Closing summary
The pound has fallen to its lowest level since 1985 against the dollar. It fell as much as 0.9% to $1.1407, according to Refinitiv data. The dollar also hit a 24-year high against the yen.
European stock markets are in the red amid global recession fears, with the UK’s FTSE 100 index down 0.8% at 7,241, while Wall Street has notched up modest gains.
The UK’s new chancellor, Kwasi Kwarteng, has used his first meeting with bank bosses to reiterate his support for the Bank of England’s independence, and set out an “unashamedly pro-growth agenda”.
He also said there would be higher borrowing in the short term to fund the energy support measures, to be unveiled tomorrow (and rumoured to cost £100bn to £150bn).
A leading economist has expressed concern that Liz Truss’s plans to freeze energy bills will benefit affluent people more than the less well-off. Paul Johnson, director of the Institute of Fiscal Studies, described the support package as “very poorly targeted”.
You can follow the latest devs on the energy crisis on our politics live blog here:
As the EU set out plans for windfall taxes, power savings and a cap on Russian gas prices, the Russian president threatened to cut off energy supplies if price caps are imposed on Russian oil and gas exports, saying that the west would be “frozen” like a wolf’s tail in a famous Russian fairy tale.
Here’s a round-up of today’s other stories:
Sterling drops to lowest level since 1985 versus dollar
The pound has fallen to its lowest level since 1985 against the dollar, knocked by the dollar’s broad-based strength and a worsening UK economic outlook.
It fell as much as 0.9% to $1.1407 and is now at $1.1422, down 0.8%, according to Refinitiv data.
This is partly because of a generally strong dollar, as the Bank of England governor Andrew Bailey noted this morning. The dollar hit a 24-year high against the Japanese yen today, and has been testing a 20-year high against the euro.
AJ Bell investment director, Russ Mould, said today:
While UK-based investors will be well aware of how weak the pound is against the US dollar, … sterling is not the only currency whose decline against the greenback is gathering pace.
The DXY index, which measures the value of the dollar against six major currencies, stands at its highest level since 2002. Investors need to keep a close eye on this, because periods of marked dollar strength in the past have seen chaos in emerging markets, but also weakness in developed market stocks and commodity prices for good measure.
The big question now is whether the run in the DXY index – and thus the dollar against a basket comprising the euro, the yen, sterling, the Canadian dollar, Swedish krona and Swiss franc – is paving the way for a fourth major advance in the US currency since the so-called ‘Nixon shock’ and America’s withdrawal from the gold standard and Bretton Woods in 1971, following bull runs in the buck during 1971-1979 and 1985-1995 and 2011-2016.
The US Federal Reserve’s interest rate increases and acceleration this month of its quantitative tightening programme are, respectively, increasing the returns available on dollars relative to other currencies and at the same time draining dollars from the global economy, to almost create a shortage of bucks.
Updated
Another press release from the Treasury on the new chancellor’s meeting with the governor of the Bank of England, Andrew Bailey, at the Treasury “to emphasise his full support for the Bank’s mission to get inflation under control”. It says:
The chancellor affirmed the UK government’s long-standing commitment to the Bank of England’s independence and its monetary policy remit. The chancellor and governor agreed that getting inflation under control quickly is central to tackling cost of living challenges.
The chancellor updated the governor on his growth and fiscal strategies, noting that reforms which create the conditions for a high-growth economy can help to alleviate inflationary pressures. He outlined the government’s plans to act this week in response to high energy prices, and reiterated that such action requires fiscal loosening in the short-term. The chancellor confirmed that over the medium-term, the government is committed to seeing debt falling.
The chancellor and the governor agreed to re-instate weekly meetings – starting with bi-weekly meetings in the first instance - and coordinate closely to support the economy over the coming months.
The US trade deficit shrank to a nine-month low of $70.7bn in July, driven by a sizeable drop in consumer goods imports, data showed today.
Paul Ashworth, chief North America economist at Capital Economics, noted that
almost half that decline [$3bn] was due to lower imports of pharmaceuticals, which are notoriously volatile, so doesn’t necessarily mean domestic demand has weakened.
Export values increased by $0.5bn, or 0.2%m/m, with import values falling by $9.7bn, or 2.9%. Thanks to some big swings in prices, however, the improvement in the real trade deficit was much more marked, with real goods exports increasing by $4.9bn, while real goods imports declined by $5.5bn.
Looking at the nominal breakdown, the decline was largely due to a $7.4bn drop back in consumer goods imports. With inventory levels for many retailers normalising and consumer spending muted by rapidly rising prices in the first half of the year, we had been braced for consumer goods imports to come off the boil.
Nevertheless, with the China trade data released earlier today showing a sharp decline in exports to the US, we anticipate that the US data will show a matching further decline in consumer goods imports in August.
As things stand now, third quarter real exports are on track for a 13% annualised gain, with real imports shrinking by 2%. That means net trade will add close to 1.5% points to third-quarter GDP growth, which we forecast will be 3.0%.
EU plans to cap Russian gas price as Putin warns of winter freeze
The head of the EU executive has set out plans for windfall taxes, mandatory electricity savings and a cap on the price of Russian gas to limit Kremlin revenues used to finance the “atrocious” war in Ukraine, reports the Guardian’s Jennifer Rankin in Brussels.
Ursula von der Leyen outlined a five-point plan in response to an energy price crisis, driven by the Russian shutdown of the key Nord Stream 1 pipeline but exacerbated by the climate crisis and lingering effects of the Covid pandemic.
Low-carbon energy companies, renewable and nuclear suppliers that have reaped “enormous revenues … they never dreamed of” from generating electricity will face a windfall tax, Von der Leyen said, with proceeds earmarked to help domestic consumers and companies pay “astronomical” bills.
Finally, Von der Leyen proposed a cap on the price of Russian gas, saying it was necessary to cut revenues that “Putin uses to finance his atrocious war in Ukraine”.
The EU has spent nearly €88bn on Russian fossil fuels since the invasion began on 24 February, according to a tracker from the NGO Europe Beyond Coal.
But limiting the cap to Russian gas is likely to be challenged by some EU member states. Poland argues the EU should cap the price of all non-EU gas: it fears that targeting Russia will trigger retaliation that will deprive Ukraine of lucrative pipeline transit fees.
Speaking in Vladivostok, Vladimir Putin dismissed attempts to cap the prices of oil and gas as “dumb” and “sheer nonsense”, while claiming that Russia had enough customers in Asia to ride out the damage. “Will they make political decisions contradicting contracts?” he said. “In that case, we will just halt supplies if it contradicts our economic interests. We don’t supply any gas, oil, diesel oil or coal.”
Asked about his comments, Von der Leyen said Russia had already partially or completely cut off gas to 13 EU member states. “We don’t give anything any more on these announcements by Russia, because we know they’re blackmailing us. The best thing is to fortify ourselves and go towards other suppliers. And have solidarity.”
Sterling falls
Sterling has fallen against the dollar and the euro, lingering near 2 1/2 year lows.
The pound dropped as much as 0.8% to $1.14185, its lowest level since March 2020. A fall below $1.1413 would take it to its weakest level since 1985, according to Refinitiv data. The dollar is generally strong, hitting a 24-year high against the Japanese yen today, and testing a two-decade high against the euro.
Sterling rose as high as $1.1609 yesterday on hopes about the new prime minister’s plans to tackle Britain’s escalating energy crisis, but later fell back again.
The Bank of England’s chief economist Huw Pill said this morning that Liz Truss’s plan could slow inflation in the short term, but it was too soon to say what that might mean for interest rates.
The pound has lost 15% against the dollar this year as UK inflation surged to double digits and growth has faltered. Against the euro, sterling fell nearly 0.7% today to €1.1550.
And here is Vladimir Putin speaking earlier.
The Russian president has threatened to cut off energy supplies if price caps are imposed on Russia’s oil and gas exports. Speaking at an economic forum in Vladivostok in Russia’s far east, he said Russia “will not supply anything at all if it contradicts our interests ... We will not supply gas, oil, coal, heating oil – we will not supply anything”. Putin also claims the developing world has been ‘cheated’ by a landmark grain deal designed to alleviate the food crisis.
Here is our full story on the new chancellor’s first moves.
The new chancellor, Kwasi Kwarteng, has used his first meeting with bank bosses to reiterate his support for the Bank of England’s independence, and promise that the new government was poised to unveil a “radical” plan for economic growth, reports our banking correspondent Kalyeena Makortoff.
Kwarteng, who previously led the business department, told 14 executives from City firms, including HSBC, NatWest, and Barclays, that the government was pursuing “unashamedly pro-growth” policies that would involve slashing taxes and regulations, while creating the right conditions for investment and innovation.
He said the government’s first priority would be to support families and businesses hit by rising energy prices, but that this would mean higher borrowing in the short term.
However, Kwarteng assured them that the government was committed to reducing debt – or at least keeping it on what the Treasury said was a “downward path”. A No 11 spokesperson said the chancellor had emphasised that his “radical supply-side agenda” would also require “monetary stability and fiscal discipline”.
Speaking at her first prime minister’s questions, Liz Truss said she was against imposing a windfall tax on energy companies to help households with soaring bills, but reiterated that she would ensure that her plan will help people and businesses.
She said she would announce her energy support package tomorrow.
I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom.
News in from the the world’s biggest airline trade body: the recovery in passenger flights is gaining momentum, with growth in both domestic and international travel.
Willie Walsh, the former IAG and BA boss who now serves as director general of the International Air Transport Association, told reporters:
Overall, we’re right about 75% of where we were in 2019 [ before the pandemic]. So making a solid recovery as we go through the summer season in the northern hemisphere.
The hearing has now finished, in time for prime minister’s questions. You can watch it again here if you wish.
Back to the Treasury committee hearing. The Bank of England’s chief economist Huw Pill just said about the cost of living crisis:
This is the sort of perfect storm of a shock that’s affecting the least well-off most. The least well off are not those who’ve accumulated savings during the lockdown period, they are not those who have access to financial markets who can borrow to smooth their way through these things, they are more reliant on fiscal policy being an opportunity and that’s why the fiscal policy choices which we’re still very uncertain about can have quite a significant effect on the real elements in the economy.
Kwarteng: support measures mean higher borrowing in short term
Speaking after the meeting, the new chancellor said:
We face extraordinary economic challenges in the coming weeks and months and I know that families and businesses across the UK are worried.
The prime minister and I are committed to taking decisive action to help the British people now, while pursuing an unashamedly pro-growth agenda.
We need to be decisive and do things differently. That means relentlessly focusing on how we unlock business investment and grow the size of the British economy, rather than how we redistribute what’s left.
With a strong and resilient economy, we deliver more jobs, higher wages, and raised living standards – all while reducing our debt-to-GDP ratio in a fiscally sustainable way.
Due to the scale of the gas crisis, the government’s first priority will be to support families and businesses in the immediate term, according to the Treasury’s press release.
The chancellor was clear this will mean “necessary higher borrowing in the short-term whilst ensuring monetary stability and fiscal discipline over the medium term”. He committed to “ensuring the economy grows faster than our debts and keeping debt as a proportion of our economy on a downward path”.
The chancellor also reiterated his full support for the independent Bank of England and its mission to control inflation, which is central to tackling cost of living challenges, the Treasury said.
Kwarteng stressed that the government will support the economy to grow, in the hope of getting back to 2.5% trend growth. He recognised that the rate of growth has been too low and committed to “creating the right conditions for business investment and innovation, reducing burdensome regulation and taxes”.
Updated
Bank of England governor Andrew Bailey has just confirmed that he will be meeting with the new chancellor, Kwasi Kwarteng, this afternoon.
This morning, Kwarteng set out Liz Truss’s “pro-growth economic approach” to finance bosses in the City of London.
Great to meet market & City leaders this morning.
— Kwasi Kwarteng (@KwasiKwarteng) September 7, 2022
I set out Prime Minister @trussliz's new, pro-growth economic approach, including immediate support for families and businesses to tackle the cost of living and a commitment to fiscal sustainability. pic.twitter.com/M04FF8TwOv
Updated
The National Institute of Social and Economic Research, a respected think tank, has published a new paper with proposals to tackle the energy crisis, which it claims would be “much more cost effective than freezing energy bills” – as planned by Liz Truss.
It says the proposal
Could reduce the bills of the poorest households from nearly £3,000 to around £1,000 per year, a 70% reduction.
Would be financed by raising the cost of energy for those who use it most, which are richer households that can afford this rise in energy bills in terms of their income and their savings, taking their energy bills from about 2% to just 3% of their income.
Could be a ‘revenue neutral’ which would not require further fiscal support such as extra borrowing or tax rises, unlike other policy ideas such as nationalising energy companies or freezing all energy bills.
Could also be combined with more fiscal spending to help reduce the energy bills of both lower- and higher-income households.
Would incentivise energy saving by higher-income households and thereby incorporate a green element into the cost structure.
🚨OUT NOW 🚨 Our new Policy Paper contain a proposal that would reduce the bills of the poorest households from nearly £3,000 to around £1,000 per year, a 70 per cent reduction ⚡
— National Institute of Economic and Social Research (@NIESRorg) September 7, 2022
🔋It would also be much more cost effective than freezing #energybills ⬇️https://t.co/xnr5g4q77G
Putin threatens to cut off energy supplies if price caps are imposed
There’s more from Vladimir Putin. The Russian president has threatened to cut off energy supplies to the west if price caps are imposed on Russian oil and gas exports, saying that the west would be “frozen” like a wolf’s tail in a famous Russian fairy tale, Reuters reports.
Speaking at an economics forum in the Pacific city of Vladivostok, Putin said European calls for a price cap on Russian gas were “stupid” and would lead to higher global prices and economic problems in Europe.
Last week, the G-7 group of advanced economic nations announced plans to impose a price cap on Russian oil exports, and to restrict Russia’s ability to secure tankers and insurance from countries outside the G-7.
Putin said if this were to happen, Russia would walk away from its supply contracts.
Will there be any political decisions that contradict the contracts? Yes, we won’t fulfil them. We will not supply anything at all if it contradicts our interests.
We will not supply gas, oil, coal, heating oil – we will not supply anything.
We would only have one thing left to do: as in the famous Russian fairy tale, we would sentence the wolf’s tail to be frozen.
He said Russia would have not problems redirecting its gas exports to other countries, such as China.
Russia is the world’s second-biggest oil exporter after Saudi Arabia, and the world’s top natural gas and wheat exporter. Europe usually gets 40% of its gas and 30% of its oil from Russia.
Putin also said Germany and western sanctions were to blame for the Nord Stream 1 pipeline shutdown, and that Ukraine and Poland decided themselves to switch off other gas routes into Europe.
Europe faces a winter fuel crisis and soaring energy bills after Gazprom suspended all gas supplies through Nord Stream 1, saying it had found an engine oil leak during maintenance work.
Calling on Germany to return a turbine following repairs for the pipeline’s Portovaya compressor station that would allow Russia to resume gas supplies, Putin said:
Nord Stream 1 is practically closed now.
There is an oil leak there, it’s a possibly explosive situation, a fire hazard. The turbine cannot work. Give us a turbine and we will turn on Nord Stream 1 tomorrow. But they don’t give us anything.
Updated
The Bank of England governor has also defended the Bank’s mandate and its record over the last decades.
Asked about the Liz Truss’s pledge during the Tory leadership contest to review the mandate of the Bank of England, and whether the mandate is outdated, Bailey said:
The inflation target…. has proved to be very successful. In 25 years since this regime came into existence… inflation has averaged pretty much exactly on target.
This is by far the biggest sock we are facing during the life of that, but it does not suggest that the regime has failed. What it suggests is that the regime now has to do its work and respond to a much bigger shock and we are confident that it will do so.
Predictably, Bailey was guarded in his comments about the expected government’s energy support package.
It’s not for us to comment on what fiscal policy will be and we will wait and see what it is… but I do very much welcome the fact that there will be, as I understand it, announcements this week because I think that will help to in, in a sense, frame policy and that’s important.
It’s important that there is a clear way forward on policy… That will be important for markets to understand what is gong to happen.
Bank of England chief economist: energy package could lower inflation
Andrew Bailey, governor of the Bank of England, and some of his senior team are being quizzed by the Commons Treasury committee.
Huw Pill, the Bank’s chief economist, said the new prime minister Liz Truss’s expected freeze on household energy bills could lower inflation in the short term, relative to the central bank’s latest forecasts published in August (which had inflation peaking at just over 13% in the fourth quarter, and remaining at “very elevated levels” throughout next year).
Pill told MPs:
Net-net on the implications for headline inflation in the short term, I would expect that to see a decline.
Bailey is being asked about “wobbly” debt markets and sterling. On the exchange rate, he pointed out that the dollar is strong against all currencies.
We have had volatile markets in the last six weeks or so.
We are seeing extreme volatility in energy markets.
I would say on the exchange rate, there are other factors, dollar specific factors. The US, the Federal Reserve is in a different situation… They are dealing much more with bringing under control a demand shock and taking aggressive action in response to that.
The UK is heavily exposed to gas prices.
He refuses to say whether the market volatility is being caused by the expected energy support package from the government, estimated to be worth £100bn (or £150bn, according to the Financial Times).
Updated
Tory thinktank: 1m more people to slide into poverty even with energy bill freeze
More than a million more people will slide into poverty this winter – even if the government freezes energy prices at current levels, a conservative think tank has estimated.
The Legatum Institute, headed by Tory peer and former government advisor Lady Stroud, calculated a price freeze would still push 1.3m people below the poverty line – though it would also shield 1.45m people from a “once-in-a-generation” rise in poverty, reports our social policy editor Patrick Butler.
The analysis suggests that even if action is taken to blunt the impact on consumers of soaring energy prices, many will still struggle with rising costs in other areas such as food, clothing and transport, partly as a result of below-inflation benefit increases.
Stroud said:
It is good to see that Liz Truss is taking this seriously and looking at energy price freezes. This will shield nearly a million and a half from poverty this winter. But if Liz Truss wants to stabilise poverty at pre-pandemic levels, she will need to go further and introduce a 10% uprating of universal credit as existing inflation will still hit the poorest hardest.
The institute used methodology developed by the respected Social Metrics Commission. Earlier this year Stroud set up an independent cross-party poverty strategy commission and criticised the government for lacking the will and ambition to tackle rising hardship and destitution.
Putin blames Germany and western sanctions for Nord Stream 1 shutdown
On the energy front: the Russian president Vladimir Putin said today that Germany and western sanctions were to blame for the Nord Stream 1 pipeline shutdown, and that Ukraine and Poland decided on their own to switch off other gas routes into Europe.
At an economic forum in the eastern city of Vladivostok, Putin said Gazprom could resume flows through Nord Stream 1 if a key turbine was returned to Russia, Reuters reported.
He also said that Russia will post a budget surplus this year, even though the economy is track for a contraction. He said the surplus would total 1.5 trillion roubles in 2022, while GDP would fall by “around 2% or a little more”.
Updated
The cost of insuring exposure to Britain’s sovereign debt has risen to levels last seen in June 2020 when markets were recovering from the Covid-19 rout, as Liz Truss started her first full day as UK prime minister and held her first cabinet meeting.
Five-year credit default spreads climbed to 27 basis points from 25 bps on Tuesday, according to data from S&P Global Market Intelligence.
Yesterday, when Truss was appointed by the Queen at Balmoral, long-dated government debt had its sharpest sell-off since the Covid pandemic started, pushing yields on 10-year gilts to their highest since 2011 at around 3.15%. Today, they have fallen back to 3.025%.
Bonds sold off on concerns about the scale of borrowing needed to fund Truss’s cost of living support package and her pledged tax cuts. Yields (the return an investor realises on an investment in a bond) move in inverse relation to bond prices.
Updated
Tory peer rejects fracking, calls for renewables investing
A Tory peer has said that investing in renewables is the best way out of the energy crisis – and rejected the idea of a return to fracking, as it would not reduce the price of gas.
Lord Deben, chairman of the UK’s independent Committee for Climate Change, told BBC’s Today programme:
If you want to get energy bills down, you produce your energy in the cheapest possible way and that happens to be by renewables.
It’s not a sensible system to say, ‘because the price of gas is very high, we should produce more gas’ because the price will be the same, it’s a world price. What you need to do is to produce as much as possible in the cheapest possible way and bills will fall much below what they would otherwise be.
He also said fracking would not help solve the energy crisis.
The price of gas is not affected by the relatively small amount that we can get, in addition from the North Sea or indeed from fracking. This is an international price and we would be paying the same price for we got out of the fracked gas as we are for the gas we’re using now.
There is no sliver of cigarette paper between the fact that if you want to deal with climate change and you want to deal with the cost of living crisis and oil and gas prices, you have to do the same thing.
Renewable energy and energy efficiency, they are the answers.
BCC chief calls for emergency business grants
Shevaun Haviland, director general of the British Chambers of Commerce, has called on the government to give the energy regulator Ofgem more powers, cut VAT on energy bills and introduce emergency business grants.
She told BBC’s Today programme:
We’re really delighted to hear the government talking about helping businesses, that’s really good to hear. What we want to see is things that can be put in place quickly.
We’d like to see Ofgem given more powers to drive more competition in the market. We’re seeing nearly 50% of our members being moved off fixed rate contracts onto variable rate contracts.
One of our manufacturers has had their bill moved from £140,000 a year to £706,000 a year. He has to sign a contract and doesn’t know how he’s going to pay it. That’s eye-watering increases and of course you cannot plan ahead.
Quickly, we want to see a reduction in VAT on energy bills for businesses. They currently pay 20%, we want that brought down to 5%.
One of our manufacturers said because of their energy bills, cash flow is really difficult. That means they can’t use cash to buy raw materials to make products even though they have a really strong order book. So they [businesses] need emergency grants quite quickly to to help them keep the doors open.
We need them to get help through this winter.
But she said there needs to be a longer-term energy plan as well.
Electricity prices in the UK have risen a lot more than in other countries, where governments have taken action to cushion the impact on households and businesses.
Sometimes — actually often — the French don’t realise how lucky they are pic.twitter.com/nwMH5jjKJh
— Sophie Pedder (@PedderSophie) September 7, 2022
Europe’s stock markets have opened lower, with the UK’s FTSE 100 the worst-hit index.
The blue-chip index has lost 77 points to 7,221, a drop of nearly 1.1%. Germany’s Dax fell 0.6%, France’s CAC and Italy’s FTSE MiB are both down 0.7% and Spain’s Ibex slid 0.6%.
The pound is also under pressure against the dollar and the euro, trading at $1.1492, down 0.2%, and at €1.1606, down 0.17%.
IFS director: expected energy support package 'very poorly targeted'
A leading economist has expressed concern that Liz Truss’s plans to freeze energy bills will benefit affluent people more than the less well-off.
Paul Johnson, director of the Institute of Fiscal Studies, described the support package, expected on Thursday, as “very poorly targeted”. He told BBC’s Today programme on Wednesday morning:
If this is a straightforward bill freeze then the majority of the money will go to better-off people who use more energy. So this is very poorly targeted. Not only is it poorly targeted, but it also means that we don’t see the full price signal, that actually across the world people need to see.
The reason that gas prices are so high is because there’s less gas around and if the world doesn’t use more gas over the next year then we’re going to run out.
Finding a way of targeting it to the many, many millions who really need it, without giving it to the many, many millions who don’t, appears to be something that has stumped the Treasury and the government for finding a mechanism of achieving that.
Johnson also said that the UK government can afford to borrow £100bn to tackle the cost of living crisis, although the amount may well rise to an “awful lot more”.
We can afford to borrow that amount. We’re still managing to borrow relatively straightforwardly on the international markets, although the interest rate we’re having to pay is rising quite fast: it’s gone above 3% for the first time in more than a decade and that’s still relatively low in historical terms.
The big question here is: ‘Is it going to be £100bn? What is the exit strategy from supporting bills?’ My guess is it might end up being an awful lot more than that unless we react quite quickly to make it a better system.
Is it the best way of spending the money? I rather suspect it is an inevitable way in the short run if everybody who needs help is to get that help, but I do think it’s incredibly important that the government thinks through and gets to a better or more targeted way of supporting us as we get through to next winter. Otherwise, we’re going to be on the hook, potentially, for an awful lot more money, for an awful lot longer.
This year and next the government will be spending about the same amount, £100bn, just on interest, on servicing its debt, the IFS director said. A lot of that is index-linked debt and should fall once inflation comes down.
Updated
High energy prices leave their mark on German industry
High energy prices are leaving their mark on German industry. Data just out shows that industrial production in Europe’s biggest economy fell 0.3% in July from the month before, compared with a 0.8% rise in June.
According to the statistical office, the relatively small number of school holidays and holiday leave prevented an even larger decline in production compared with July last year. Production in industry excluding energy and construction was down by 1%.
“Is this the first gust of wind preluding a perfect storm?” asks Carsten Brzeski, global head of macro at ING.
German industry is clearly suffering from disrupted supply chains on the back of the war in Ukraine, the aftermath of pre-summer lockdowns in China, low water levels in the main rivers and increasingly, higher energy prices. The statistical office released additional data showing that production in the energy-intensive industrial segments declined by more than the broader industry. Production in this area has dropped by 6.9% since February 2022.
For Germany’s industrial backbone, small and medium-sized enterprises, higher energy prices look like a ticking time bomb. With ongoing pressure on consumers’ disposable incomes, companies’ pricing power is fading. In this regard, it is remarkable that the government’s third relief package presented on Sunday provided only very limited support for this segment of the economy.
Looking ahead, shrinking order books since the start of the Ukraine war, the well-known supply chain problems (both international and domestic) plus high uncertainty, high energy and commodity prices and potential energy supply disruptions will not make life any easier. Judging from the first macro data for the third quarter, the German economy has not fallen off a cliff at the start of the third quarter but is rather sliding into recession.
German industrial production in energy intensive sector (red) vs total manufacturing production (blue) pic.twitter.com/QL3rBaRvgj
— Fabien Bossy (@FabienBossy) September 7, 2022
Updated
Introduction: Oil prices fall to nine-month low; Halifax warns of 'challenging period' for UK housing market
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
House prices in the UK rose by 0.4% in August, against a 0.1% drop in July, as Britain’s largest mortgage lender Halifax warned of a “more challenging period ahead”.
The annual rate of growth eased to 11.5% from 11.8%, suggesting the heat is slowly coming out of the market. Figures from Halifax show a typical UK property now costs a record £294,260. Wales is still showing the strongest annual growth in the UK, at 16.1%, while London recorded its highest annual rate in six years, at 8.8%.
Kim Kinnaird, director of Halifax Mortgages, said:
While house prices have so far proved to be resilient in the face of growing economic uncertainty, industry surveys point towards cooling expectations across the majority of UK regions, as buyer demand eases, and other forward-looking indicators also imply a likely slowdown in market activity.
Firstly, there is the considerable hit to people’s incomes from the cost-of-living squeeze…While government policy intervention may counter some of these impacts, borrowing costs are also likely to continue to rise, as the Bank of England is widely expected to continue raising interest rates into next year.
With house price to income affordability ratios already historically high, a more challenging period for house prices should be expected.
Meanwhile, crude oil prices have fallen to their lowest level since before Russia invaded Ukraine in late February, as China’s zero Covid policy and expectations of more interest rate hikes around the world fuelled concerns over a global recession (which would reduce demand for oil).
Brent crude, the global benchmark, is down $1.56 to $91.27 a barrel, while US light crude has lost $1.68 to $85.2 a barrel.
China’s exports and imports lost momentum in August as surging inflation held back overseas demand and fresh Covid curbs and heatwaves disrupted output. Exports rose 7.1% in August from a year earlier, a big slowdown from July’s 18% gain, official customs data showed. Oil imports fell 9.4%.
This led to a smaller trade surplus of $79.4bn, compared with $101.3bn in July, which was a record for a single-month goods trade balance for any country.
Liz Truss became the UK’s new prime minister yesterday, when she met with the Queen at Balmoral. She insisted the UK will “ride out the storm” of the worst cost of living crisis in a generation as she launched her premiership with a brutal cabinet clear-out.
Kwasi Kwarteng has been appointed chancellor, the second-most powerful job in British politics. During his stint as business secretary, Kwasi Kwarteng clashed with Rishi Sunak over how best to oversee the UK economy. Today, he walks into the office recently held by his former rival, taking charge at the Treasury under his longstanding political and ideological ally Truss.
The Agenda
9am BST: Italy retail sales for July
10am BST: Eurozone second-quarter GDP, third estimate (forecast: 0.6%)
1.30pm BST: US trade for July
3pm BST: Bank of Canada interest rate decision
