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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK wage squeeze continues; US inflation jumps to 40-year high of 8.5% – as it happened

United Kingdom United States Office for National Statistics ZEW
people hold a banner saying Lloyd's insure climate breakdown
Extinction Rebellion protesters outside the Lloyd's of London building today. Photograph: Henry Nicholls/Reuters

Closing post

Time to wrap up.

The cost of living squeeze on UK workers has continued, with wages failing to keep pace with prices.

Regular pay shrank in the quarter to February, with basic earnings up only 4% - failing to match inflation which was over 6% that month.

The latest UK labour market report also showed that public sector workers’ pay was shrinking by over 4% in real terms, and that long-term illness from Covid was taking people out of the jobs market.

That helped to pull the unemployment rate down to below its pre-pandemic levels, and to the joint-lowest point since the 1970s.

Our economics editor Larry Elliott says that the pandemic’s impact on the over-50s and public sector staff is particularly troubling:

US inflation has hit its highest rate since 1981, rising 8.5% over the year to the end of March. The war in Ukraine drove up energy costs for Americans, and food and housing costs also jumped.

Economists said the latest surge in prices would intensify pressure on the US Federal Reserve to hike interest rates, but some also hope that this could be the peak for inflation.

Growth in UK retail sales slowed last month as fears over the rising cost of living led to the sharpest drop in consumer confidence since the 2008 financial crisis:

The World Trade Organisation has cut its forecast for global trade growth this year, from 4.7% to 3%, due to the economic disruption caused by the Russia-Ukraine war.

The WTO also warned that poorer countries risk food shortages.

Development charity Oxfam is also deeply concerned. It warned that more than a quarter of a billion people around the world could be pushed into extreme poverty this year amid a surge in global food prices after Russia’s invasion of Ukraine, the ongoing impact of Covid and rising global inequality.

The World Bank is providing more financial support to Ukraine, by approving a $1bn (£770m) package to help keep critical services running.

Russia’s economy is on track to contract by more than 10% in 2022, the country’s former finance minister Alexei Kudrin says, following the crippling sanctions imposed following the invasion of Ukraine.

Sri Lanka is to default on its debts for the first time since independence in 1948, as a deep financial crisis forces it to preserve scarce foreign exchange reserves.

Sri Lanka’s finance ministry announced all debt payments would be temporarily suspended while it agreed a bailout with the IMF, saying:

The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic’s financial position.

Frances O’Grady will stand down as general secretary of the Trades Union Congress at the end of the year.

The first woman to hold the post in the TUC’s 154-year-old history, she said it had been the greatest honour of her life to serve the trade union movement during a turbulent decade for workers.

Extinction Rebellion protesters have forced the closure of the insurance market Lloyd’s of London, after using superglue, chains and bicycle locks to block entrances to the building.

Protesters dressed as tea ladies pour ‘realitea’ and ‘honestea’ outside Lloyd’s headquarters in the City of London.
Protesters dressed as tea ladies pour ‘realitea’ and ‘honestea’ outside Lloyd’s headquarters in the City of London. Photograph: Vuk Valcic/ZUMA Press Wire/REX/Shutterstock

The group is demanding that Lloyds stops insuring fossil fuel projects.

The chief executive of easyJet has insisted that the great summer getaway will not be ruined, despite as many as a fifth of staff being off sick amid a wave of Covid, resulting in hundreds of flight cancellations.

The online fashion retailer Asos expects to take a £14m hit to its profits and a 2% reduction in growth, following its decision to stop trading in Russia in response to Moscow’s invasion of Ukraine.

One of the UK’s biggest accounting firms, Deloitte, is under investigation by regulators for its audits of Go-Ahead, after the bus and rail operator was embroiled in a scandal for wrongly withholding £50m of taxpayers’ money.

German investor optimism has dropped to its lowest level since early in the pandemic, with the Ukraine war and rising inflation hitting confidence.

Goodnight. GW

European market close

Europe’s stock markets have ended the day lower.

In London, the FTSE 100 index lost 42 points or 0.55% to 7,576, with jet engine maker Rolls-Royce (-5.8%), commercial property group Land Securities (-4.5%) and online grocery technology firm Ocado (-4.3%) leading the fallers.

Oil companies rallied, though, with BP up 2.5% after the Brent crude price surged over 6% to $105 per barrel.

Germany’s DAX lost 0.5% while France’s CAC is 0.3% lower.

Michael Hewson of CMC Markets sums up the day:

European markets have seen a negative bias for most of the day after getting a weak handoff from Asia after Chinese Premier Li Keqiang issued another warning of the effect that covid lockdowns would have on the Chinese economy, casting doubt on China’s ability to deliver on its 2022 GDP target of 5.5%.

We have recovered off the lows of the day, largely due to the more positive tone coming from Wall Street and the rebound in US markets.

The European banking sector has seen a big slide on reports that a big European mutual fund, or funds, has cashed out of its stakes in Germany’s two biggest banks, Deutsche Bank and Commerzbank. Both stake sales happened at a significant discount to Monday’s closing price, with Deutsche Bank being the worst performer on the DAX today.

This appears to have spilled over into weakness in UK banks, although the weakness in HSBC and Standard Chartered may well be down to the growth warning issued by Chinese Premier Li about the Chinese economy, than any spillover effect from the weakness in Europe.

AstraZeneca shares are also under pressure on the back of profit taking after the shares hit record highs at the end of last week.

On the FTSE100, Rolls-Royce shares are the worst performers after being on the receiving end of a broker downgrade from JPMorgan on scepticism over the profitability prospects of its New Markets unit which includes the production of new modular nuclear reactors.

The Financial Conduct Authority says its pay package is ‘highly competitive, after Unite members voted for industrial action in a ballot (see earlier post).

An FCA spokesperson says:

“Our new employment package is highly competitive, providing fair, competitive pay at all levels and rewards strong, consistent performance.

Most colleagues are receiving an average 7% increase in base pay this year and over 12% over the next two years, with an additional one-off cash payment of 4% in May. Our lowest paid and strongest performers will receive more. The changes we have made ensure the FCA’s pay and benefits package remains one of the best, if not the best, of any regulatory or enforcement agency in the UK.

“While we acknowledge the recent vote, we respect colleagues’ decision and understand the strength of feeling about some of the changes we have made.”

British employees with the smallest monthly pay packets are also receiving the lowest annual salary rises, Reuters reports.

This trend is intensifying the cost-of-living squeeze faced by the poorest households, tax data showed on Tuesday.

An employee who earns less than 90% of other employees in Britain saw their average monthly pay packet in the three months to the end of February rise by just 0.6% compared with a year earlier to £681.

By contrast, pay for the median employee rose by 6.0% and that for the top 1% of employees - who make at least £168,000 pounds a year - has risen by 8.4%.

Even average earners will be feeling a pay squeeze. Consumer price inflation hit a 30-year high of 6.2% in February, and may rise higher in tomorrow’s data covering March.

Here’s the full story.

US inflation may (or may not) be peaking, but it also appears to be broadening:

Back in the UK, staff at the financial watchdog have voted in favour of strike action over changes to pay and conditions.

Over 75% of those taking part in the ballot voted in favour, with a further 89.8% also voting to support industrial action short of strike action, says the Unite union.

Unite says the vote for strike is a historic first for the FCA workforce.

Sharon Graham, Unite general secretary said:

For the first time ever, the employees at the Financial Conduct Authority have voted for industrial action. They have made it very clear that the proposed changes to staff pay and conditions are completely unacceptable.

The FCA management must now address the serious concerns of their employees.

The FCA’s pay offer includes the scrapping of bonuses paid to some staff, which Unite says are widely considered part of basic pay, and would mean 10-12% pay cuts for the majority of its 4,200 staff.

Unions were also unhappy that the regulator was offering a 5% rise in basic pay, below inflation which hit 6.2% in February.

Alan Scott, Unite officer, says the regulator should rethink its plans for “pay cuts and unfair appraisals”, and meet with Unite to resolve the issue before staff walk out.

Updated

These tweets from Andreas Wallström, head of forecasting at Swedbank, illustrate how US inflation may have peaked....

The outside of the New York Stock Exchange (NYSE) in Manhattan, New York City.
The outside of the New York Stock Exchange (NYSE) in Manhattan, New York City. Photograph: Andrew Kelly/Reuters

Stocks have opened higher in New York, as traders hope that US inflation may have hit its peak.

The Dow Jones industrial average index of 30 major US companies is up 322 points, or 0.94% at 34,630 points, while the tech-focused Nasdaq has jumped by 1.72%.

Janet Mui, head of market analysis at wealth manager Brewin Dolphin, says there’s some relief that inflation wasn’t even higher, and that core inflation was a little lower than forecast.

“US headline inflation rose to 8.5% YoY from 7.9% YoY. This was the fastest rate of annual price increases in 40 years but markets had been braced for worse following a warning from the White House that inflation was “extraordinarily elevated”. After that build up there was relief that the rate was broadly in line with forecasts.

“The rise in headline inflation was mainly driven by the biggest jump in gasoline prices (+18.3% MoM) since 2009. Core CPI (excluding food and energy) rose by only +0.3% MoM, a rare downside surprise relative to expectations. This is taken as a positive by markets and US bond yields have retreated after the report.

“The higher cost of living will remain a key risk this year with inflation-adjusted wage growth in the US worsening to -3.6% YoY. Today’s release of US NFIB small business optimism for March plunged with businesses citing inflation as their biggest operating challenge.

Used cars for sale at a Toyota car dealership in Arlington, Virginia.
Used cars for sale at a Toyota car dealership in Arlington, Virginia. Photograph: Saul Loeb/AFP/Getty Images

Used car and truck prices in America jumped by 35% over the last year, due to the ongoing shortages of components for new cars.

Those shortages forced consumers to buy second-hand vehicles, pushing up prices.

But on a monthly basis, used car and truck prices were down 3.8% in March compared with February.

That could be a sign that some of the ‘transitory’ factors that have pushed up inflation in the last year are now easing.

These charts show the painful increase in US food prices in March, and over the last year.

The price of food to eat at home increased by 1.5% over the month, with all six major grocery store food group indexes rising, and were 10% higher than a year before.

Updated

Full story: US inflation climbed to 8.5% in March, highest rate since 1981

Prices in the US climbed at their highest rates since 1981, rising 8.5% over the year to the end of March as the war in Ukraine drove up energy costs for Americans, the labor department announced on Tuesday.

The latest Consumer Price Index (CPI) – which measures the prices of a basket of goods and services – comes after the index rose by 7.9% in the year through February, the fastest pace of annual inflation in 40 years.

Driven up by continuing supply chain issues, soaring demand and rising energy prices, inflation is now at levels unseen in the US since Ronald Reagan took the White House from Jimmy Carter.

US inflation jumps: what the experts say

March’s rise in US inflation to an eye-watering 8.5% may mark the peak, says Andrew Hunter, senior US economist at Capital Economics:

The surge in energy prices helped drive headline CPI inflation up to a new 40-year high of 8.5% in March but, with base effects set to become much more favourable and signs that monthly gains in core prices are moderating, we expect that to mark the peak.

The 18.3% m/m jump in gasoline prices resulted in an 11% m/m surge in CPI energy, enough to drive overall headline consumer prices up by a huge 1.2% m/m. But with crude oil prices now falling back, that move will be partly reversed in April, and we expect energy inflation to decline significantly over the rest of this year.

Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, says the US Federal Reserve could raise US interest rates by 50 basis points, not a more modest 25bp, next month.

The rate of inflation is running at the highest level in 40 years, due to large increases in the cost of energy, food and accommodation. The figures will add further pressure to the Fed to accelerate the pace of interest rate increases and potentially hike by 0.50% at the next meeting, as opposed to the traditional 0.25%.

However, the significant increases in the cost of living and the interest rate increases will start to have a detrimental impact on the growth outlook for the American economy, which could cause the Fed to divert course throughout the latter half of 2022 or 2023. The Fed has a tricky task ahead of them and historically have struggled to battle inflation without lowering economic growth.”

Rob Clarry, investment strategist at wealth managers Tilney Smith & Williamson, says the Ukraine war contributed to the inflation jump (through higher energy and commodity costs).

As expected, US consumer prices have continued to rise rapidly. Domestically, strong consumer demand and a tight labour market are contributing to elevated inflation.

Additionally, ongoing strains in global supply chains and the impact of the Russian invasion of Ukraine have led to high levels of imported inflation.

Hinesh Patel, portfolio manager at Quilter Investors, warns that lockdowns in China could create more supply chain disruption, and even higher prices.

“The Federal Reserve will feel emboldened today to press ahead with its aggressive hiking of interest rates as it looks to combat inflation. While used car prices and other non-essential items have begun to reach their price peak, the headline figures today illustrates how much of this is an energy-related shock. Ultimately, this will continue for some time as oil producers remain content with where the oil price currently sits and the war in Ukraine rages on, adding pressure for further sanctions on Russian gas and oil.

Were it not for China’s most recent lockdowns chocking off oil demand in the short-term the situation could be even worse. Furthermore, the longer Shanghai remains shut the larger the probability of yet another supply chain price shock.

More details of the jump in US inflation:

Rising gasoline and food prices pushed up US inflation

Gasoline, housing costs and food prices all helped to push up US inflation last month.

Gasoline prices jumped 18.3% in March alone, and accounted for over half of the 1.2% monthly increase in inflation, while the food index rose 1% last month.

Over the last year, energy prices have jumped 32% in the US, including a 48% increase in gasoline prices at US forecourts, and a 21.6% rise in natural gas prices.

The prices of food for home consumption jumped 10% over the last year, which is the largest 12-month increase since the period ending March 1981.

The inflation report says:

The index for meats, poultry, fish, and eggs increased 13.7 percent over the last year as the index for beef rose 16.0 percent.

The other major grocery store food group indexes also rose over the past year, with increases ranging from 7.0 percent (dairy and related products) to 10.3 percent (other food at home).

The Shelter index, which measures the cost of housing, jumped by 5% over the last year.

Core inflation (which strips out food and energy) rose by 6.5%, the largest 12-month change since August 1982.

Updated

US inflation hits new 40-year high of 8.5%

Just in: US inflation has jumped to a new 40-year high, as the Ukraine war drove up energy prices.

Consumer prices across the US surged by an annual rate of 8.5% in March, new data shows, up from 7.9% in February. That’s the highest annual inflation rate since December 1981.

Prices rose by 1.2% in March alone, accelerating from the 0.8% rise seen in February.

Back in the UK, Frances O’Grady will stand down as general secretary of the Trades Union Congress at the end of the year.

The first woman to hold the post in the TUC’s 154-year-old history, she said it had been the greatest honour of her life and a privilege to serve the trade union movement during a turbulent decade for workers in the aftermath of the 2008 financial crisis.

O’Grady has been general secretary of the TUC, the UK union movement’s umbrella group, since January 2013. Early in the Covid pandemic she played a key role alongside Carolyn Fairbairn, then head of the CBI, the business lobby group, in drawing up the furlough scheme with the chancellor, Rishi Sunak.

US small business confidence has fallen again, with the share of owners reporting that inflation was their single most important problem the largest since 1981.

The National Federation of Independent Business said its Small Business Optimism Index dropped 2.4 points to 93.2 in March, the third straight month of readings below the 48-year average of 98.

A gauge of the economic outlook hit a record low:

Thirty-one percent of owners identified inflation as their single most important problem, up 5 points from February. This was the biggest share since the first quarter of 1981, as rising prices surged up the list of worries.

We’ll shortly find out if US inflation jumped again last month....

Updated

Extinction Rebellion: Lloyd's must stop underwriting fossil fuel projects

Extinction Rebellion protest at Lloyd’s of London building today
Extinction Rebellion protest at Lloyd’s of London building today Photograph: Henry Nicholls/Reuters

Today’s protesters at Lloyd’s of London are calling for an end to all new fossil fuel investments and insurance.

Clare Walmsley, a spokesperson from Extinction Rebellion, explains that the Lloyd’s market is supporting the fossil fuel industry by providing insurance for projects which contribute to the climate emergency.

By underwriting the world’s most deadly fossil fuel projects, they are creating climate chaos – floods, famine, wildfires and death. Insuring new oil and gas projects in the North Sea will do nothing to solve the cost of living crisis either. Instead, it locks us into a system that’s already pushing millions into poverty.

“We can see from Lloyd’s long racist history, that it has always been happy to trade lives for profit. Its business was kickstarted by insuring the trans-Atlantic slave trade.

Today its underwriters support projects that sacrifice Indigenous, Black and brown communities on the frontlines of fossil fuel extraction and climate breakdown.”

In 2020, the Lloyd’s of London insurance market apologized for its “shameful” role in the 18th and 19th Century Atlantic slave trade and pledged to fund opportunities for black and ethnic minority groups.

Extinction Rebellion protestors urged Lloyds of London not to insure the Trans Mountain oil pipeline in Canada
Extinction Rebellion protesters urged Lloyd’s of London not to insure the Trans Mountain oil pipeline in Canada. Photograph: Guy Bell/Rex

Updated

Lloyd’s of London switches to remote trading after climate protests

Activists from Extinction Rebellion outside Lloyds of London, in the City of London.
Activists from Extinction Rebellion outside Lloyds of London, in the City of London. Photograph: Dominic Lipinski/PA

Lloyd’s of London has advised its employees and market participants not to come to their City of London headquarters today, after climate activists from Extinction Rebellion blocked its entrances (see earlier post).

A spokesperson for Lloyd’s has told Reuters:

Lloyd’s supports safe and constructive engagement on climate change and we’re continuing to work to support a responsible transition.

In the interests of our people’s safety, we have advised corporation employees and market participants not to come to the building today. The market remains open and trading is continuing online using our remote capabilities.

Activists from Extinction Rebellion dressed as cleaners speaking to a police liaison officer outside Lloyds of London.
Activists from Extinction Rebellion dressed as cleaners speaking to a police liaison officer outside Lloyd’s of London. Photograph: Dominic Lipinski/PA

Updated

WTO cuts global trade growth forecast as Russia-Ukraine war threatens recovery

The World Trade Organisation has cut its forecast for global trade growth this year.

It warns that the prospects for the global economy have darkened since the outbreak of war in Ukraine on 24 February, with the war putting the fragile global trade recovery at risk.

WTO economists now expects merchandise trade volume growth of 3.0% in 2022 — down from its previous forecast of 4.7%, followed by 3.4% growth in 2023.

It warns, though, that these estimates are less certain than usual, as this fan chart shows:

The WTO’s latest trade forecasts
The WTO’s latest trade forecasts - dark areas have a higher probability Photograph: WTO

The sharp rise in commodity prices is risking food shortages in poor countries, the WTO explains:

Despite their small shares in world trade and output, Russia and Ukraine are key suppliers of essential goods including food, energy, and fertilizers, supplies of which are now threatened by the war.

Grain shipments through Black Sea ports have already been halted, with potentially dire consequences for food security in poor countries.

Plus, the lockdowns in China are again disrupting seaborne trade, and could lead to fresh shortages of manufacturing inputs and higher inflation.

Director-General Ngozi Okonjo-Iweala is worried that low-income countries could be unable to feed themselves:

“The war in Ukraine has created immense human suffering, but it has also damaged the global economy at a critical juncture. Its impact will be felt around the world, particularly in low-income countries, where food accounts for a large fraction of household spending,”

“Smaller supplies and higher prices for food mean that the world’s poor could be forced to do without. This must not be allowed to happen. This is not the time to turn inward. In a crisis, more trade is needed to ensure stable, equitable access to necessities. Restricting trade will threaten the wellbeing of families and businesses and make more fraught the task of building a durable economic recovery from COVID‑19.

Last month, Okonjo-Iweala warned there rocketing global food prices could lead to riots in poorer countries:

Updated

German investor morale has fallen again, as the Ukraine war hits confidence and economic growth.

The ZEW Institute’s gauge of investor sentiment fell to -41.0 points from -39.3 in March, while a measure of current conditions also fell (to -30.8 from -21.4).

Both measures fell to levels seen at the beginning of the Covid-19 pandemic in March 2020.

But there was one bright note: inflation expectations declined compared with last month (when oil prices hit their highest levels since 2008).

The ZEW president, Achim Wambach, said there is still a risk of stagflation this year.

The ZEW Indicator of Economic Sentiment remains at a low level. The experts are pessimistic about the current economic situation and assume that it will continue to deteriorate.

The decline in inflation expectations, which cuts the previous month’s considerable increase by about half, gives some cause for hope. However, the prospect of stagflation over the next six months remains.

Updated

The big pay squeeze is still to come

The UK has effectively had a pay cut, says Jonathan Boys, labour market economist for the CIPD, as wage growth failed to keep up with prices.

Boys also warns that the gap between public and private sector pay could make it harder to recruit staff for public services.

If a gap between private and public pay persists, a wedge will open up between the two and it could become increasingly hard for the public sector to compete for talent.

“Today’s statistics look backwards but it’s what’s to come that is concerning,” Boys adds:

The OBR forecasting that inflation could reach 8.7% this year. The big pay squeeze is still in the pipeline. Employers a big role to play in supporting their staff through this time. If the ability to award pay rises is limited, employers can look at the total employment offer.

This includes designing jobs that include ample flexible working options. Financial wellbeing support can make a difference, as can revisiting the mix of benefits offered to make sure they work hard for employees, especially the lowest paid.

Updated

Dr Kemar Whyte, senior economist at the NIESR thinktank, warns that the UK cost of living squeze tightened last month:

Latest ONS estimates suggest wage rises are running at around 5.4% [including bonuses], but with inflation running at over 6.0%, it is clearly not enough to keep up with prices. This confirms that the cost-of-living squeeze is tightening in the UK.

The latest Labour Force Survey suggest the labour market is still tight, with unemployment down to 3.8% and the employment rate largely unchanged from the previous three-month period. The imbalance between labour demand and supply mean vacancies remain at record highs, putting upward pressure on wage growth.

Updated

Activists from the Extinction Rebellion (XR) climate change protest group, demonstrate at the Lloyds of London’s head office in London on April 12, 2022.
Activists from the Extinction Rebellion (XR) climate change protest group, demonstrate at the Lloyds of London’s head office in London on April 12, 2022. Photograph: Justin Tallis/AFP/Getty Images

Climate activists are protesting outside Lloyd’s of London in the City today, calling for a halt to insuring fossil fuels projects.

Extinction Rebellion (XR) said more than 60 activists had been at the central London building since 7am on Tuesday to stop staff from entering the site and with the aim of closing the business for the day.

XR says:

People used superglue, chains and bike locks, to block over 25 entrances to the building.

Staff already inside were allowed to exit. Climbers also scaled the outside of the iconic building and dropped two banners, saying ‘End Fossil Fuels Now’ and ‘Insure Climate Justice’. Others stuck stickers on the windows that said ‘Stop Insuring Trans Mountain’. There was also a performance outside from the Dirty Scrubbers, Tea Ladies, CorpRats and Orchestrated Discontent.

Extinction Rebellion protest at Lloyd’s of London buildingPerformance Art activists from Extinction Rebellion protest, outside the Lloyd’s of London building, in the City of London financial district, in London, Britain, April 12, 2022. REUTERS/Henry Nicholls
The Extinction Rebellion protest at Lloyd’s of London. Photograph: Henry Nicholls/Reuters

City of London Police said it is “aware of groups of protesters at Liverpool Street Station and the Lloyd’s building on Lime Street” and that officers are at the scene.

Extinction Rebellion close Lloyds of London as part of their April rebellion in London. They aim to take disruptive action to stop the ‘Climate and Ecological Emergency’. They also demand that Lloyds stop insuring the fossil fuel industry.
More of the protesters. Photograph: Guy Bell/Rex

Updated

UK workers suffered the biggest fall in their real pay for nearly nine years as the cost-of-living squeeze tightened, according to today’s jobs data.

PA Media explains:

The Office for National Statistics (ONS) said regular pay excluding bonuses tumbled 1.8% in the three months to February when taking soaring inflation into account, as measured by the Consumer Prices Index (CPI) - the steepest fall since August to October 2013.

The ONS said real pay was now “falling noticeably”, with figures for February alone showing regular wages dropped 2.1% after inflation, which was the biggest drop since August 2013, the ONS added.

When compared with CPIH, which includes owner occupiers’ housing costs and is the ONS’s preferred measure of inflation, real regular wages fell 1% in the three months to February.

While pay rose 4% in the quarter, it was far outstripped by inflation and experts have warned wages will lag even further behind rising prices this year as inflation is expected to rocket in the autumn.

Sri Lanka to default amid worst economic crisis in decades

Sri Lankans shouted anti government slogans during a protest outside the president’s office in Colombo, Sri Lanka, last night.
Sri Lankans shout anti-government slogans during a protest outside the president’s office in Colombo last night. Photograph: Eranga Jayawardena/AP

Sri Lanka is to temporarily default on its foreign debts for the first time since independence over 70 years ago, as an economic crisis grips the country.

Sri Lanka’s finance ministry said the country will suspend debt payments on all its $51bn of external obligations, including loans from foreign governments, ahead of an International Monetary Fund bailout.

A statement from the ministry said the pandemic, and the Ukraine war, made it impossible for Sri Lanka to service its debts.

After an “unblemished record” of servicing its external debts since independence in 1948, a comprehensive debt restructuring now seems “inescapable”, the ministry said:

The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic’s financial position.

It is now apparent that any further delay risks inflicting permanent damage on Sri Lanka’s economy and causing potentially irreversible prejudice to the holders of the country’s external public debts.

Suspending foreign debt payments will allow Sri Lanka to use its limited foreign currency reserves to buy essential imports such as fuel, the central bank governor P Nandalal Weerasinghe told reporters.

It has come to a point that making debt payments are challenging and impossible. The best action that can be taken is to restructure debt and avoid a hard default.

Sri Lanka has suffered weeks of power blackouts and severe shortages of food, fuel and pharmaceuticals, with doctors saying they are almost out of life-saving medicines.

Weerasinghe, who took office last week, said the suspension of debt payments will be temporary:

This will be on a temporary basis until we come to an agreement with creditors and with the support of a programme with the IMF.

We need to focus on essential imports and not have to worry about servicing external debt.

Updated

Russia’s economy "set for biggest contraction since 1994"

A pharmacy and a currency exchange on a main street in Moscow this month.
A pharmacy and a currency exchange on a main street in Moscow this month. Photograph: AP

Russia’s economy is on track to contract by more than 10% in 2022, the country’s former finance minister Alexei Kudrin says, following the crippling sanctions imposed following the invasion of Ukraine.

That would be the biggest fall in gross domestic product since the years following the 1991 fall of the Soviet Union, when the economy shrank for several years.

Reuters has the details:

Russia’s economy and finance ministries are currently working on new forecasts, RIA state news agency quoted Kudrin, who now serves as head of the Audit Chamber, as saying.

“The official forecast would be for more than around a 10% contraction,” said Kudrin, who served as Putin’s finance minister from 2000 to 2011, according to RIA.

Previous Russian government forecasts envisaged gross domestic product growth of 3% this year after the economy expanded by 4.7% in 2021.

A source close to the Russian government who spoke on condition of anonymity told Reuters that the economy ministry projects a GDP contraction of between 10% and 15% this year.

A contraction of 10% would amount to the biggest decline in gross domestic product since 1994, according to World Bank and International Monetary Fund data.

The World Bank this month forecast Russian GDP output would fall 11.2% this year, while the UK said on Friday that Russia’s economy is expected to contract by between 8.5% and 15% this year.

Updated

Morning market report

European stock markets have opened in the red, as investors brace for America’s inflation rate to hit a new 40-year high over 8% later today.

The UK’s FTSE 100 index is down 40 points or 0.5% at 7,578 points, while Germany’s DAX and France’s CAC have lost 1.5% each.

Victoria Scholar, head of investment at interactive investor, says,

European markets are under pressure, taking their cues from the declines on Wall Street as the market await key inflation data stateside.

Trading updates and economic data are setting the agenda in the UK with the FTSE 100 under pressure inching towards support at 7,600. Rolls-Royce and the LSE are languishing at the bottom of the index while the miners and oil companies like BP, Glencore, Fresnillo and Endeavour eke out modest gains. In Germany focus is on the banks with Deutsche Bank and Commerzbank selling off sharply on a report that a key investor is offloading a major stake in both.

Investors are also watching reports that Russian forces may have used chemical agents in an attack on the people of Mariupol.

Jim Reid of Deutsche Bank told clients this morning:

The Pentagon is monitoring claims that Russia used a chemical agent in Mariupol. A number of news agencies have reported the accusation, but as of yet, none have been able to verify the original claim.

If true, that would mark a much-feared escalation in tactics as Ukraine braces for a renewed assault on its territory in the east. After starting the week off on a weak foot, S&P 500 futures are down another -0.41% this morning.

Updated

Here’s a handy thread from the Resolution Foundation on today’s UK jobs report:

Public sector workers bear brunt of wage squeeze

Having been in the front line in the pandemic, public sector workers are now in the teeth of the UK’s wage squeeze.

Average public sector pay, including bonuses, rose by 1.9% a year in December-February. That means a deep pay cut in real terms, with CPI inflation hitting 6.2% in February.

Across the private sector, though, total pay rose 6.2%.

In finance and business services, earnings grew by 9.8%, with pay packets swelled by strong bonus payments.

The TUC says today’s data shows the sharpest monthly fall in public sector real wages on record, and is urging the government to help.

TUC general secretary Frances O’Grady said:

Our amazing key workers put their lives on the line to get us through the pandemic.

The very least they deserve is a decent pay rise.

But, after a decade of having their wages held down by ministers, more pain is on the way.

At a time when many key workers feel exhausted and burnout – and when staff shortages are really hitting our public services – this is the last thing the country needs.

Updated

Rising long-term sickness pushes workers out of labour market

Covid-19 is driving more workers out of the jobs market, experts warn.

Today’s jobs report shows 487,000 more people are classed as economically inactive than before the pandemic.

That lifted the economic inactivity rate to 21.4% from 20.2% back in February 2020, and pushed down the unemployment rate to just 3.8% this morning.

This trend is being driven by older workers, says Jake Finney, economist at PwC, with the 50-64 group accounting for more than half of this increase since the pandemic started.

This group is suffering from higher levels of long-term sickness, with long Covid expected to be the primary new cause for this increase.

We expect higher inactivity to become a permanent feature of the UK labour market, as around six in 10 of these older workers say they will not consider returning to work in the future.

UK inactivity
UK inactivity Photograph: ONS

Resolution Foundation agrees, saying ‘Covid retirees’ are leaving their jobs.

The UK jobs market continued to tighten in early 2022, with vacancies hitting a record high, unemployment falling to 3.8 per cent – matching its lowest level since December 1974 – and short-to-medium-term unemployment falling to a record low.

But the overall size of the labour market remains smaller than it was pre-pandemic. Economic inactivity increased again to 21.4 per cent, suggesting that more Covid retirees are leaving the labour market.

This chart shows the rise in long-term sickness (the lime-green columns).

april12inactivity2
UK inactivity Photograph: ONS

Stephen Evans, chief executive of Learning and Work Institute, says some people are leaving to care for others, as well as retiring or being ill themselves.

We continue to see people falling out of the labour market altogether, especially carers, retired people and long-term sick.

Employers are crying out for staff, yet there are 1.25 million fewer people in the labour market than if pre-pandemic trends had continued. The government must act swiftly to support people who are being hit the hardest, so we need a new Plan for Jobs, Growth and Living Standards.”

Updated

Political reaction

Minister for employment, Mims Davies, points out that the unemployment rate has fallen to its joint-lowest level since the 1970s:

With the unemployment rate returning to the lowest we have seen in nearly 50 years, it is clear our Plan for Jobs has worked – protecting livelihoods and businesses throughout the pandemic.

Behind these ONS figures we know this is a difficult time for many workers and families. We’re doing everything we can to help, with our Way to Work scheme which is supporting people coming through the doors of our Jobcentres to move into better paid, higher skilled work. As well as increasing the National Living and Minimum Wage all backed up by over £22bn of targeted investment.

But Pat McFadden, Labour’s shadow chief secretary to the Treasury, highlights that last month’s spring statement failed to give as much support as hoped for strugging households.

Today’s figures show that Conservative choices are leaving real wages squeezed and people worse off.

At a time like this, Rishi Sunak could have chosen a one-off windfall tax on huge oil and gas company profits to cut household energy bills by up to £600.

Instead, he’s decided to make Britain the only major economy to land working people with higher taxes in the midst of a cost of living crisis.

Updated

Capital Economics: Labour demand softening, and wage squeeze will worsen

There are some signs of softening in demand for labour in today’s jobs report, warns Ruth Gregory of Capital Economics:

Labour demand was a bit weaker than we expected at the start of the year. Admittedly, LFS employment still increased by 10,000 in the three months to February (consensus forecast: 53,000) up from -13,000 in January. But the single month data showed that in February itself employment fell by 89,000.

In the three months to February, the unemployment rate fell from 3.9% to the rate of 3.8% seen before the pandemic. That further fall reflected a rise in inactivity of 76,000 in the three months to February, driven by more people saying they were retired, looking after family/home or long-term sick.

March’s claimant count and HMRC PAYE employee data were also both a bit softer than in recent months, perhaps as the war in Ukraine and higher inflation began to weigh on domestic activity. But the number of people claiming benefits still fell by 46,900, pushing the claimant count rate down from 4.4% to 4.3%, and the number of employees still rose by 35,000.

What’s more, the mix of decent demand for workers and a diminished supply of workers pushed up the number of vacancies to a new record high of 1.288 million in three months to February, and maintained the upward pressure on wage growth.

Gregory also warns that real wages could fall by 3.2% by April, from the 1% fall in December-February, as rising energy bills drive inflation over 8%.

Ben Harrison, director of the Work Foundation thinktank, says today’s jobs report shows the need for more government help for struggling households, especially those relying on universal credit.

Today’s statistics shows a mixed picture for the UK’s labour market recovery with employment stationery at 75.5% and unemployment dropping to 3.8%. However, the vacancy rate remains high at 1.3 million, and economic inactivity continues to rise to 21.4%.

Crucially, workers and job seekers are being hit by the largest fall in living standards on record as inflation outpaces wage growth. Many are struggling to make ends meet as regular pay growth is at 4% (excluding bonuses) but inflation continues to rise, with the Bank of England predicting inflation will reach 8% in spring and could rise further later in the year.

The chancellor’s spring statement failed to provide economic security to the most vulnerable in society, including those in low paying and insecure employment. Universal credit beneficiaries saw their benefits uprated by just 3.1% in April, lagging behind inflation. The chancellor must return to despatch box and, at a minimum, raise universal credit in line with predicted inflation to provide security to those at the sharp end of the cost of living emergency.

Updated

Median pay in the finance and insurance sector grew by an inflation-beating 19.7% in the year to March, the ONS’s experimental data shows.

That reflects the jump in banker bonuses, after business boomed in 2021.

But pay lagged badly in the arts and entertainment sector, up just 1.6% over the last year.

Although there are over half a million more UK workers on company payrolls than before the pandemic, total employment is still 558,000 lower than in February 2020 (due to the drop in self-employment).

UK unemployment report

ONS: Basic pay 'falling noticeably in real terms'

Basic pay is now falling “noticeably in real terms”, says Darren Morgan, director of economic statistics at the Office for National Statistics.

Here’s his summary on the jobs report:

Overall, employment in December-February was little changed on the previous three months, and so is still below its pre-pandemic level.

While unemployment has fallen again, we are still seeing rising numbers of people disengaging from the labour market, and as they aren’t working or looking for work, are not counted as unemployed.

Early estimates suggest there was only a small increase in the number of employees on payroll in March, while job vacancies, although again at a record high, rose at their slowest for nearly a year.

While strong bonuses continue to mitigate the effects of rising prices on people’s total earnings, basic pay is now falling noticeably in real terms.

Updated

Experimental data from the ONS today also suggest that median monthly pay increased by 6.0% a year in March.

That suggests that firms have been raising wages to attract and retain staff, as workers are hit by rising prices.

But it lags behind February’s CPI inflation rate of 6.2%, which is expected to rise to 6.7% for March (we get that data tomorrow).

Updated

Regular real pay falls

Today’s jobs report shows that the UK’s wage squeeze continues, with basis pay failing to keep up with rising prices.

Regular pay, which excludes bonuses, only rose 4.0% over the last 12 months. That means real regular pay packets shrank by 1.0% once you adjust for inflation, as the cost of living crunch deepens.

Total pay, including bonuses, rose by 5.4% in the 12 months to February. That means total pay was 0.4% higher than a year ago.

The ONS says:

Strong bonus payments over the past six months have kept recent real total pay growth positive.

Updated

Introduction: UK unemployment rate drops to 3.8%

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

The UK’s unemployment rate has dropped further below its pre-pandemic levels as employers struggle to hire staff, and more people drop out of the labour force.

And Britain’s wage squeeze continued, with regular pay dropping by 1% over the last year after adjusting for inflation.

The UK jobless rate slipped to 3.8% in the three months to February, the latest labour force survey released this morning shows. That’s the lowest rate since October-December 2019, just before Covid-19 hit the economy, with the unemployment total down 86,000 to 1.296m.

Employment rose by 10,000 during the quarter, with 32,485 people now in work. That left the UK employment rate flat at 75.5%, still 1.1 percentage points lower than before the coronavirus pandemic.

Instead, the economic inactivity rate increased by 0.2 percentage points to 21.4% in December 2021 to February 2022. That’s because 76,000 more people became economically inactive in the quarter, taking the total to 8.857 million.

This increase was driven by those who are economically inactive because they are looking after family or home, retired, or long-term sick, the ONS explains.

Companies did add more staff, with 35,000 more people in payrolled employment in March than in February.

But while the number of full-time employees increased during the latest three-month period, this was offset by a decrease in part-time employees, as this chart shows:

UK employment

Job vacancies hit a new record over the quarter, jumping to 1,288,000.

But the rate of growth in vacancies continued to slow down. There were 50,200 new openings added in January to March 2022 compared with the previous quarter, the slowest rise in almost a year.

The largest increase was in human health and social work, which increased by 13,100 to a new record of 215,500 vacancies.

More details to follow....

Also coming up today

US inflation may hit a fresh 40-year high today, with March’s consumer price index data forecast to jump to 8.4% from February’s 7.9%.

That would be the fastest pace since 1981, and probably spur the Federal Reserve to raise US interest rates aggressively over the coming months. Economists now expect half-point hikes in both May and June.

We also get the latest economic confidence index for Germany from the ZEW institute, which will show the impact of the Ukraine war on investors.

European stock markets are set to open lower, having dropped around 0.6% yesterday.

The agenda

  • 7am BST: UK labour market report
  • 10am BST: ZEW survey of German economic confidence in April
  • 11am BST: NFIB index of US business optimism index
  • 1.30pm BST: US inflation report for March

Updated

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