Closing summary
The heavy selling in the UK bond markets continues, as we get closer to the end of the Bank of England’s emergency bond-buying on Friday. Pension funds are lobbying the central bank to extend it, but it said today that it would stick to its schedule.
The Bank’s statement came after the Financial Times reported that the central bank had signalled privately to lenders that it would extend the programme beyond Friday’s deadline.
The bond selloff sent yields soaring, thereby increasing the cost of government borrowing. The yield, or interest rate, on the 20-year gilt jumped by 27 basis points to 5.19%, the highest since June 2002. The 30-year yield rose 24 bps to 5.01%, while the 10-year gilt yield hit its highest level since 2008, rising 16 basis points to 4.632%.
The turmoil in financial markets has pushed UK mortgage rates sharply higher since the government’s mini-budget, with the central bank now expected to raise its base rate to 6% by next summer. The average two-year fixed mortgage rate in the UK has risen to 6.46%, from 6.07% this time last week – and compared with 2.25% a year ago, according to the latest data from Moneyfacts.
Sterling has recovered from yesterday’s slide and is trading 0.76% higher at $1.1046 in volatile trading.
The Bank of England’s chief economist Huw Pill said he still sees the need for a “significant” base rate rise in November, despite the worsening economic outlook.
Britain’s economy shrank by 0.3% in August from July, hit by a slump in manufacturing and by maintenance work that slowed the oil and gas sector, as well as a downturn in consumer-facing industries such as retail, official data showed.
On the other side of the Atlantic, US producer prices rose more than expected last month, suggesting inflationary pressures persist.
Britain’s biggest housebuilder Barratt has reported a slump in reservations of new homes in recent weeks, as the housing market is hit by economic uncertainty and rising mortgage rates. The trading update sent housebuilder shares plunging, while banks (Lloyds and Barclays) were also among the biggest losers on the FTSE 100 index.
Our other main stories today:
Thank you for reading. We’ll be back tomorrow. Take care! – JK
Updated
The turmoil in UK bond markets continues, as we get closer to the end of the Bank of England’s emergency bond-buying on Friday. The yield on the 10-year gilt has just hit its highest level since 2008, rising 16 basis points to 4.632%.
Meanwhile in the UK parliament, Rachel Reeves, the shadow chancellor, used an urgent question to urge the government to abandon its mini-budget.
She said:
Conservative economic policy has caused mayhem with financial markets, has pushed up mortgage costs and put pension funds in peril. And it’s wiped £300bn off the UK’s stock and bond markets. All directly caused by the choices of this government.
The mini-budget just 19 days ago was a bonfire made up of unfunded tax cuts, excessive borrowing and repeated undermining of economic institutions.
It was built and then set ablaze by a Conservative party totally out of control. Not disruptors, but pyromaniacs. And that fire has now spread.
And Downing Street said that there would still have to be “difficult decisions” about public spending despite Liz Truss saying she was committed to avoiding spending cuts. The PM’s spokesperson said:
The prime minister was clear that government spending will continue to rise but beyond that it really is for the chancellor to come forward with anything on spending which he will do on the 31st [October].
More on our politics live blog here.
Updated
US producer prices rise more than expected
On the other side of the Atlantic, US producer prices rose more than expected last month, suggesting inflationary pressures persist.
Figures from the US Labor Department showed wholesale prices rose 0.4% in September, twice has much as expected. The annual growth rate dipped to 8.5% from 8.7% in August.
Core producer prices, which strip out food and energy, items that tend to be volatile, also rose by 0.4% on the month, and by 5.6% in the past year.
INFLATION WATCH: U.S. wholesale prices rise 0.4% in September, PPI shows. Double Wall Street's forecast. Little sign of easing inflation pressures. Increase in the producer price index over past year dips to 8.5% from 8.7%. Core PPI also up 0.4% in the month and 5.6% in past year
— MarketWatch Economy (@MKTWeconomics) October 12, 2022
Average two-year mortgage fixed rate rises to 6.46%
The average two-year fixed mortgage rate in the UK has risen further, to 6.46%, from 6.07% this time last week – and compared with 2.25% a year ago, according to the latest data from Moneyfacts.
NEW
— Ed Conway (@EdConwaySky) October 12, 2022
Latest data from Moneyfacts finds that the avg 2yr fixed mortgage rate has risen to 6.46%.
Was 6.07% this time last week.
Was 2.25% a year ago.
That pushes up the mortgage burden for those taking out these mortgages today to the highest level since the late 80s/early 90s pic.twitter.com/ORpB96XbOx
Updated
UK 20-year gilt yield jumps to highest since 2002
The selloff in UK government bond market continues, sending yields on longer-dated gilts soaring. The yield, or interest rate, on the 20-year gilt has jumped to a 20-year high - up 27 bps to 5.19%, the highest since June 2002, according to Reuters.
Heavy selling of British government bond continues:
— Andy Bruce (@BruceReuters) October 12, 2022
20-year gilt yield hits 5.19%, highest since 2002 - up 25 bps on the day. pic.twitter.com/GOZwOOn4R7
British pension funds press BoE to extend bond buys amid cash scramble @reuterstommy @reutersCarolynC https://t.co/6iG5xOOxFX
— Andy Bruce (@BruceReuters) October 12, 2022
Updated
Here is our full story on the Marks & Spencer store closures (and openings).
Marks & Spencer is planning to close 25% of its bigger stores selling clothing and homeware while opening more than 100 new Simply Food outlets, as it speeds up its turnaround plan in the face of a “difficult economic backdrop” and rising costs.
The retailer told investors it aims to have 180 “full-line” shops – selling its full range of food, clothing and homeware products – by early 2028, down from 247 at present, and said it would get rid of “lower productivity” outlets.
Over the same period, M&S intends to open 104 additional Simply Food stores, as it shifts from larger shops selling clothing and homewares to more outlets selling groceries.
The company is aiming to complete its store closure and opening plans over the next five years, but said it would try to complete the transition as quickly as possible, ideally in three years.
Updated
The government is “mindful” of the need to ensure reasonable borrowing costs, Chris Philp, chief secretary to the Treasury, told MPs in parliament, after the recent mini-budget – a package of unfunded tax cuts – sharply pushed up government bond yields, thereby increasing borrowing costs.
We are mindful of the need to ensure reasonable borrowing costs, which of course means financial responsibility.
The chancellor will be setting out in under three week’s time, on 31 October, precisely how he will be delivering fiscal stability and fiscal responsibility in the years ahead.
Mini-budget will not lead to promised growth, leading economists tell MPs
Senior economists have dismissed Liz Truss’s chances of reaching 2.5% economic growth in the next few years, as they said her government’s “guerrilla tactics” in last month’s mini-budget played a major role in spooking markets, reports our political correspondent Peter Walker.
Speaking to the Commons Treasury committee, the economists said the 2.5% growth target was “almost impossible”. The committee has launched its own investigation into the mini-budget in the absence of a formal forecast from the Office for Budget Responsibility.
The economists also dismissed the arguments of Jacob Rees-Mogg, the business secretary, that turmoil in pension funds had been caused by global factors alone, and warned that Kwasi Kwarteng, the chancellor, would need to unveil either spending cuts or tax increases to reassure markets in a promised statement on 31 October.
Truss: ‘absolutely’ committed to not making public spending cuts
Over in parliament, the prime minister, Liz Truss, said she remains “absolutely” committed to not making cuts to public spending, reports my colleague Andrew Sparrow.
During prime minister’s questions, Labour leader Keir Starmer said freezing energy bills was a Labour idea in the first place.
During the leadership contest Truss said she was not contemplating public spending reductions. Will she stick to that?
“Absolutely,” she said, adding that she wants to spend public money well.
You can read more on our politics live blog with Andrew Sparrow here:
Britain’s financial watchdog has told pension funds to “really focus” on building up buffers against future shocks, before the Bank of England ends its support for the government bond market on Friday.
Nikhil Rathi, chief executive of the Financial Conduct Authority, told reporters:
What’s really important right now is that everybody involved in the situation, the pension funds, the managers, the bank counterparties, really focus on the work they need to do in coming days to ensure there is resilience in the system.
BOE chief economist sees need for 'significant' rate rise in November
The Bank of England’s chief economist Huw Pill still sees the need for a “significant” base rate rise in November, despite the worsening economic outlook.
In a speech at the Scottish Council for Development and Industry in Glasgow, he said:
At present, I am still inclined to believe that a significant monetary policy response will be required to the significant macro and market news of the past few weeks. But I will see when we get to November how events have evolved in the meantime.
Pill also said that new independent forecasts from the Office for Budget Responsibility, which will be released alongside the chancellor’s budget plans on 31 October, will “bolster the credibility of the process, thereby helping to add stability in what is a volatile environment at present”.
The lack of an independent assessment by the fiscal watchdog was a key reason why Kwasi Kwarteng’s recent mini-budget of tax cuts sparked turmoil on financial markets, and in the mortgage market.
He also talked about the Bank’s decision to intervene in the bond markets two weeks ago.
In the face of dysfunction that has emerged in some specific market segments in recent weeks, the Bank is conducting a set of temporary and targeted financial stability operations to support the gilt market. Their goal has been to permit an orderly deleveraging of positions held by so-called liability driven investment (LDI) funds, which became vulnerable in the volatile market conditions we have seen of late.
In taking this action, the Bank has sought to prevent the emergence of a self-sustaining vicious spiral of collateral calls, forced sales and disappearing liquidity from emerging in a core segment of the financial markets. Restoring market functioning helps reduce any risks from contagion to credit conditions for UK households and businesses.
M&S to shut 67 clothes stores and open 104 food shops – report
Marks & Spencer is setting out its “reshaping for growth” plans to shareholders today. Its new bosses, chief executive Stuart Machin and co-chief executive Katie Bickerstaffe, were expected to explain how M&S is stepping up the pace of change by reducing costs, increasing margins and shifting volume into growth categories and channels.
Looks like this involves the closure of 67 clothing stores, as well as the opening of more food shops. The Sun’s business editor Ashley Armstrong has tweeted:
Marks & Spencer has told investors it will speed up turnaround in face of tough backdrop.
— Ashley Armstrong (@AArmstrong_says) October 12, 2022
Says it will SHUT 67 full line clothing shops but open 104 food shops as part of cutting store estate bill.
UK government bond yields at pre-intervention levels
UK government bonds are selling off, ahead of the end of the Bank of England’s emergency buying programme on Friday. This has pushed yields (which move inversely to prices) to the levels last seen before the Bank’s intervention two weeks ago.
The yield, or interest rate, on the 20-year gilt jumped as much as 20 basis points to 5.1% today, topping 5% for the first time since 28 September. The 30-year gilt yield is also almost at 5%, up 20 basis points to 4.98%, while the 10-year yield has risen to 4.5%, up 10 basis points.
Joshua Raymond, director at online investment platform XTB.com, said:
We’ve seen a marked deterioration in UK bond markets today, with long term gilt yields racing back to the same highs that triggered the Bank of England’s interventions. UK 10-year bond yields are trading back at 4.56% whilst 30-year yields are at 5%. The mixed messaging from the Bank of England last night towards extending its bond buying scheme has been problematic.
The market has long called the Bank of England’s actions to curb spiralling inflation too slow and weak. Now we have governor Bailey telling an audience in Washington that the BoE’s bond buying will cease on Friday and for pension funds to get their houses in order, only for that sentiment to be quickly reversed after private conversations with banks were leaked to show the central bank could extend its scheme. The timing of this confusion is bad and it’s had the reverse effect of helping investor confidence. It’s no surprise therefore yields have raced higher yet again today.
The Financial Times reported that the central bank had privately told bankers that the bond support facility would be extended, but the Bank then put out a statement saying that it will end on Friday as planned.
Updated
Sterling has recovered strongly today, after sliding last night when the Bank of England’s governor Andrew Bailey warned pension funds that they had just three days left to raise more cash to protect against future shocks, as the Bank’s support for the bond market will end on Friday as planned.
The pound rose 1% to $1.1097 a few minutes ago, and is now trading at $1.1062, up 0.9%.
However, yields on government bonds have risen sharply, increasing government borrowing costs, as the end of the bond support facility nears. The yield, or interest rate, on the 20-year gilt has jumped 20 basis points to 5.1%.
Updated
Bank of England warns of high mortgage costs for households
The central bank has also warned that the global economic outlook has worsened significantly since July, and that rising interest rates will pose similar problems for households as at that time of the financial crisis.
If interest rates rise to 6% as markets expect, the proportion of households facing high debt servicing costs will reach levels seen before the 2008 global financial crisis, the financial policy committee said in its latest quarterly report.
Assuming rates follow this market-implied path, the share of households with high cost-of-living adjusted mortgage debt-servicing ratios would increase by end-2023 to around the peak levels reached ahead of the global financial crisis.
However, households are in a stronger position than in the run-up to the global financial crisis (GFC), so UK banks are less exposed to household vulnerabilities. In particular, the ratio of aggregate household debt (excluding student loans) to income is well below the pre-GFC peak and the share of outstanding mortgage debt at high loan-to-value ratios is much lower. The UK banking sector is also much better capitalised compared with the pre-GFC position.
Nevertheless, it will be challenging for some households to manage the projected rises in the cost of essentials alongside higher interest rates.
The Bank of England has warned that if mortgage rates remain as high as they are now the number of households struggling to make payments will reach the same levels as in the global financial crisis in 2008.
— Ashley Armstrong (@AArmstrong_says) October 12, 2022
Updated
This morning, the Bank of England held a successful gilt auction.
UK sells £3.5 billion of a new 2027 gilt (with a whopping great coupon of 4.125%) and attracts orders worth 2.08 times the amount sold.
— Andy Bruce (@BruceReuters) October 12, 2022
BOE: 'closely monitoring' funds as bond support nears end
The Bank of England said it was “closely monitoring” liability-driven investment (LDI) funds ahead of the end of its bond-buying programme on Friday.
The central bank stepped in two weeks ago to stop a fire sale of assets by LDI funds used in the pension industry after they were hammered by a slump in bond prices following the chancellor’s mini-budget, a package of unfunded tax cuts, the Friday before.
The Bank said then that the support for the bond market was temporary and would end on 14 October, and its governor Andrew Bailey said last night that pension funds needed to restructure and warned they had just three days left to “get this done”.
The central bank’s financial policy committee conveyed a similar message in its quarterly report today.
The Bank, the pensions regulator and the Financial Conduct Authority are closely monitoring the progress of LDI managers as they put their funds on a sustainable footing for whatever level of asset prices prevails when the Bank ceases purchasing gilts, and to ensure LDI funds are better prepared for future stresses given current market volatility. The Bank’s purchases will be unwound in a smooth and orderly fashion.
While it might not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned from this episode and appropriate levels of resilience ensured.
So far, the Bank has bought £8.8bn of gilts, as UK government bonds are known, to stop the sell-off.
Updated
Bank of England: bond-buying to end on Friday
The Bank of England has reiterated that its emergency bond-buying programme will end on Friday, as planned, dashing hopes of an extension.
A spokesperson said:
As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October. The Governor confirmed this position yesterday, and it has been made absolutely clear in contact with the banks at senior levels. Beyond 14 October, a number of facilities, including the new TECRF [Temporary Expanded Collateral Repo Facility], are in place to ease liquidity pressures on LDIs [liability-driven investments].
Bond yields have risen today, with the 20-year gilt yield topping 5% for the first time since 28 September when the Bank announced the programme to calm nerves in the bond market and help relieve pressure on pension funds. The yield has risen 15 basis points to 5.05%, while the 30-year yield is up 16 basis points at 4.93%.
The pound is still trading 0.85% higher at $1.1057 after dipping into negative territory earlier this morning.
Updated
Eurozone industrial output jumps in contrast to UK
Industrial output in the eurozone rose sharply in August as manufacturers boosted investment despite fears of a recession, official figures have shown.
Industrial production in the 19 countries sharing the euro rose 1.5% in August from July, according to Eurostat, and was much better than the 0.6% gain forecast by economists. This is in sharp contrast with UK manufacturing, which fell 1.6% in August, contributing to an overall economic decline of 0.3%.
In the eurozone, output of capital goods such as machinery rose 2.8% in August, suggesting companies ramped up investment. They also produced more consumer goods while energy output was cut.
Among the biggest economies, France’s industrial production rose 2.5%, while Italy’s increased by 2.3%, and output in Germany – normally the eurozone’s economic powerhouse – declined by 0.5%.
Updated
Jacob Rees-Mogg has insisted pensions are not at risk and claimed the BBC is breaching its impartiality guidelines by suggesting the financial market turmoil is linked to the government’s mini-budget, reports our deputy political editor Rowena Mason.
After another turbulent morning for the markets, the business secretary was accused of “denying economic reality” by the Liberal Democrats, as he said there was no systemic problem and claimed the economy was in a “good state”.
Rees-Mogg also denied that his intervention in the electricity market to recoup more money off renewable and nuclear providers was a windfall tax, despite it being widely seen as such.
He gave a round of broadcast interviews after the Bank of England governor ruled out more interventions to bail out pension funds after Friday but then appeared to reverse that position early on Wednesday morning. At the same time, new official figures showed the economy is believed to have contracted by 0.3% in August, raising fears of a recession.
Speaking to BBC Radio 4’s Today programme, Rees-Mogg said global factors may have been to blame for the fall in pound and low investor confidence as much as the unfunded tax cuts in the mini-budget.
Despite an immediate market reaction to Kwasi Kwarteng’s fiscal event in September, Rees-Mogg said: “You suggest something is causal which is a speculation. What has caused the effect in pension funds … is not necessarily the mini-budget. I think jumping to conclusions about causality is not meeting the BBC requirement for impartiality.”
Sterling on a rollercoaster ride
The pound is on a rollercoaster ride, hitting a daily high of $1.1065 against the dollar and is now trading at $1.1031, up 0.6%. It briefly dipped into negative territory earlier.
Remarks from the Bank of England’s governor Andrew Bailey sent the pound sliding last night, when he said the Bank’s emergency £65bn bond-buying programme would not be extended beyond Friday.
However, the Financial Times reported today that the central bank had told bankers privately that the facility could be extended if market conditions demanded it.
This appears to have given sterling a boost, while longer-dated government bond yields have risen, increasing government borrowing costs. The 30-year gilt yield is up 13 basis points at 4.91% while the 20-year yield has just topped 5%, rising 10 basis points. It is the first time this yield is back above 5% since the central bank’s announcement of its bond-buying programme on 28 September, which calmed nerves and warded off a mass collapse of pension funds.
Updated
Barratt warns housing market cooling rapidly
Housebuilders and banks are leading losses on the FTSE 100, after Barratt, Britain’s biggest housebuilder, warned that the housing market was cooling rapidly.
Barratt shares fell more than 8% earlier and are now down 6.4% while Persimmon lost 4.4%. Barclays and Lloyds Banking Group fell 4.5% and 4% respectively, amid the worsening economic outlook. The FTSE 100 index is trading 3 points lower at 6,881.
Barratt said buyers were reserving an average of 188 homes per week between 1 July and 9 October, compared with 281 in the previous financial year. It said this reflected the “customer response to increased wider economic uncertainty, where growing cost of living concerns have been compounded by increased mortgage interest rates and reduced mortgage availability”.
Forward sales totalled 13,314 homes as of 9 October, about 2,000 homes less than this time last year. The company is now expecting adjusted pre-tax profits of £972.5m for the full year, in line with City forecasts but down on previous guidance and below the £1.05bn recorded last year.
David Thomas, the chief executive, said:
We continue to see strong levels of interest across the country, however private reservations remain below the level seen in the financial year 2022 as customers react to the wider economic uncertainty.
The company added:
The outlook for the year is less certain with the availability and pricing of mortgages critical to the long-term health of the UK housing market.
Investec analyst Aynsley Lammin said:
Clearly the sales rate has not been helped by lack of finished product and the end of Help to Buy, but the current macro uncertainty is obviously a significant factor.
The independent housing market analyst Anthony Codling tweeted:
Whilst Liz Truss talked of growth, growth and growth, in its trading update today Barratt spoke of uncertainty, uncertainty and uncertainty. Whilst it is not a member of the apocryphal anti-growth coalition it seems the mini-budget has stymied Barratt's growth aspirations pic.twitter.com/ov2FMQElNK
— Anthony Codling (@anthonycodling) October 12, 2022
Updated
UK bond yields rise again
UK government borrowing costs have increased further, with yields (or interest rates) on bonds rising this morning.
The yield on the 20-year gilt, as UK government bonds are known, has topped 5% for the first time since 28 September when the Bank of England stepped in with an emergency bond-buying programme to calm the market and prevent a collapse of pension funds.
The 20-year gilt is now at 4.9%, up 6 basis points, while the 30-year yield increased 10 basis points to 4.8%.
Updated
UK watchdog: pension sector must review risk
UK pension funds should review their risks and funding gaps ahead of the end of the Bank of England’s emergency bond-buying programme on Friday, the Pensions Regulator said today.
Pension funds are racing to raise enough money to meet hundreds of billions of pounds in collateral calls on derivative positions before the deadline. The watchdog called on trustees to step up engagement with investment managers to quantify funding gaps and risks, and to review disposal plans.
The regulator also encouraged pension funds to consider appointing professional trustees and to discuss whether employers are able to provide cash to help plug gaps.
As the Bank of England recently stated, insuring schemes against all extreme market outcomes might not be a reasonable expectation but it is important that lessons are learned from these recent events.
Updated
The pound is back in negative territory versus the dollar, dipping 0.02% to $1.0961, amid worries over the UK economy – which shrank 0.3% in August according to official figures released today – and the end of the Bank of England’s emergency bond-buying programme this Friday.
UK business secretary backs 'respected' Bank of England governor
Jacob Rees-Mogg, the UK business and energy secretary, said he had confidence in the governor of the Bank of England, Andrew Bailey, adding that he did not think there was a systemic problem in pension funds.
Asked on Sky News if he had confidence in the job being done by the Bank’s governor, Rees-Mogg said:
Yes of course I’ve got confidence in the governor of the Bank of England. It is so important that we have an independent Bank of England with a respected governor. Andrew Bailey is a respected governor and the Bank of England’s independence is operating as it should. He must make the decisions in relation to market support.
Rees-Moss is on BBC radio 4’s Today programme now, talking about the government’s plans to cap electricity generators’ revenues. He has denied that this is a windfall tax in all but name.
What this is doing is rationalising the market in a way that energy companies have been in favour of to move to contracts for difference which provides them with security for pricing over the longer term.
This is not a windfall tax. It’s clearly not a tax, it’s nothing to do with the profits these companies are making, it’s to do with the pricing structure that is agreed with the renewable companies to ensure that it is a good long-term approach, which is why all new contracts, over the last five years or so, have been signed on a contract for difference basis.
Rees-Mogg also defended the government’s mini-budget, a package of unfunded tax cuts that sent the pound sliding and government borrowing costs soaring.
The intervention a couple of weeks ago as a percentage of GDP is not that enormous.
He said the market turmoil was down to the fact that the interest rate differential between the US and UK had widened.
It’s much more to do with interest rates than it is to do with a minor part of fiscal policy.
Updated
Former BOE official: Extending bond-buying would take pressure off government 'to do what's needed'
The former Bank of England deputy governor, Sir Charlie Bean, said he wasn’t surprised that the pound had fallen last night on the governor’s remarks – that the central bank would not extend its emergency bond-buying programme beyond Friday. He told BBC radio 4’s Today programme:
Main market participants expected the Bank simply to extend its facility.
If you say you’re going to keep on extending the facility, you take the pressure off the pension funds to do what’s needed, you also take the pressure off the government to do what’s needed and get the fiscal position in order. We shouldn’t forget that this is the prime cause of it [the market turmoil].
Updated
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said:
August’s drop in GDP likely marks the start of a downward trend that will continue deep into next year. The drop was driven by a 1.8% month-to-month fall in output in consumer-facing services sectors, reflecting the intense real income squeeze on households. Indeed, output fell by 5.0% in the arts, entertainment and recreation sector and by 1.8% in the food and accommodation services sector.
The downturn in global goods trade also hit manufacturing output, which dropped by 1.6%. Admittedly, warmer-than-normal weather contributed to the 0.6% fall in the output in the energy supply sector, and greater-than-usual maintenance at oil rigs explains why output in the mining and quarrying sector plunged by 8.2%. But a reversal of both of these blips in September would boost month-to-month growth in GDP by only 0.08pp.
Britain’s biggest business group is also concerned about the economic situation. Ben Jones, CBI lead economist, said:
The UK economy retreated in August. And business surveys, including our own, have turned sharply downwards since the summer and there is an increasing chance that the UK entered a downturn during the third quarter.
Ongoing supply challenges, sharp rises in energy prices, and a tight labour market mean businesses continue to face significant cost pressures, but the Government’s energy price caps provide welcome breathing space.
Rising interest rates are adding further to costs facing businesses and households. In the run-up to the medium-term fiscal plan, business will be looking for reassurance that policy measures will be delivered against the backdrop of a stable macroeconomic environment.
Rachel Reeves, Labour’s shadow chancellor, said the GDP figures show “the economy is still in a dire state because of this Tory government”. She called on the government to reverse its “disastrous mini-budget,” which triggered the financial market turmoil seen in recent weeks.
The facts speak for themselves. Mortgage costs are soaring leaving families worrying about making ends meet. Borrowing costs are up. Living standards down. And we are forecast to have the lowest growth in the G7 over the next two years.
Updated
Introduction: UK economy shrinks in August, pound rises on hopes of bond-buying extension
The UK economy contracted by 0.3% in August because of a large drop in manufacturing, pointing to a further weakening of the economy in the third quarter and triggering fears of recession.
Meanwhile, the pound rose 0.3% to $1.0996 this morning on suggestions that the Bank of England could extend its emergency bond-buying programme.
Michael Hewson, chief market analyst at CMC Markets UK, said:
The pound had another choppy day yesterday, rising as high as $1.1180, before sliding sharply on comments from Bank of England governor Andrew Bailey in Washington, that the central bank would not be extending its £65bn gilts programme beyond this Friday, and that pension funds had another three days to shore up their portfolios against further shocks.
Having done so much to stabilise markets in the past few days, including the action to stabilise the linker market yesterday, this hard line could come back and bite the Bank of England hard if it serves to heighten volatility in the days ahead.
However, the Financial Times is reporting that the central bank has signalled privately to bankers that it could extend its bond-buying programme past this Friday’s deadline.
The decline in GDP came after downwardly revised growth of 0.1% in July, according to the Office for National Statistics. Monthly GDP is now estimated to be at the same level as its pre-coronavirus levels, in February 2020.
It said: “There has been a continued slowing in the underlying three-month on three-month growth,” where GDP also fell by 0.3% in the three months to August compared with the three months to May.
Overall production, which comprises utilities, mining and manufacturing, was down 1.8% after a 1.1% fall in July, with manufacturing the main driver, declining by 1.6%.
The service industries slipped by 0.1% after growth of 0.3% in July because of declines in human health, with a drop in the number of hospital appointments and operations, as well as social work, arts, entertainment and recreation, partly due to fewer sports events. Output in consumer-facing services fell by 1.8%, with retail particularly weak, as the cost of living squeeze took its toll on households. Construction grew by 0.4%.
GDP fell 0.3% in August 2022, following revised growth of 0.1% in July 2022 https://t.co/vUKZr3BVEy
— Office for National Statistics (ONS) (@ONS) October 12, 2022
GDP fell 0.3% across the 3-months to August. pic.twitter.com/LKYZ0LkXP8
The chancellor, Kwasi Kwarteng, said:
Countries around the world are facing challenges right now, particularly as a result of high energy prices driven by Putin’s barbaric action in Ukraine.
That is why this government acted quickly to put in place a comprehensive plan to protect families and businesses from soaring energy bills this winter.
Our growth plan will address the challenges that we face with ambitious supply-side reforms and tax cuts, which will grow our economy, create more well-paid skilled jobs and in turn raise living standards for everyone.
Renewable power companies will have their revenues capped in England and Wales, after the government bowed to pressure to clamp down on runaway profits.
The announcement late on Tuesday night provoked immediate accusations that Downing Street had performed “another screeching U-turn” – having previously rejected calls to impose a windfall tax on power giants.
David Bharier, head of research at the British Chambers of Commerce, said:
The 0.3% fall in monthly GDP for August 2022 is a warning sign that the economy was already stalling before the market turmoil of recent weeks.
Our research indicates that business confidence is falling at an alarming rate. Volatility in the currency and bond markets following recent government announcements will have only exacerbated this.
Financial markets continue to be shaky. Asian stocks hit two-year lows, as China has no immediate plans to ease its strict Covid curbs, while the dollar rallied, and wobbles in the UK bond market and pound dragged down investor confidence.
European markets fell for the fifth day in a row yesterday, amid concerns over the global economy as the IMF warned about the outlook, as well as warning that the “worst is yet to come”.
The Agenda
1.30pm BST: US producer prices for September
2.30pm BST: European Central Bank president Christine Lagarde speaks
7pm BST: US Federal Reserve minutes of last meeting
Updated
