new orders dropping too.

Here’s the key points:

  • Fastest reductions in output and new orders since February 2021
  • Price and supply-chain pressures ease, but remain marked overall
  • Business confidence weakens to 19-month low

Usamah Bhatti, economist at S&P Global Market Intelligence, adds:

Construction firms in the bloc were increasingly pessimistic regarding the outlook for activity over the coming year, with confidence at its lowest level since October 2020.

At the national level, German firms reported the strongest decline in output for nine months, while Italian constructors signalled a further expansion in May that was nonetheless the softest in the current 16-month growth sequence. Businesses in France saw a mild increase that was the fastest since January.”

PwC fined £5m over construction audits

A Pricewaterhouse Coopers logo outside their premises in London.

PricewaterhouseCoopers has been fined almost £5 million pounds ($6.22 million) for conducting poor audits of two UK construction companies

PwC will pay £3m for failings in its audits of Galliford Try, and £1.96 million over a review of Kier Group Plc, the Financial Reporting Council said Tuesday.

It was also ordered to report on its most modern audits that considered long-term contracts, the FRC said, as the regulator continues its crack down on the Big Four auditors.

Claudia Mortimore, the FRC’s deputy executive counsel, says the breaches “concern failures to properly audit revenue recognised under specific complex long-term contracts,”.

PwC said:

We are sorry that aspects of our work were not of the required standard,”

The firm added that it had invested in improving audit quality since the audits of Kier and Galliford Try.

JD Sports and Elite Sports, along with Rangers Football Club, broke competition law by fixing the prices of some Rangers-branded clothing to keep them high at the expense of fans, Britain’s competition watchdog has found.

The Competition and Markets Authority (CMA), which has been investigating the matter since December 2020, said sports retailers Elite and JD fixed the retail prices of a number of Rangers-branded replica kits and other clothing products from September 2018 until at least July 2019.

Rangers FC also took part in the alleged collusion, by fixing the retail price of adult home short-sleeved replica shirts from September 2018 until at least mid-November of that year. All three companies allegedly colluded to stop JD undercutting the retail price of the shirt on Elite’s Gers Online store, the watchdog said.

More here.

Expected swings in the British pound over a one-week and one-month period have edged higher today, Reuters points out, reflecting the greater political uncertainly over Boris Johnson’s future.

Frederique Carrier, head of investment strategy for the British Isles and Asia at RBC Wealth Management, says:

“The PM has survived the no confidence vote, but the number of Conservatives MPs who voted against him is substantial enough to weaken his position further.”

“This is unlikely to be the end of turmoil and the victory is not clear enough to draw a line under the past few months.”

There’s a tale of two takeovers in the City this morning.

Biffa, the waste management company, has received a possible buyout offer from affiliates of private equity firm Energy Capital Partners (ECP), worth £1.36bn or 445p per share.

High Wycombe-based Biffa’s shares have jumped 30% to 420p, leading the risers on the FTSE 250 index.

But fashion chain Ted Baker’s hopes of being acquired have suffered a blow. Its preferred suitor has decided not to make a takeover offer - news that sent its shares down 20%.

Ted Baker put itself up for sale in April and said last month it had chosen a preferred bidder to take the process forward.

Full story: UK spending bubble burst by cost of living crunch

British consumers cut back sharply on spending last month as the rising cost of living hit budgets hard.

Retail sales fell at an annual rate of 1.1 per cent in May, worse than the 0.3% drop in April, and the worst since January last year.

That’s according to the latest industry data from the British Retail Consortium and KPMG, which adds to the pressure on the pound.

BRC chief executive Helen Dickinson said sales fell again “as the cost of living crunch squeezed consumer demand”.

“It is clear the post-pandemic spending bubble has burst, with retailers facing tougher trading conditions, falling consumer confidence, and soaring inflation impacting consumers spending power.

Supply chain issues including rising commodity and transport costs, a tight labour market and higher energy bills are forcing retailers to increase their prices, contributing to wider inflation.

Dickinson added that big-ticket items, such as furniture and electronics, took the biggest hit as “shoppers reconsidered major purchases during this difficult time”.

The sales figures were not adjusted for inflation, so the drop in sales “masked a much larger drop in volumes once inflation is accounted for”.

However, retailers did get a platinum jubilee lift, as there was a sharp increase in consumer footfall on the high streets during the long bank holiday weekend.

Investors are focusing on the UK’s economic problems, as the cost of living crisis hits growth, says Bloomberg:

The pound slid against the dollar into the European session, erasing a knee-jerk bounce on Monday spurred by Prime Minister Boris Johnson winning a confidence vote in his leadership. A looming growth slowdown is keeping longer-term measures of sterling sentiment near the most bearish levels since 2020, while political turmoil is set to continue even after the vote.

The battle for the Conservative Party leadership comes amid a cost-of-living crisis that’s threatening to plunge the economy into a recession.

That’s piling pressure on the Bank of England to support growth and rein in the highest inflation in four decades, while keeping pace with the Federal Reserve and other global peers -- a process pound traders will be watching very closely.

There’s little good news ahead to lift the pound, warns Jeffrey Halley, analyst at OANDA:

The UK has a post-Jubilee railway strike yesterday, and Boris Johnson survived a no-confidence vote. In BoJo’s case, TINA came to his rescue, there is no alternative.

The railway strike is what I believe will be a summer/autumn/winter of discontent for the UK as the cost of living soars and the Bank of England waves the white flag. War in Eastern Europe and a UK Government still seemingly intent on invalidating the Brexit agreement over Northern Island all add up to me struggling to find a reason for GBP/USD to ever see a 1.3000 handle in 2022.

Pound under pressure

The pound touched its lowest level in over two weeks this morning, as a strengthening dollar, weakening economy, and political uncertainty all weigh on sterling.

Sterling dropped 0.7% in early London trading to around $1.243, its lowest level since May 20 at $1.2433.

It’s also lost half a eurocent against the euro to €1.167.

The pound had a good day on Monday, but the narrowness of Boris Johnson’s win in last night’s no-confidence vote may be hurting the currency today.

Investors are also anxious about the UK’s economic outlook, with a recession looming and inflation heading towards 10%.

Retail sales dipped last month, new figures show, as consumers tightened their belts amid the cost-of-living crisis.Like-for-like sales were down 1.5% for May compared with the same month a year earlier.

Victoria Scholar, head of investment at interactive investor, says sterling is under pressure after last night’s vote.

The pound held onto gains after the result of the confidence vote was announced, trading higher against the US dollar but has since lost ground this morning with $1.24 the next support level to watch.

The currency is suffering amid a lack of international investor confidence in the UK both economically and politically with criticism of Johnson’s leadership expected to continue and the potential for government legislation to be blocked by members of his own party.

Given that markets hate uncertainty more than anything, the fact that sterling rallied on Monday morning after the no confidence vote was triggered speaks to Johnson’s lack of popularity among investors.

However it is worth noting that some of the gains for GBP-USD were driven by a softer US dollar and although there was an initial spike, cable pared gains during the session as markets began to realise that firstly Johnson may win the vote and secondly the alternative may not be much better.

Introduction: German factory orders sink

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

Germany’s manufacturing sector is a European powerhouse, so a surprise drop in factory orders this morning has fuelled worries over the economic outloook.

German factory orders fell by 2.7% in April, new figures show, dashing hopes of a 0.3% rise after a 4.7% tumble in March.

It’s the third consecutive monthly fall in factory orders. On an annual basis, factory orders were 6.2% lower than a year before.

The war in Ukraine, supply chain problems, China’s Covid-19 lockdowns and the surge in energy prices are all hitting Europe’s largest economy.

Germany’s statistics office says:

“The increased uncertainty caused by the Russian invasion of Ukraine continues to lead to weak demand, especially from abroad.

However, companies still have well filled order books.”

Naeem Aslam of Avatrade says the figures confirm that “economic conditions are becoming dire” for the eurozone’s largest economy.

Markets are also edgy after Australia’s central bank announced its largest interest rate rise in 22 years earlier today, as it tries to tackle inflation.

The Reserve Bank of Australia lifted its cash rate target by 50 basis points to 0.85%, after the energy squeeze and supply chain problems pushed up prices. It also signalled further rises will follow, the latest sign that central bankers are serious about squashing inflationary pressures.

Australia’s consumer price inflation rate was 5.1% for the March quarter - lower than many other countries - but too high for the RBA.

RBA governor, Philip Lowe said inflation in Australia has increased significantly, adding:

While inflation is lower than in most other advanced economies, it is higher than earlier expected.

The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.

Australia’s stock market fell 1.5%, and we’re expecting a weak start in Europe.

Later today we’ll get a healthcheck on eurozone construction firms, UK services company, and the World Bank’s assessment of the global economy.

The agenda

  • 8.30am BST: Eurozone construction PMI report for May
  • 9.30am BST: UK services sector PMI report for May
  • 10.15am BST: The Business, Energy and Industrial Strategy Committee starts an inquiry into the UK’s semiconductor industry.
  • 10.30am BST: South Africa’s Q1 GDP report
  • 1.30pm BST: US trade report for April
  • Afternoon: World Bank’s “Global Economic Prospects” report
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