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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Global markets post worst first-half performance in decades – as it happened

United States United Kingdom Nationwide Inflation Bank of England Christine Lagarde Robert Gardner South West Wales
Traders on the floor of the New York Stock Exchange today
Traders on the floor of the New York Stock Exchange today Photograph: Brendan McDermid/Reuters

US stocks suffer sharpest first-half drop in more than 50 years

Traders on the floor of the New York Stock Exchange today.
Traders on the floor of the New York Stock Exchange today. Photograph: Brendan McDermid/Reuters

And finally... Wall Street has ended the day lower, ending a month, a quarter and indeed a half-year of losses.

As feared, the S&P 500 has posted its worst first half to a year in more than half a century.

All three major U.S. stock indexes finished the month and the second quarter in negative territory, with the S&P 500 notching its steepest first-half percentage drop since 1970, down 20.6%.

The Nasdaq had its largest-ever January-June percentage drop, down 29.5%, while the Dow Jones Industrial Average suffered its biggest first-half percentage plunge since 1962, losing over 15%.

Today, the Dow fell 253.88 points, or 0.82%, to 30,775.43, the S&P 500 lost 33.45 points, or 0.88%, to 3,785.38 and the Nasdaq Composite dropped 149.16 points, or 1.33%, to 11,028.74.

Jonas Goltermann, Senior Markets Economist at Capital Economics, fears more pain ahead.

Despite renewed falls in equity markets and broadening signs that investors are bracing for a major slowdown in the global economy, most central banks appear determined to press ahead with the most aggressive and synchronised tightening cycle since at least the 1990s.

While policymakers may eventually relent, we think their willingness to impose further pain on financial markets continues to be underestimated.

I may pop back later with a market update, but otherwise here are today’s main stories:

Updated

European markets close sharply lower

The UK’s FTSE 100 has ended June with a bump.

The blue-chip index shed 2% to finish at 7,169 points, wiping out this week’s gains. Every sector lost ground, led by miners, energy firms and utilities, as recession fears ratcheted up again.

David Madden, market analyst at Equiti Capital, sums up the day:

Equites markets are enduring severe sell offs as worries about global growth mount. Stock markets in Europe are all down over 2% as recession whispers loom over the continent.

In recent weeks there has been growing speculation about a downturn in the UK and the eurozone as some economic reports point to a fall in activity. The cooling of economies in Europe comes at a time when the Bank of England are in the midst of a hiking cycle and the European Central Bank have made it very clear they will lift rates next month. High levels of inflation and higher borrowing costs are likely to compound the economic slowdown.

BT staff vote for first national strike in 35 years

BT staff have voted for their first national strike in 35 years, which is expected to affect customers across the country having broadband services installed or getting faults fixed.

The strike by BT engineers, call centre and shop staff represents the vast majority of its 58,000-strong frontline workforce, and the trade union organising the ballot has said that BT customers can expect disruption to services including repairs, having new phone and internet lines fitted or getting hold of support staff.

The UK’s largest telecoms company has been in dispute with the Communication Workers Union (CWU), which represents about 40,000 of the company’s 100,000 workforce, over pay as the cost of living soars.

In April, BT gave 58,000 workers a £1,500 pay rise that it said was its biggest award in two decades. The CWU, which is pushing for a 10% rise at BT as inflation hit a 40-year high of 9.1% last month, called the offer “insulting” and a “relative pay cut”.

More here.

Wall Street is still in the red, with the S&P 500 index down 0.8% so far today, and around 20% since January.

Inflationary worries are still high, after today’s PCE report showed prices kept rising in May:

As Sam Stovall, chief investment strategist at CFRA, put it:

“A lot of investors were expecting inflation data to really start to come down. But what we’re finding is that it’s a lot more challenging, and that the inflation data is remaining elevated for longer and probably has not peaked.”

What goes down....often goes up again:

Pictet: Recession in the US and Europe looks inevitable

Recession in the US and Europe looks inevitable, says Pictet Wealth Management.

“One consequence of the unprecedented shocks facing the world economy, following the pandemic, the war in Europe, as well as major disruptions to supply chains, is that business cycles are likely to be shorter and more volatile than in the past two decades. A recession over the coming year looks inevitable, in our view, both in the US and in Europe, as the result of rapid monetary tightening and the largest squeeze to real incomes in decades,

“Markets have increased dramatically their pricing of a US recession in recent weeks. Meanwhile the Bloomberg consensus on a US recession in one year’s time has increased from 15% in March to 33% today. Our proprietary model based on the US yield curve has increased sharply— from 4% at the end of last year to 22% today.

And here’s the damage:

Former post office operators who helped to uncover the Horizon IT scandal are to receive £19.5m compensation from the UK government.

The interim compensation package will be made available by ministers to the eligible members of a group representing postal workers who were the first to take legal action against the Post Office, taking the total compensation made to those wrongly accused of stealing money to about £30m.

Between 2000 and 2014, more than 700 post office operators were prosecuted based on information from the Horizon IT system, which was installed in Post Office branches and maintained by Fujitsu.

The system falsely suggested there were cash shortfalls, leading to 736 unsafe convictions for theft, fraud and false accounting in one of the biggest miscarriages of justice in British legal history.

Bill Blain, strategist at Shard Capital, predicts further losses in the markets this summer as company profits are squeezed:

Inflation is Central Bank’s number one concern – not addressing the market declines we’ve seen in the first half. We’re expecting a series of large hikes in interest rates through the summer – even the ECB!

Yet, Markets are still in denial/fool-themselves mode. Markets tend to accentuate the positive and, in doing so remain largely unaware of reality. But at some point reality and inflated hopes tend to collide. Usually painfully.

I’m guessing, but I have a gut-feeling the coming July earnings season could be the straw that triggers the next leg down. The results news-flow will be subtle, and its unlikely to be a succession of disastrous results – just a stream of not-quite-as-good-as-expected numbers. Cumulatively, the news trend will confirm companies are struggling more than anticipated with the consequences of high staffing costs and low availability, high inventories and the need to discount, falling demand on the back of the inflation shock, and ongoing supply chain issues.

Back in the UK, the Unite union has secured a ‘cost of living’ increase for staff at Barclays from 1st August.

The bank has agreed to increase salaries by £1,200 per year. The increase will apply to over 35,000 Barclays employees, and is targeted towards lower paid staff.

Dominic Hook, Unite National Officer said:

“Unite has won this significant financial recognition for our members across Barclays. This is a victory for Unite as the union made sure staff concerns were heard at the highest levels of the bank.

“As all employees face significant cost of living increases Unite has campaigned to ensure that this bank recognised the need to act. Unite welcomes that this announcement will increase pay and not simply a one-off payment.

“Unite representatives at Barclays have today shown to all their colleagues across the company the importance of the collective voice within the union.”

The rise will increase earnings by 5.5% for some lower-paid staff, and 4.7% for others, depending on pay scales.

Updated

The OPEC+ group of oil producers has decided to stick to its production targets, despite pressure to pump more to bring inflation down.

Oil ministers from OPEC countries and their allies agreed to stick to a planned output increase of 648,000 barrels per day in August.

Jamie Maddock, equity research analyst at Quilter Cheviot, says:

“It’s no surprise to see OPEC+ members stick with its production plan for August, but with the backdrop of increasing Russian oil sanctions and a recent reduction in Russian gas flows into Europe, it may be forced to change course and boost production to protect demand and global economic growth.

“The current OPEC+ plan means that by August it will have an output target that is back at pre-pandemic levels and despite calls that are going to naturally grow louder that they intervene in the current energy crisis it may not have the capacity to do.

Copper prices fell today, nailing their biggest quarterly slump since 2011 as COVID lockdowns in China and slowing economic growth curtailed demand.

Other industrial metals were also headed for their worst quarter in several years, down between 20% and 40%, on rising recession fears.

Many analysts fear further declines in the near term, as central banks push ahead with rapid interest rate rises that will stifle growth. More here.

S&P 500 on course to post worst first half since 1970

Wall Street has started the last day of June with fresh losses.

The S&P 500 index has dropped by 50 points, or 1.3%, to 3,768 points in early trading, while the Dow Jones Industrial Average has lost 1.5%.

Around $8trn has been wiped off the S&P 500, which contains five hundred of the largest US companies, so far this year.

The S&P 500’s 20% tumble puts it on track for its worst performance for the first six months of a year since 1970, the FT points out.

Every sector has tumbled, apart from energy stocks which have surged thanks to rising crude oil and gas prices.

Stephen Innes of SPI Asset Management says the mood in the markets is dire today, with concerns rising about disruption to Russian gas supplies.

Heads up, this is not just a European issue; instead, the world is hostage to the energy situation in Germany. If the gas shutoff is not resolved in the coming weeks, this will lead to a broader global energy crisis with material upfront effects on global growth.

Over and above the markets worry about recession risk; having to deal with yet another energy supply shock could be the tipping point and a scenario that would qualify as stagflation or even worse.

Global stock markets wrap up torrid first half of 2022

Global stock markets are on track to post their worst first half of a year in decades.

MSCI’s All-Country World Index has tumbled by 20% since the start of 2022, as shares. have been hammered by recession worries.

That’s its worst opening six months to a year since the index was created in 1990, according to Reuters, wiping $13trn off share values.

The pan-European Stoxx 600 index has shed 16% since the start of the year, Japan’s Topix has lost 6%, and the US S&P 500 has shed a fifth.

Britain’s FTSE 100 index has fared better, down over 3% so far this year, with oil companies rallying.

The surge in energy and commodity prices, following Russia’s invasion of Ukraine, has rocked markets. With inflation hitting the highest in decades, stocks have slumped as central bankers have tightened monetary policy and pledged to cool prices.

Bonds have also had a torrid year. Ten-year US Treasury bills were on track for their worst first-half of a year since 1788, according to Deutsche Bank.

Despite this turbulence, Federal Reserve chair Jerome Powell insisted yesterday that it was important to avoid persistent inflation.

Powell told a central banking conference in Portugal yesterday that:

“The process is highly likely to involve some pain but the worst pain would be from failing to address this high inflation and allowing it to become persistent,”

America’s red-hot inflation may be cooling, but still remains very high.

A closely watched gauge of US price rises rose 0.6% in May largely due to the higher cost of gas and food, up from 0.2% in April.

But the ‘core’ personal consumption price index, which strips out volatile food and energy costs, rose by 0.3%, below forecasts.

The annual core rate of inflation slowed to 4.7%, from 4.9% in April and 5.2% in March, which could show price pressures easing.

But the annual headline PCE inflation was unchanged at 6.3% in April.

Updated

More Americans filed new unemployment claims than expected last week, although the total remains low by historic standards.

There were 231,000 initial claims filed a week ago, marginally higher than forecast.

The previous week’s data was revised up to show 233,000 claims -- a proxy for layoffs - as investors look for signs of a slowdown in the jobs market.

Lunchtime round-up

After a busy morning here in London, here’s a summary of the key points.

UK households have suffered the longest squeeze on disposable incomes on record.

Real disposable household incomes (ie, accounting for inflation) fell by 0.2% in the first three months of this year, the fourth quarterly drop in a row -- even before the impact of the Ukraine war.

Economists warned that incomes will continue to be squeezed, as food and energy prices soar, pushing inflation to 40-year highs.

Paul Dales of Capital Economics said households were less protected against the cost of living squeeze to come.

The final Q1 GDP data perhaps leave households looking a bit more vulnerable to the big fall in real incomes that’s going to hit in Q2 and Q3.

Although GDP and consumer spending won’t fall as far as real incomes, it’s pretty clear the economy is going to be very weak for a while and a recession is a real risk.

The latest GDP data also showed that

UK house price inflation has eased, with prices only rising by 0.3% this month. That pushed house prices to a new record of £271,613, but Nationwide said there were ‘tentative signs’ of a slowdown.

Nationwide’s chief economist, Robert Gardner, said:

“The market is expected to slow further as pressure on household finances intensifies in the coming quarters, with inflation expected to reach double digits towards the end of the year.

Moreover, the Bank of England is widely expected to raise interest rates further, which will also exert a cooling impact on the market if this feeds through to mortgage rates.

Guy Harrington, CEO of bridging financing form Glenhawk, say the outlook for 2023 looks “increasingly ominous.”:

“Another month of slowing growth is just a precursor to the sharp correction about to torpedo the UK housing market, caused by a perfect storm of record inflation, geo-political turmoil, rising rates and a once-in-a-generation cost of living crisis.

Elsewhere:

Updated

House price growth slows: what the experts say

Here’s more reaction to the UK’s house price slowdown to 0.3% this month, or 10.7% over the last year:

Tom Bill, head of UK residential research at estate agents Knight Frank:

“The rate of inflation is fast catching up with UK house price growth, which stubbornly remains in double digits. How can house prices rise to such an extent during a cost-of-living squeeze?

The answer is that they are both increasing largely for the same reason – a supply chain disruption. Property listings are rising as more sellers sense the market is peaking, but it will take time to filter through to prices.

We expect UK prices to end the year at 8% before calming down further in 2023 as supply and demand rebalance and higher mortgage rates increasingly put the brakes on exceptionally high levels of demand.”

Simon Gerrard, managing sirector of London estate agent Martyn Gerrard:

“Whilst there is nothing new about the seasonal summer slowdown, this year the housing market must also contend with a cost of living crisis, soaring inflation and an upward creep in mortgage rates.

“However despite these obvious challenges, house prices will remain high as buyers fight tooth and nail to secure the best homes in a chronically under-supplied market. But on the ground it is the second steppers who are struggling most as they seek to move up the ladder amid near-unprecedented competition for property.

“Make no mistake, alarm bells should be ringing within government over this housing supply crisis. The only viable solution to make the market more accessible is an urgent relaxation of planning laws to help stimulate supply across the country.”

James Sproule, Chief Economist at Handelsbanken

Our expectation remains that house prices will be flat through the end of the year and see a small dip in early 2023. This is being driven by overall rental yields responding to the broader rises in Gilt yields, as well as the very depressed levels of consumer confidence putting people off moving home.

There remains a chance that any decline in overall house prices (we continue to expect particular narrow categories of housing to do better than the average) will be masked by inflation.

In other words, nominal house prices will languish, while real house prices fall. This could be critical in maintaining a wealth illusion in consumers’ eyes and such an illusion could be important to the eventual economic recovery.”

A Lavazza’s espresso coffee cup installation at the headquater in Turin

Italian coffee giant Lavazza has said it is in “constructive and open” talks with UK retailers after revealing that supply costs for its green beans have risen 80% in a year, PA Media reports.

Lavazza warned that it expected inflationary pressures to remain until at least the end of 2023 but said it was working hard to absorb costs.

The cost of a 1kg bag of Lavazza whole beans has risen by around £2 over the last 14 to 16 months in UK supermarkets.

As Heinz products disappeared from Tesco shelves in a dispute over pricing, Lavazza’s UK general manager Pietro Mazza told PA:

“We are all facing tough times.

“The situation is troubling and will be for some time, so we need to keep the conversation (with retailers) as free and open as possible.”

Mazza stressed that it was retailers who set the retail price of Lavazza products rather than the company.

But he said:

“It has been very tough in terms of supply - for green beans and for the components of our equipment.

“We have seen an 80% average increase in the cost of green beans in a year.”

UK tells airports and airlines there's 'no excuse' for widespread summer disruption

Britain has told airlines it was up to them to avoid a repeat of recent chaotic scenes at airports during the upcoming summer holiday season, as it published a 22-point plan outlint its support for the industry.

Transport Secretary Grant Shapps said there was ‘simply no excuse’ for widespread disruption (on the day when passengers at Heathrow were hit by disruption).

Holidaymakers deserve certainty ahead of their first summer getaways free of travel restrictions. While it’s never going to be possible to avoid every single delay or cancellation, we’ve been working closely with airports and airlines to make sure they are running realistic schedules.

The 22 measures we’ve published today set out what we’re doing to support the industry. It’s now on airports and airlines to commit to running the flights they’ve promised or cancel them with plenty of time to spare so we can avoid the kind of scenes we saw at Easter and half term.

With 100 days having passed since we set out that restrictions would be eased, there’s simply no excuse for widespread disruption.

The list of measures being taken including an “amnesty” on airport slots so airlines can hand them back without losing them for good, setting up an aviation recruitment campaign, and reminding airlines of their legal responsibilities.

But there’s no new measures today, and some aviation industry sources havse said only two -- previously announced on slot allocation and speeding up recruitment -- would helpo reduce queues this summer, our transport correspondent Gwyn Topham reports.

Shadow transport minister Mike Kane accused Shapps of being “missing in action” when it comes to aviation, telling the House of Commons:

“He needs to step up to the plate, he needs to go to the Prime Minister, he needs to knock on the door, and he needs to clean up the mess.”

Sri Lanka inflation hits record levels as crisis deepens

Armed Sri Lankan military personnel stand guard at a closed gas station this week
Armed Sri Lankan military personnel stand guard at a closed gas station this week Photograph: Chamila Karunarathne/EPA

Inflation in Sri Lanka has hit record levels, as citizens suffer from persistent shortage of essentials including food and fuel.

Cnsumer prices in the crisis-riven country continued their ascent in June, rising by 54.6% year-on-year.

That puts Sri Lanka’s inflation over the 50% level that most economists commonly use to define hyperinflation, says Bloomberg, which reports:

“We would have reached a hyperinflation-like impact already, although official numbers are only now catching up,” said Kavinda Perera, head of research at Asia Securities in Colombo.

“There is still room for prices to increase further, with electricity tariff hikes on the cards,” he said, noting that there’s no monetary policy solution to supply-driven problems like energy prices.

On Monday Sri Lanka was forced to halt to all fuel sales for two weeks except for essential services, as its economic meltdown left it increasingly short of foreign exchange reserves to pay for imports.

The IMF reported today that talks with Sri Lankan authorities had been constructive and productive this week, raising hopes that a credit facility could be agreed soon.

UK’s biggest recruiters warn ministers not to hire agency staff to replace strikers

Britain’s biggest recruitment and staffing companies have written to the government to protest against plans to replace striking workers with agency staff, warning that this would further inflame strikes.

In a letter to Kwasi Kwarteng, the bosses of 13 companies including Hays, Adecco, Randstad and Manpower called on the business secretary to reconsider plans to repeal a decades-long ban on using agency workers to cover for picketing staff.

“We can only see these proposals inflaming strikes – not ending them,” the 13 groups warned in their letter, which was sent by Sarah Thewlis, chair of the Recruitment & Employment Confederation (REC).

Here’s the full story:

Businesses call for help to weather 'perfect storm'

The Government is being urged to put in place support for businesses to help firms weather a “perfect storm” of spiralling costs and problems recruiting workers.

Shevaun Haviland, director-general of the British Chambers of Commerce (BCC), said action is needed to save the economy as the cost of doing business crisis continues to worsen.

She told the BCC’s annual conference in London that ministers must not to impose any more tax increases on businesses, and should provide more assistance in the autumn budget.

“Increasing costs of raw materials over last summer, supply chain and shipping issues, problems in recruiting people, and, by this March, spiralling energy prices. It really is the perfect storm for businesses, firmly putting the brakes on recovery.

“This has to change; we are on limited time. The Government has until the autumn Budget to reset, rethink and get their house in order.

“First, they need to put in place support for businesses now to weather this storm, and they need to work in partnership with us to develop a long-term economic strategy for growth.”

Britons cut back last week, with less spending on credit and debit cards and fewer trips to restaurants.

Data collated by the Office for National Statistics found that credit and debit card spending fell to 99% of its February 2020 average, down from 100% the week before.

The number of transactions at most Pret A Manger locations fell, while UK seated diners decreased by 16 percentage points.

That probably shows the impact of last week’s rail strikes which kept many workers at home, as well as cost of living pressures.

Firms may also have reined in their recruitment, with the total volume of online job adverts down slightly week-on-week.

And 35% of businesses reported their production and/or suppliers had been affected by recent increases in energy prices, up from 33% reported in early May 2022.

UK's balance of payments deficit hits record

Britain racked up a record shortfall in its current account in early 2022, in part due to the soaring cost of its fuel imports.

The UK’s balance of payments deficit widened to £51.7bn in January-March, which is 8.3% of GDP, the ONS reported this morning.

Economists polled by Reuters had expected a deficit of just under £40bn pounds.

The shortfall was the biggest in records going back to 1955.

Samuel Tombs, an economist with Pantheon Macroeconomics, warned Britain’s current account gap would come under further strain as tourism resumes -- which causes money to flow out of the country.

“With the current account deficit set to remain large over coming quarters, sterling will remain very sensitive to global trends in risk appetite.”

The ONS cautioned that the current account figures were subject to more uncertainty than usual, due to the impact of post-Brexit changes in how data is collected.

As Reuters’ Andy Bruce explains:

More disruption at Heathrow

Airline passengers have complained of “total chaos” at Heathrow today after the airport made a last-minute order to cancel flights because it could not handle them.

Thousands of travellers were disrupted by a rare “schedule intervention” on Thursday morning, which led to the scrapping of 30 flights during the morning peak.

Some passengers did not find out their flights were cancelled until they arrived at the airport, the UK’s busiest.

The travel writer and broadcaster Andy Mossack tweeted: “Total chaos at Heathrow this morning. British Airways flights cancelled and zero customer service!”

Another affected passenger, Andrew Douglas, said he was due to be on a flight but had “spent the last four hours in multiple queues at Heathrow airport because it’s been cancelled”.

He added:

“Absolute shambles, complete chaos and only found out at check-in with no prior notification. Horrific service.”

A JD Sports store in London, Britain.
A JD Sports store in London, Britain. Photograph: May James/Reuters

Peter Cowgill, the former boss of JD Sports, more than halved his pay last year to £2.4m and continues to wrestle over his exit package after losing out on more than £1m in bonuses following a series of corporate governance mishaps.

Cowgill, who stepped down from JD last month, missed out on a share bonus related to long term performance at the fashion and outdoor kit retailer worth more than £850,000 because of his early exit from the business.

His annual bonus was trimmed by about £180,000 after the company was handed fines by the competition watchdog according to the group’s annual report published this week.

JD’s remuneration committee said it had “exercised discretion” to reduce the annual bonus pay out for Cowgill from 200% of salary to 180% after the corporate governance issues came to light.

The report says that executives are entitled to a pay off worth up to a year’s salary, benefits and “incidental expenses” but it is not clear if Cowgill will be awarded such a payment. Cowgill’s annual salary increased about 4% to £906,000 in April and his annual benefits were set at £3,000 indicating the potential size of any pay off.

JD is currently being run by an interim chair and chief executive as it searches for new permanent bosses.

The nominations committee said JD would “continue to further strengthen corporate governance” and would “specifically measure” corporate governance related issues as part of the annual bonus of executives in the current financial year.

Gazprom shares plunge after dividend shock

Russian gas giant Gazprom has shocked the markets by scrapping plans to pay out a record dividend.

Gazprom’s shareholders have voted against paying a dividend for 2021 at its annual meeting, sending shares tumbling by a quarter.

Deputy CEO Famil Sadygov said.

“The shareholders decided that in the current situation it is not advisable to pay dividends based on the 2021 results.

“Gazprom’s priorities currently are implementation of its investment program, including Russian regional gasification,” he said.

Gazprom, which is majority state owned, had proposed a dividend of 52.53 roubles per share, which would have been its biggest payout, after making record earnings in 2021 due to surging energy prices.

The European Central Bank plans to ask euro zone lenders to factor a possible recession into their business plans and will use this new calculation for approving
dividend payout proposals, ECB bank supervisor Andrea Enria said today.

Reuters has the details:

The ECB continues to project solid economic growth for this year and next but has argued that an escalation of Russia’s war in Ukraine, which could lead to a cut off in gas supplies could in an adverse scenario drag the euro zone into a deep recession next year.

“We will propose to ask banks to recalculate their capital trajectories under a more adverse scenario, including also potentially a gas embargo or a recessionary scenario, and use this also for the purpose of vetting their distribution plans going ahead,” Enria told European Parliament committee.

Inflationary pressures have pushed Sweden’s central bank into its largest interest rate rise in two decades.

The Riksbank has just hiked its benchmark rate to 0.75% from 0.25%, and warned that it expects to keep raising borrowing costs. It has also decided to unwind its asset purchase scheme faster than previously planned.

Announcing the 50 basis-point rate hike, it says:

The Executive Board’s forecast is that the policy rate will be raised further and that it will be close to 2 per cent at the start of next year.

The Executive Board has also decided that, in the second half of the year, the Riksbank’s asset holdings shall shrink faster than was decided in April.

The Riksbank said that the Ukraine war, and China’s pandemic lockdowns, have pushed up prices for energy, various input goods and food, prompting firms to hike their prices -- some ‘unusually strongly’.

Just like in other countries, price rises in Sweden have now spread increasingly and prices for goods, food and services have been rising considerably faster than expected since the start of the year. Companies’ costs have increased rapidly.

The strong demand has made it possible to pass them on to consumer prices. There are also signs of changed price setting behaviour in that companies have raised prices unusually strongly in relation to how much costs have increased.

Today’s losses mean European shares are set for their worst quarter since the first three months of 2020, at the start of the pandemic.

The continent-wide Stoxx 600 index has dropped 1.5% today, taking its losses in April-June to over 10%.

The rise in French inflation to a new record added to concerns that central banks could tighten monetary policy aggressively to cool prices, risking a recession.

Ben Laidler, Global Markets Strategist at social investment network eToro, says there have been “few hiding places” for investors this year.

Driven by a one-two punch of high-for-longer inflation and aggressive central banks, followed by surging recession fears, US and global equities plummeted over 15%, Bitcoin more than halved and both bonds and commodities fell. Only China rose, among the biggest markets, and the US dollar, among asset classes.

“Now the race between peaking inflation and a recession is going to make for a long, hot summer. However, with financial conditions significantly tightening and economies slowing, US inflation should soon peak.

This will hopefully allow the Fed and other central banks to slow their hiking pace before a recession becomes inevitable, though the ECB faces an even tougher task of an interest rate lift-off with high-for-longer oil prices and a grinding Ukraine conflict.

Updated

Inflation in France has jumped to a record high.

Consumer prices in the eurozone’s second-largest economy climbed by 6.5% per year in June on an EU-harmonised basis, official preliminary figures show, up from 5.8% in May.

Prices rose by 0.8% in June alone.

Statistics agency INSEE said food and energy prices had risen sharply due to disruption resulting from Russia’s invasion of Ukraine.

Markets fall as global downturn worries rattle investors.

European stock markets are ending the month in the red, as recession worries continue to swirl.

The FTSE 100 index of blue-chip shares has lost all this week’s gains, shedding 125 points or over 1.7% to 7189.

Nearly every stock is down, led by discount retailer B&M (-5.3%), luxury fashion group Burberry (-4.6%) and online grocery technology business Ocado (-4.5%).

Housebuilders are also weaker, a sign of concerns over the UK’s economic outlook.

Germany’s DAX and France’s CAC have both fallen over 1.8%, as stocks stumble.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says:

‘’A sense of foreboding is again gripping financial markets, with anxiety rising that by attacking inflation, central banks risk severely weakening economies.

Following fresh falls on Wall Street, Asian markets retreated and European indices also opened lower. The FTSE 100 slid 1.8% with risers very few and far between.

As worries about a global downturn have increased, oil has dipped amid expectations of lower demand, with Brent Crude falling slightly to below $116 a barrel. But it’s still at an eye-watering level, up 51% since the start of the year due to intense supply pressures.

Japan's worst factory output slump in two years

Japan’s factory’s posted the biggest monthly drop in output in two years in May, as China’s COVID-19 lockdowns and semiconductor and other parts shortages hit manufacturers.

Factory output slumped by 7.2% in May, from the previous month, official data showed on Thursday.

Production of items such as cars as well as electrical and general-purpose machinery dropped sharply.

The decline -- the biggest since a 10.5% tumble in May 2020 -- was much bigger than a 0.3% fall expected by economists in a Reuters poll.

The slump shows that the world’s third-largest economy is being hit by supply disruptions and persistently high prices of raw materials and energy -- factors which are threatening a global slowdown.

Updated

In better economic news, UK car production has risen for the first time in 11 months.

Some 62,284 units left factory gates in May, up 13.3% compared with April, and the first monthly rise since June 2021, according to the Society of Motor Manufacturers and Traders.

Battery electric car production more than doubled (up 108.3%) with 4,525 built in May, to meet rising demand for greener vehicles.

But so far this year, overall output has decreased by 23%, as shortages of semiconductors hampered carmakers.

Mike Hawes, SMMT chief executive, said:

“May’s return to growth for UK car output is hugely welcome after 10 months of decline, indicating the sector’s fundamental resilience.

Any recovery, however, will be gradual as supply chain deliveries remain erratic, business costs volatile and geopolitical instability still very real.

Updated

Worryingly, UK business investment has continued to fall.

Business investment dropped by 0.6% in January-March, today’s UK GDP report shows, which takes it 9.2% below its pre-coronavirus level.

There was continued weakness in capital expenditure on transport equipment during the quarter, due to supply chain constraints, particularly the continued semi-conductor shortage.

Business investment
Business investment Photograph: ONS

This latest drop in UK household real incomes leaves people less protected for the economic problems ahead, with the risk of a recession.

Paul Dales of Capital Economics explains:

The final Q1 GDP data perhaps leave households looking a bit more vulnerable to the big fall in real incomes that’s going to hit in Q2 and Q3.

Although GDP and consumer spending won’t fall as far as real incomes, it’s pretty clear the economy is going to be very weak for a while and a recession is a real risk.

Real incomes have now declined modestly in each of the last four quarters, Dales adds, with more pain ahead:

This meant that the saving rate stayed at 6.8% rather than rise to 7.2% as we had forecast.

That leaves households with a slightly smaller buffer than we expected to cope with the much bigger falls in real incomes that are going to hit in Q2 and Q3 due to the surge in inflation. In 2022 as a whole, we think real incomes will decline by around 2.0%.

UK household incomes suffer longest run of declines on record

UK households suffered another fall in real incomes in the first three months of this year, as the cost of living crisis worsened.

Inflation outpaced earnings again in January-March, for the fourth quarter in a row, as UK households endured the longest drop in real income on record.

Real Household Disposable Income fell by 0.2% in the January-March quarter, the latest GDP data from the Office for National Statistics shows.

That’s the fourth consecutive quarter of real negative growth in disposable income -- the worst run since records began in 1955, according to Bloomberg.

Although nominal household income grew by 1.5% in Q1, it was offset by quarterly household inflation of 1.7%, the ONS reports.

The ONS also confirmed that the UK economy grew by 0.8% in January-March, as first estimated.

Darren Morgan, director of economic statistics at the ONS, said:

“Our latest estimate for economic growth in the first quarter is unrevised as a whole, showing the UK continued to recover from the pandemic.

“Both household incomes and spending rose in cash terms in the first quarter, leaving the rate of saving unchanged.

“However, once taking account of inflation, incomes fell again, for the fourth consecutive quarter.”

Guy Harrington, CEO of Glenhawk (which provides bridging financing) says it’s ‘absolute madness’ to think house prices will keep rising in the current climate.

He warns:

“Another month of slowing growth is just a precursor to the sharp correction about to torpedo the UK housing market, caused by a perfect storm of record inflation, geo-political turmoil, rising rates and a once-in-a-generation cost of living crisis.

It’s absolute madness to think house prices will keep on rising. As caution grips the market, the outlook for 2023 looks increasingly ominous.”

Updated

The current double-digit annual house price growth doesn’t seem sustainable in the long run, given economic pressures.

So says Myron Jobson, senior personal finance analyst at interactive investor:

Property prices have gone up faster than wages, creating an affordability squeeze, while mortgage rates have risen to levels we haven’t seen in a while. These factors, as well as the prospect of higher interest rates to rein in runaway inflation, are likely to go some way towards taming frothy housing prices.

“The housing market has already begun to show signs of cooling. Mortgage activity has started to come down, falling back towards pre-pandemic levels in April, and new buyer enquiries has waned – which is indicative of the inflationary pressures currently exerted on household budgets.

But a slowdown is more likely than a property market crash, Jobson predicts, given the imbalance between supply and demand.

House price growth continues to “drift downward” in response to mounting pressures in the broader economy, says Nicky Stevenson, managing director of national estate agent group Fine & Country:

“Increased borrowing costs have come at a time when disposable incomes are already shrinking and the UK is edging closer to recession.

“These pressures are bound to stretch affordability in the months ahead with inflation still to peak and more aggressive monetary tightening now being signalled by the Bank of England.

“A tight labour market and the ongoing supply crunch will continue to mitigate this cooling effect with overall gains remaining robust by historical standards.”

London remains the weakest performing region for house price growth since the start of the pandemic.

The South West saw the largest increase, as people looked for larger, more rural properties in the move to home-working.

Nationwide reports that:

Since 2020 Q1, average house prices in the capital have increased by 14.9%, whilst all other regions, except the Outer Metropolitan, have seen at least a 20% uplift.

“The South West was also the strongest region over this period, with a 27.7% increase, after taking account of seasonal effects, followed by Wales, where average prices rose 26.2%. Meanwhile in the North West, prices were up 25.8%.

UK house price growth since pandemic
UK house price growth since pandemic Photograph: Nationwide

House prices across the South West jumped 14.7% year-on-year in the last quarter, as it overtook Wales as the strongest performing region in Q2

It was followed by East Anglia, where annual price growth remained at 14.2%, Nationwide reports.

Wales saw a slowing in annual price growth to 13.4%, from 15.3% in the first quarter.

Price growth in Northern Ireland was similar to last quarter at 11.0%. Meanwhile, Scotland saw a 9.5% year-on-year rise in house prices.

Nationwide house price index
Nationwide house price index Photograph: Nationwide

Introduction: UK house price growth slows in June

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

UK house prices growth slowed this month as the weakening economy, the cost of living squeeze, and rising interest rates cooled the market.

Lender Nationwide reports that prices rose by 0.3% this month, a notable slowdown on May’s 0.9% house price inflation -- but still the 11th monthly rise in a row.

This pulled the annual UK house price growth to 10.7% in June, from 11.2% in May, with most regions seeing a “slight slowing” in annual growth over the last quarter.

Nationwide reports that:

  • The price of a typical UK home climbed to a new record high of £271,613, with average prices up over £26,000 in the past year.
  • South West overtook Wales as strongest performing region, while London remained weakest
  • South West also strongest performing region through the pandemic
UK house price index
UK house price index Photograph: Nationwide

Robert Gardner, Nationwide’s chief economist, says the market is expected to slow further -- as interest rates continue to rise:

“There are tentative signs of a slowdown, with the number of mortgages approved for house purchases falling back towards pre-pandemic levels in April and surveyors reporting some softening in new buyer enquiries.

Nevertheless, the housing market has retained a surprising amount of momentum given the mounting pressure on household budgets from high inflation, which has already driven consumer confidence to a record low.

Gardner says that the current strength of the labour market, and low availability of houses, have kept ‘upward pressure on house prices’.

But.....

“The market is expected to slow further as pressure on household finances intensifies in the coming quarters, with inflation expected to reach double digits towards the end of the year.

Moreover, the Bank of England is widely expected to raise interest rates further, which will also exert a cooling impact on the market if this feeds through to mortgage rates.

Also coming up today

The OPEC group of oil producers holds a regular meeting to agree production targets. A big change isn’t expected this month, despite pressure from the West to increase output.

At least five OPEC+ delegates said this week’s meeting will focus on confirming August output policies and would not discuss September, says Reuters.

A flurry of data will give us a new insight into the global economy, including French inflation, eurozone unemployment, US jobless claims and the PCE measure of US inflation.

Trade secretary Anne-Marie Trevelyan and shadow chancellor Rachel Reeves are both appearing at the British Chambers of Commerce’s annual conference, along with business leaders and a ‘senior cabinet minister).

Christine Lagarde will close the European Central Bank’s Forum in Sintra, where Bank of England governor Andrew Bailey yesterday warned that Britain will suffer a more severe dose of inflation than other major economies during the current energy crisis.

The agenda

  • 7am BST: UK Q1 GDP report (second estimate)
  • 7am BST: Nationwide house price index for June
  • 7.45am BST: French inflation report for June
  • 8.30am BST: Swedish Riksbank interest rate decision
  • 10am BST: Eurozone unemployment report for May
  • 1.30pm BST: US weekly jobless claims
  • 1.30pm BST: US PCE measure of inflation for May
  • 2.30pm BST: ECB president Christine Lagarde speech.
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