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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Middle East oil shock would lead to higher interest rates, warns IMF; FTSE 100’s worst day in nine months – as it happened

United Kingdom Unemployment China United States GDP Economy International Monetary Fund Office for National Statistics The Bank of England
Chief Economist Pierre-Olivier Gourinchas holds the IMF's World Economic Outlook during a press briefing today.
Chief Economist Pierre-Olivier Gourinchas holds the IMF's World Economic Outlook during a press briefing today. Photograph: Mandel Ngan/AFP/Getty Images

Closing post

With City traders reeling from a bad day, it’s time to wrap up.

Here are today’s main stories:

Thames Water to ask debt markets for survival plan funding

Thames Water is preparing to tap debt markets within weeks in an attempt to fund a rescue plan and repair its threadbare finances, the Guardian can reveal.

It is understood the embattled water company is planning to publish a revised five-year spending plan within days, ahead of a deadline next month. Its board is expected to meet on Thursday to rubber-stamp the plan, and executives hope to release it on Friday.

Sources said the company then intends to wait for up to a week before approaching lenders to fund the proposals and has sought advice from City bankers and lawyers on the debt issuance. Financiers said the proposed timing of the fresh borrowing was surprising, given huge uncertainty around Thames’s future.

Britain’s biggest and most heavily indebted water company is fighting to secure its financial future, and has already said it only has cash reserves to fund its operations for the next 15 months without a substantial increase in bills.

FTSE 100 posts worst day since last July

Newsflash: Britain’s blue-chip share index has racked up its biggest one-day fall since last summer.

Anxiety over the Middle East crisis, and concerns that central banks will not cut interest rates soon, combined to drive shares lower.

The FTSE 100 has closed down 145 points, or 1.8%, at 7820.

That’s a three-week low, and quite a change in fortune since last Friday when the index almost hit its record high of 8,047 points.

It’s the biggest drop in points, and percentage, since 6th July 2023.

Updated

These charts show how the IMF expects weak growth in the UK this year….

… and no growth at all, once you adjust for immigration.

US government bond prices are weakening after the International Monetary Fund predicted strong growth across the American economy.

This is pushing up the yield on Treasury bonds, as investors anticipate that a stronger economy means higher interest rate for longer.

IMF forecasts: expert reaction

ING’s global head of macro Carsten Brzeski fears the IMF are too optimistic in their forecasts for European growth, and for inflation across major economies:

“The IMF’s latest economic outlook acknowledges the strong resilience of the US economy but remains a bit too optimistic regarding the European growth outlook and inflation outlook for all developed economies.

In my view, the IMF’s mildly optimistic outlook slightly overlooks the structural transitions that are likely to weigh on Europe over the coming years and could prevent the European economy from returning to potential growth already next year. The rather benign take on inflation seems to underestimate the risk of reflation, either as a result of rebounding economic activity, longer transmission lags for monetary policy or simply new energy price shocks.

The events of the last days and the worsening conflict between Iran and Israel are a good reminder of how fast energy-driven inflation could return.”

Eric LeCompte, executive director of the religious development group Jubilee USA Network, says high debt levels are holding back growth:

“Five years after the pandemic began, the IMF forecasts weak global growth for the next five years.

“In addition to the suffering caused by wars and conflicts, it is more difficult to have accurate economic outlook predictions.

“High debt levels across developing countries and the lack of debt relief means we can’t achieve a strong global economy.”

There has been a sharp drop in new home construction projects in the US.

Privately‐owned housing starts in March fell by 14.7%, to a seasonally adjusted annual rate of 1,321,000, down from an annual rate of 1,549,000 in February.

Building permit approvals (giving permission to begin a home construction project) fell by 4.3% in March.

Updated

UK consumer confidence has fallen for the first time in seven months, YouGov reports, as people grow less optimistic about the economic outlook.

Its confidence index has fallen for the first time since July 2023, due to decreases in household finance, business activity, and job security metrics.

European banks are having a bad day.

The Stoxx 600 Banks index is down 2.5%, on track for its worst day since August.

Lloyds is down 3%, HSBC has lost 2.9% and Barclays is 2.6% lower.

FTSE 100 on track for worst day in nine months

Britain’s stock market is on track for its worst day since last July, as investors grow more fearful.

The FTSE 100 index is now down 155 points this afternoon, or 1.95%, at 7809 points, which is a three-week low.

This would be the biggest one-day fall in nine months, as investors continue to worry that central bankers will be slower to cut interest rates than hoped.

Grocery technology firm Ocado are the top riser, down 5.2%, followed by tech investor Scottish Mortgage (-4.3%). Mining giants are also among the top fallers

Nearly every one of the hundred stocks in the index are in the red, with only chemicals maker Croda (+2.5%) and energy firm Centrica (+0.7%) keeping above water.

Market sentiment has been hit by “simmering Middle East tensions, a tepid opening to the earnings season and further economic data showing little evidence that the need for interest rate cuts is approaching”, says Richard Hunter, head of markets at interactive investor.

Hunter adds:

Investors are keeping a close eye on the developing situation in the Middle East and assessing the likelihood of retaliatory action from Israel following the weekend’s Iran attack.

One such side effect has been an oil price which remains up by 17% this year, despite flattening out after its recent hike, but which nonetheless remains an inflationary factor which complicates the desired direction of travel for global central banks.

European stock markets are also a sea of red, with Germany’s DAX and France’s CAC both down 1.6%.

This follows losses in Asia-Pacific markets, after falls on Wall Street yesterday:

Updated

The IMF is urging the UK to rebuild its fiscal buffers ready for the next crisis, rather than undermine them with tax cuts.

The Fund was asked today for its view on Jeremy Hunt’s budget:

Q: Is the IMF comfortable with the British approach of cutting taxes on an assumption of further unspecified cuts to public spending?

Pierre-Olivier Gourinchas says that a number of countries who deployed fiscal buffers during the pandemic and the cost of living crisis have seen their debt/GDP levels rise.

We are calling for the rebuilding of these buffers, so countries can deal with future shocks, he says.

The UK needs to rebuild its fiscal capacity, he says, as do many other countries including the US.

This is important, Gourinchas adds, as countries which had the fiscal room to protect households and businesses during these two crises did much better than those who did not.

IMF: Middle East oil shock would lead to higher interest rates

The International Monetary Fund has predicted that central banks would raise interest rates if the Middle East crisis triggered a sharp surge in the oil price.

My colleague Larry Elliott pressed the Fund on this issue in Washington today, asking:

Q: Is there a risk that the conflict between Israel and Iran will be the next malign shock to the global economy? How do you think it would affect the global economy?

IMF chief economist Pierre-Olivier Gourinchas replies that the Fund is watching developments, and adjusting its scenarios and analysis.

It is evaluating various possible trajectories for the global economy, including a scenario where there is fairly significant disruption in oil markets that leads to a 15% rise in oil prices, and increased shipping costs.

Under that scenario, the 15% rise in oil prices lifts global inflation by 0.7 percentage points.

Gourinchas says this scenario would impact business confidence, and investment.

And it would lead to higher borrowing costs, he predicts, as central banks tried to dampen down inflationary pressures.

Gourinchas says:

The increased inflation that would come from higher energy prices would trigger a response from central banks that would tighten interest rates in order to secure inflation coming back to target, and that would weigh down on activity.

It would do so in a context in which, in some countries, activity and growth is already fairly weak, so that might also have a strong effect there.

Updated

The IMF still expects the Federal Reserve to start cutting interest rates this year, even though US inflation has been higher than forecast.

IMF chief economist Pierre-Olivier Gourinchas tells reporters that:

We would still expect the US to be in a position where it starts easing sometime in 2024.

Progress has been “enormous” in terms of disinflation, and in the resilience of economy, he adds.

IMF: 15% rise in oil price would raise global inflation 0.7pp

Q: What’s the energy price outlook, as the US considers new sanctions on Iran?

The IMF has drawn up a scenario exploring the impact of rising geopolitical tensions, with elevated energy costs and higher shipping costs.

This would lead to higher price pressures in the global economy, higher inflation, and lower output, says Pierre-Olivier Gourinchas.

Gourinchas tells reporters in London that the IMF believes a 15% increase in oil prices would increase inflation globally by 0.7 percentage points.

We are not in that scenario now, though, he insists, adding it is too early to say if the current increase in oil prices will be sustained.

Updated

IMF: low-income developing countries suffering more scarring

The IMF are now taking questions in Washington on its new World Economic Outlook.

Q: What scarring is occuring in low-income developing countries, as they try to recover from the pandemic?

IMF chief economist Pierre-Olivier Gourinchas says the Fund has lowered its estimate of economic scarring for most regions and countries, but increased for low-income developing countries.

Those countries are suffering an impact both on output, and on high price pressures, he says. That’s due to high energy and food prices, an increase in food insecurity, in a region that had smaller buffers to protect their population.

Rising interest rates mean these countries have less fiscal space too.

The World Bank warned this week that the pandemic has brought poverty reduction to a halt:

The US fiscal stance is “out of line with long-term fiscal stability”, IMF chief economist Pierre-Olivier Gourinchas adds.

That’s a sharp nudge to Washington policymakers that the US deficit, which rose to $1.6 trillion in the 2024 fiscal year, is too high.

Fiscal consolidition is never easy, but is better done before markets dictate it, Gourinchas points out.

Updated

Pierre-Olivier Gourinchas, the IMF’s chief economist, is telling reporters in Washington that the global economy continues to display remarkable resilience, with growth holding steady and inflation declining.

But many challenges lie ahead, Gourinchas adds.

Risks are now broadly balanced, he explains.

Downside risks include new prices spikes from geopolitical tensions, persistent core inflation, or a disruptive turn towards fiscal adjustment could slow activity

On the upside, faster disinflation, or more timely structural reforms that boost productivity could support activity, Gourinchas.

Gourinchas also warns that we are “not there yet on inflation”, as progress towards bringing inflation down to target has stalled since the start of the year in some countries [such as the US].

Updated

The IMF are hopeful that the world economy will achieve a ‘soft landing’ (lowering inflation without causing a recession).

Full story: UK households face second year without improved living standards, says IMF

Britain’s households will endure a second year without an improvement in their living standards in 2024 as the effects of high inflation take time to abate, the International Monetary Fund has revealed.

In its flagship World Economic Outlook (WEO), the Washington-based IMF said it was forecasting modest 0.5% UK growth this year – but only as a result of a rising population.

Growth per head – one of the key measures of living standards – is expected to remain flat this year after a 0.3% drop in 2023.

The IMF said there would be a pick-up in the economy as 2024 wore on – something the government is banking on to reduce its opinion poll deficit with Labour – but it would not be until 2025 that the cost of living crisis would be over.

Although official figures due out on Wednesday are expected to show a fall in the UK’s annual inflation rate to about 3%, the IMF believes the Bank of England will be cautious about cutting interest rates, and has pencilled in only two 0.25 percentage point cuts in official borrowing costs this year.

UK and Germany to lag major rivals this year

Newsflash: the UK is set to be one of the slowest growing major economies this year, although Germany will lag further behind.

The International Monetary Fund’s latest World Economic Outlook, just released, shows that the global economy is set to grow by 3.2% in both 2024 and 2025, matching its expansion in 2023.

Advanced economies are seen expanding by 1.7% this year, rising to 1.8% in 2025.

But Britain will be towards the back of the pack; UK GDP is forecast to rise by 0.5% this year, before accelerating to 1.5% next year. That’s a small downgrade on the Fund’s forecasts back in January.

Germany will be even slower though, with GDP set to rise just 0.2% in 2024, and 1.3% in 2025.

Italy is expected to grow by 0.7% in each year, while Japan’s GDP is seen rising 0.9%, and then 1%.

France is expected to grow by 0.7%, and then 1.4%.

While the US will continue to lead the way, expected to expand by 2.7% and then 1.9%.

Updated

The City slightly trimmed its forecast for how quickly the Bank of England will cut interest rates this year, following this morning’s labour market data.

The money markets are now pricing in around 46 basis points of cuts this year, down from a previous forecast of 50bp (which is exactly half a percent).

That suggests that two quarter-point rate cuts, bringing Bank rate down from 5.25% to 4.75% by December, are no longer fully priced in.

The Bank has to weigh up the rise in unemployment and fall in employment (suggesting a cooling economy) alongside strong basic pay growth of 6% (which implies inflationary pressures are still strong), when deciding when it is safe to start loosening monetary policy.

Bank of America has reported a drop in earnings, as provisions for bad debts increased and profits from high interest rates faded.

BofA’s net income fell to $6.7bn in the first quarter of this year, a 18% drop on the $8.2bn it made a year before.

Its net interest income (NII), the money a bank makes by charging higher interest on loans than deposits, shrank by 3%. BofA says “higher deposit costs more than offset higher asset yields and modest loan growth”.

Provision for credit losses have risen to $1.3 billion, up from $1.1bn in Q4 2023 and $931m a year ago.

Activist investor calls on Wood Group to consider quitting London

An activist hedge fund has stoked concerns over a corporate flight from the London Stock Exchange after calling on British oil services firm Wood Group to reconsider its UK listing or sell itself off.

In a letter to Wood’s board Franck Tuil, the founder of Sparta Capital Management, he was “frustrated by the continued underperformance of the shares” when compared to rival engineering companies listed in the US.

The intervention by Tuil, a former senior portfolio manager at hedge fund Elliott, comes amid rising fears in the City that oil giant Shell may abandon its place at the top of the FTSE 100 in favour of a listing in the US because it believes European investors undervalue the company.

BP’s future on the LSE has also come into doubt after reports that the UAE’s state oil company, Adnoc, had considered a multi-billion pound takeover bid of the company which has also contended with a lagging share price in recent years.

Wood Group’s market valuation has tumbled by over a third in the last year following the collapse of a takeover bid by US-based Apollo Global Management. Since the $2.1bn takeover bid fell apart Wood’s share price has slumped to value the company at $1.21bn.

Tuil said:

“We believe that the board must be realistic on how it can best achieve fair value for shareholders; if the UK public markets are unwilling or unable to engage in Wood’s story, we believe you should undertake a strategic review and actively seek alternative solutions.”

Wood Group declined to comment.

Try the Be the Chancellor tool

With a general election no more than nine months away, Britain may have soon have a new chancellor.

And the Institute for Fiscal Studies have produced an excellent interactive tool to show the challenge she, or he, will face to manage the nation’s finance.

Their ‘Be the Chancellor’ tool launched today shows the trade-offs and fiscal challenge awaiting the next government. It shows the impact on the public finances of changing departmental spending, and of altering a wide range of taxes.

It also shows how faster, or slower, growth affects the tax take.

Calculating the cost, or fiscal benefit, of each decision, it shows whether your Treasury would hit the target of having debt falling, as a share of national income, in five years.

The tool even lets you add your own fiscal policy, if there’s something you’re desperate to tax (or stop taxing).

You can try it here.

Hitting the fiscal mandate became easier this month, as the UK entered a new fiscal year in April. That means the target to get debt/GDP falling moved a year into the future.

The IFS says this could create an extra £12bn of fiscal firepower for spending increases or tax cuts:

While difficult to predict with precision, we estimate that this mechanical rolling forward of the forecast could, all else equal, add something like £12 billion to Chancellor Jeremy Hunt’s ‘headroom’ against his fiscal mandate – a target that Rachel Reeves has promised to retain if Labour forms the next government

Updated

Global economy facing 'lower economic growth and trade disruptions in 2024'

The global economy is likely to slow further this year, the United Nations trade body has warned today.

UN Trade and Development predicts global growth will slow to 2.6% this year, down from 2.7% in 2023, as falling investment and subdued trade dynamics hit the world economy.

In a new report, it warns that monetary policy alone cannot solve all pressing global challenges, even if higher interest rates do bring down inflation.

UN Trade and Development warns that the better-than-expected growth recorded in 2023 is now being ‘squandered’, saying:

Policy discussions continue to centre on inflation, conveying confidence that anticipated monetary easing will heal the world’s economic woes.

Meanwhile, the pressing challenges of trade disruptions, climate change, low growth, underinvestment and inequalities are growing more serious.

The record number of people not working due to long-term sickness or disability shows that the UK needs a better sick pay system, says Amanda Walters, director of the Safe Sick Pay campaign.

Walters says:

“Government efforts to support people back into work, launched last year by Jeremy Hunt, have not done the job. Workers recovering from illness in some cases can be forced to leave employment as they can’t afford to pay the bills on £116.75 a week sick pay.

All political parties need to recognise that the right remedy is a sick pay system that at the very least covers the most essential household bills.”

Last summer, a coalition of charities and health experts warned that Britain’s sick pay system lags behind the rest of Europe:

Back at parliament, Bank of England deputy governor appointee Clare Lombardelli has rejected the idea that the UK’s fiscal watchdog, the OBR, should be abolished.

Former prime minister Liz Truss has argued that the OBR should be scrapped, claiming it is part of a failed economic model.

Lombardelli though, tells MPs that she’s a “big fan of the OBR”, having seen the benefit of its independent assessment when she worked at the Treasury.

She says:

It’s very valuable to have that independent expert judgement on fiscal policy.

Truss’s administration, ironically, proved this in September 2022 when it decided not to publish the OBR’s independent economic forecast alongside the mini-budget… which promptly spooked the bond market and drove the pound to a record low.

Truss has also called for Bank of England governor Andrew Bailey to resign over his response to the 2022 mini budget.

Q: Doesn’t that show that support for central bank independence is fading, asks Labour MP Angela Eagle.

Lombardelli insists there is “widespread support for this structure”, under which the BE has control of interest rates.

Lombardelli nimbly danced around a question about whether there should be an inquiry into the aftermath of the mini-budget, as Truss demands. Lombardelli points out that the events of September and October 2022 have been well examined by the Treasury committee already, with plenty of data about what happened.

Q: What message did the sacking of the permanent secretary of the Treasury, Tom Scholar, shortly before the catastrophic mini-budget give to the markets?

This is also “well-trodden territory”, Lombardelli demures, with a frown.

EasyJet suspends flights to Tel Aviv until late October

Airline easyJet has announced that it is to suspend all flights to and from Tel Aviv until 27 October, following the Iranian missile and drone strike on Israel over the weekend.

In a statement, the carrier said:

“As a result of the continued evolving situation in Israel, easyJet has now taken the decision to suspend its flights to Tel Aviv for the remainder of the summer season until 27 October.

“Customers booked to fly on this route up to this date are being offered options including a full refund.”

On Monday, easyJet announced that it would look to resume flights to the Israeli city on Sunday after suspending flights after the attacks.

It comes just after easyJet resumed flights to Israel on 25 March after cancelling all flights following the 7 October Hamas attacks on the country.

The weekend saw a number of other major airlines suspend flights, including WizzAir, Air Canada, Delta, Iberia and Lufthansa.

Q: When do you expect interest rates to be cut in the UK, asks Thérèse Coffey MP.

Clare Lombardelli says her first MPC meeting will be in August [the decision is due at noon, Thursday 1st August].

She won’t put a date on when she expects UK rates to start falling.

But the issue to consider, she explains, is that while headline inflation is falling quite quickly, the factors adding to inflation are things that could be persistent, such as services prices and the labour market.

The falls in the inflation basket are changes to goods and energy prices, which drove inflation on the way up.

So the question is how persistent inflation will be, says Lombardelli, noting that today’s employment report showed wages are rising at 6%, much higher than the Bank’s target.

But on the other hand, economic activity is being hit by monetary policy.

So policymakers need to balance those two risks, Lombardelli explains, adding that the ‘direction of travel’ for European central banks is towards looser monetary policy.

Updated

Clare Lombardelli also defended her (soon to be) colleagues on the Bank’s Monetary Policy Committee, over their reluctance to raise interest rates sooner after the pandemic.

Treasury committee member John Baron MP told Lombardelli that there is a consensus that the Bank of England was “well behind the curve” on inflation, and too slow to start raising interest rates as inflation climbed even before the Ukraine war.

You can’t defend that, can you, Baron asks.

Lombardelli can! She points out that central bankers around the world were juggling competing risks on activity and inflation; in the UK there were fears that unemployment would rise as the furlough scheme ended, while goods inflation had been pushed up by pandemic bottlenecks, which would unwind.

As such, Lombardelli argues that the decisions made by the Bank – which started raising interest rates in December 2021 – were reasonable.

I think it’s perfectly understandable that the balance of risks at the time was interpreted the way it was.

Lombardelli: Middle East developments could push up inflation

Developments in the Middle East and disruption to shipping through the Red Sea could exert upward pressure on inflation in the near term, BoE deputy governor appointee Clare Lombardelli tells MPs.

In a signal that geopolitical tensions could add to the bumpiness of inflation, Lombardelli says:

The quantities of goods being shipped through the Red Sea are down and shipping costs have more than doubled since the end of 2023. On energy, we saw in 2021 and 2022 how fast energy markets can be disrupted, with a direct impact on inflation.

Energy markets are now much calmer, UK gas prices are near pre-pandemic levels, but with a quarter of global oil and gas trade passing through the Strait of Hormuz, this is a potential choke point in the event of escalation.

So far there has been a limited impact on energy prices or inflation, but there are risks to activity and inflation in an adverse scenario.

Clare Lombardelli also tells MPs that Brexit appears to have had a negative economic impact.

In her written evidence to the Treasury committee, the incoming BoE deputy governor says:

It is not possible to quantify the specific impact of Brexit on the UK economy given it has taken place alongside other significant economic shocks and trends – the pandemic, the energy price shock, and a general slowing in the rate of globalisation.

The evolution of the UK economy since 2016 suggests that the economic impacts of Brexit may have come through more quickly than were anticipated by the weight of analytical studies which were conducted in the period following the referendum.

The evidence suggests that Brexit has had a negative economic impact through investment and trade. What is less certain is the precise size of this negative impact.

Updated

Fall in inflation likely to be 'bumpy', BoE's Lombardelli warns

The fall in UK inflation is likely to be ‘bumpy’ in the coming months, newly appointed Bank of England deputy governor Clare Lombardelli has warned.

In written evidence to parliament’s Treasury committee (where she is testifying this morning), Lombardelli predicts that the short and medium-term prospects for the UK economy are “improving”, after a very difficult period for people and businesses.

But while she sees price rises slowing, Lombardelli – who joins the Bank in July – warns that the journey may not be smooth, and that services inflation may be stickier.

She says:

Inflation has fallen significantly from the extremely painful levels which peaked at just over 11% in 2022, and it is expected to continue to fall.

The decline in the figures is likely to be bumpy as pricing behaviour isn’t smooth and base effects will impact on the numbers, but the overall experience for people should be of lower and more predictable inflation.

Headline inflation is expected to fall more quickly than services inflation.

The next UK inflation report, for March, is due tomorrow morning. CPI inflation is expected to have dropped to 3.1%, down from 3.4% in February, but still above the Bank’s 2% target.

Lombardelli, currently the chief economist at the Organisation for Economic Co-operation and Development (OECD), is a former economic advisor to David Cameron and George Osborne.

She will succeed Ben Broadbent, the current deputy governor for monetary policy, on 1 July.

In today’s evidence to the Treasury committee, Lombardelli also predicts that unemployment will rise as higher interest rates and tighter financial conditions feed through the economy.

But, she adds, “these increases should not be large”, and the labour market is expected to remain relatively strong by international and historical standards.

Updated

Today’s labour market report is a story of two halves: “a cooling jobs market dampened by slower growth and falling demand and with pay growth still stubbornly strong.”

So says Sanjay Raja, chief UK economist at Deutsche Bank Research.

He explains that the pay data – showing average earnings up 6% per year – wasn’t what the Bank of England’s MPC wanted to see.

But the employment data, which “surprised massively to the downside” with a fall of 156,000, gives clearer signs that the labour market is cooling.

He adds:

The LFS redundancy data also highlighted a continuing trend of higher redundancies, with February marking a third consecutive month of 100k+ redundancies.

Updated

Tony Wilson, director at the Institute for Employment Studies, has now posted a detailed thread on today’s jobs data.

It shows how long-term ill health is driving economic inactivity higher, and how there’s been a worrying rise in long-term unemployment:

UK recruiters see challenging conditions

Financial results from two UK recruitment firms today show that the jobs market has cooled, at home and abroad.

Hays reported a 16% drop in fees earned by filling vacancies in the United Kingdom & Ireland (UK&I) in the first quarter of this year.

Overseas jobs market also cooled, dragging Hays’ total like-for-like fees down by 14%

Dirk Hahn, Hays chief executive, explains:

“Market conditions remained challenging through the quarter. In Australia and UK&I, Temp activity was stable through Q3, although volumes in each are down c.15% YoY, and slightly below pre-Christmas levels.

Rival recruiter Robert Walters reported a 20% drop in net fees in the UK in Q1, saying that trading conditions remain challenging, although fee income rose sequentially in London for the first time in five quarters.

Across the group, gross profits fell 21%.

Toby Fowlston, chief executive, commented:

“In-line with the latter part of 2023, overall trading conditions remained challenging during the first quarter of 2024.

Although certain macro-economic indicators, such as inflation, continue to moderate in some markets, the general environment remains one where client and candidate confidence is at low levels, which we expect to continue to be a headwind to fee income growth in the near-term.

Updated

Full story: UK unemployment rate leaps to 4.2%

The number of people out of work rose by more than expected in February, raising concerns that employers are beginning to lay off staff in response to high interest rates.

The Office for National Statistics said the unemployment rate increased to 4.2% in February from 3.9%, well above the 4% expected by City economists.

Analysts said the cooling effects of higher interest rates were leading to more redundancies and discouraging employers from hiring staff.

Despite rising unemployment, regular pay growth excluding bonuses was stronger than expected at 6% in the three months to February, underlining the dilemma facing the Bank of England over when to start cutting interest rates. Pay growth of 6% was down from 6.1%, but stronger than the 5.8% expected by economists polled by Reuters. Total pay, which includes bonuses, was unchanged at 5.6%.

More here.

The drop in the UK’s employment rate to 74.5%, down from 75% in the previous quarter, means the jobs recovery is going backwards, warns Stephen Evans, chief executive at Learning and Work Institute.

Evans points out that Britain is lagging behind fellow G7 nations:

“The labour market continues to ease with falls in employment and rises in unemployment and economic inactivity. Most troubling is that the UK is the only G7 country where employment remains lower than pre-pandemic levels. This is driven by rises in economic inactivity, with 2.8 million people economically inactive due to long-term sickness, a record high.

“The answers are to get the economy growing and offer more and better help to find work to people who are economically inactive. The number of people economically inactive due to long-term sickness who get help to find work each year is only half the number who want a job. That needs to change.”

Shares in fashion retailer Superdry have been briefly halted this morning after plunging over 25%, as it announced plans for a sweeping restructuring plan and to delist from the stock market.

My colleague Julia Kollewe explains:

Superdry is to embark on a restructuring plan including rent reductions in stores and a fundraising, backed by its boss and co-founder Julian Dunkerton, and will delist from the London Stock Exchange.

The struggling British fashion retailer announced the plans a fortnight after Dunkerton decided against making a takeover offer with partners after a two-month pursuit. Superdry hopes the measures will return the business to a “more stable footing”.

The three-year restructuring plan, a formal procedure under the Companies Act for companies in financial difficulties, is expected to result in rent reductions on 39 UK sites, the extension of the maturity date of loans, and “material” cash savings from rent and business rate changes.

The Resolution Foundation have dug into today’s UK jobs data, and found that economic inactivity has risen to its highest level since 2015 among working age people.

Resolution explain:

This rise is broad based – the inactivity rate is up (and the employment rate down) for all age groups except those aged 35-49, and in all English regions outside London and the South East.

The number of people inactive because of ill health has hit a new record high of 2.8 million, while there has been a worrying increase in the number of people who don’t want a job – the number of inactive who want a job is at its lowest since Mar-May 2022.

TUC: People are too sick to work

One cause of Britain’s long-term sickness crisis is the long waiting lists for treatment on the NHS.

Data last week showed that the waiting list for routine hospital treatment in England has fallen for the fifth month in a row, but remained near a record high, with 7.54 million treatments waiting to be carried out at the end of February.

TUC General Secretary Paul Nowak says today:

“NHS waiting lists are near record levels. But instead of taking responsibility, the Tories are attacking people who are too sick to work. The nasty party is back!

Updated

European stock markets take a tumble

The London stock market has made a bad start to the morning.

The FTSE 100 index of blue-chip shares has dropped by around 1.35%, or 105 points, to 7860 – its lowest level since 21 March.

Nearly every stock on the index is in the red, with miners and banks among the fallers.

The City is catching up with losses on Wall Street last night, where stocks fell again amid continuing angst that the US Federal Reserve may not cut interest rates as soon as hoped.

Shares across Europe are also in the red, with France’s CAC index down 1.8% at the open and Spain’s IBEX off 1.2%.

China’s faster-than-expected growth in Q1 isn’t cheering investors; perhaps because data for March was weaker than expected….

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

“Risk-off sentiment is gripping European markets today - the DAX, CAC and FTSE 100 have shed more than 1% each as negative momentum from yesterday’s sell-off on Wall Street carries forward to this morning’s price action. The strength of the US dollar is proving problematic for risk appetite as hopes fade of a near-term rate cut stateside. San Francisco Fed President Mary Daly said there’s ‘no urgency’ to cut US interest rates.

There are also worries about rising geopolitical tensions in the Middle East with concerns about how Israel plans to respond to Iran’s attack over the weekend.

In the UK, almost all stocks are in the red today on the FTSE 100, caught up in today’s sell-off. B&M European Value Retail has plunged to the bottom of the blue chip index, giving back yesterday’s gains, despite forecasting full year profit at the top end of guidance.

Updated

Secretary of State for Work and Pensions, Mel Stride MP, insists the government is taking steps to tackle the UK’s rise in economic inactivity (see previous post).

He says:

“We’ve seen long term sickness related inactivity rise since the pandemic, that’s why we introduced our £2.5bn Back to Work Plan to transform lives and grow the economy.

“Our welfare reforms will cut the number of people due to be placed in the highest tier of incapacity benefits by over 370,000. As millions are benefiting from this month’s huge boost to the National Minimum Wage, it is work, not welfare, that delivers the best financial security for British households.”

Alarm over rise in economic inactivity

Labour market experts are alarmed by the continued rise in the number of Britons who are economically inactive, as shown in today’s employment report.

The UK economic inactivity rate for those aged 16 to 64 years has risen to 22.2% in December-February, with 9.404 million people neither in work (employed) or looking for work (unemployed).

That’s 150,000 more than in the previous quarter, and 275,000 more than a year ago, the Office for National Statistics reports.

The ONS says the increase in the last quarter is mainly due to a rise in students and those inactive because of long-term sickness.

There are record numbers out of work due to long-term ill health, points out Tony Wilson, director at the Institute for Employment Studies.

Wilson explains:

“Today’s jobs figures are surprisingly poor, with a steep fall in employment and a sharp rise in those out of work, including an unexpected rise in unemployment.

However, most concerning is the rise in ‘economic inactivity’, which is the measure of those not in work but not looking for work, which is even higher now than it was in the depths of the pandemic. Overall there are nearly a million fewer people in the labour force than there were four years ago, and over a million fewer in work than there would have been if pre-crisis trends had continued.

The trouble is that not enough people out of work are looking for jobs, rather than that people who are looking for jobs can’t find them. In other words, the weak labour market is holding back economic growth, not the other way round.

Ben Harrison, director of the Work Foundation at Lancaster University, says the UK workforce is “sicker and poorer as economic inactivity has risen further to 9.4 million, and unemployment has risen to 4.2%”.

Harrison explains:

“A record 2.82 million people are economically inactive due to long-term sickness, and the UK is facing unresolved structural issues with labour market participation, as employers aim to fill 916,000 vacancies.

The UK continues to be an international outlier with participation rates below pre-Covid levels. Since December 2019 to February 2020, 717,000 people have become economically inactive due to ill health and the tide is not turning.

The Institute of Directors is also concerned. Alexandra Hall-Chen, principal policy advisor for employment at the IoD, says:

The rise in economic inactivity over both the quarter and the year is a worrying development for businesses, given its potential to exacerbate persistent skills and labour shortages in the UK.

The ongoing expansion of government-funded childcare is a welcome step to increasing labour market participation, but more action from government is urgently needed to increase domestic labour supply.”

Updated

The easing pressure in the labour market keeps the Bank of England on track for a summer cut to interest rates, says Yael Selfin, chief economist at KPMG UK.

“The slight easing in regular pay growth will bring some comfort for the Bank of England which has relied on the pay data as a key gauge of domestic inflationary pressure.

Moreover, the rise in unemployment rate paints a picture of a less tight labour market. The exact timing of the first rate cut will be a hot debate for the MPC in the coming months.

Real wage growth hits 2.5 year high

UK wage growth has cooled, today’s labour market report shows, but falling inflation means that real pay is actually accelerating.

Regular pay (excluding bonuses) rose by 6.0% per year in December-February, a slowdown on the 6.1% recorded in November-January.

Growth in total pay (which includes bonuses) was unchanged at 5.6%.

But once you account for CPI inflation, real wages are rising at the fastest pace in two and a half years.

Real total pay (adjusted for CPI) was 1.8%, while real regular pay grew by 2.1% – both were last higher in July to September 2021.

UK firms have cut back on their vacancies – another sign that demand for labour is weakening.

There were 916,000 vacancies across the economy in January to March 2024, the ONS reports, which is a drop of 13,000 - or 1.4% – compared with October to December 2023.

Jake Finney, economist at PwC UK, says:

“The latest data suggests the UK labour market continues to cool, albeit at a gradual pace considering the strain the economy has been under over the past few years.

The unemployment-to-vacancies ratio, a key measure for the Bank of England, ticked up to 1.6 in the three months to February 2024 as unemployment increased and vacancies fell further.

UK unemployment rate jumps to 4.2%

Newsflash: Britain’s unemployment rate has risen to 4.2%, as the number of workers in payrolled jobs falls and more people leave the jobs market.

The latest healthcheck on the UK’s labour market shows that the unemployment total rose by 85,000 in the December-February quarter, to 1.44 million.

That takes the jobless rate to its highest level since last summer, just before the UK began sliding into a shallow recession.

The number of people in employment fell by 156,000 in the quarter to 32.98 million, as firms cut back on their workforce.

But not all those people joined the ranks of the unemployed; another 150,000 people were classed as ‘economically inactive’ in the quarter, taking the number neither in work nor looking for a job to 9.404 million.

And in March, the number of payrolled employees shrank by 67,000, to 30.3 million.

ONS director of economic statistics Liz McKeown says there are “tentative signs that the jobs market is beginning to cool”, given the drop in headline employment rate and the fall in payrolls.

McKeown adds:

“However, we would recommend caution when looking at the size of the fall in headline employment, as previously highlighted lower sample sizes mean there is greater volatility in quarterly changes than was the case.”

Updated

Introduction: China's GDP beats forecasts, but there are signs of weakness too

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

China’s economy has beaten expectations for growth in the first quarter of the year, but there are already signs that growth may be slowing.

China’s gross domestic product. grew by 5.3% in January-March compared to a year ago, data released today by the National Bureau of Statistics showed.

That beat foreasts of 4.6% increase, and shows a slight rise on the 5.2% growth recorded in the previous quarter.

China’s National Bureau of Statistics says the country’s economy had continued to rebound in Q1 2024, but also struck a cautious note:

Generally speaking, in the first quarter, the national economy made a good start with positive factors amassing, laying a strong foundation for achieving the annual development targets.

However, we should be aware that the external environment is becoming more complex, severe and uncertain, and the foundation for stable and sound economic growth is not solid yet.

However, a flurry of economic reports from March were weaker than expected, implying that demand softened at the end of the quarter.

Retail sales figures for March only rose by 3.1%, missing forecasts of 4.5% growth, while industrial production grew by 4.5%, failed to meet market expectations of 5.4% growth.

Stephen Innes, managing partner of SPI Asset Management, says:

Amidst mounting concerns over the resilience of the Chinese economy, Tuesday’s data releases from Beijing delivered a mixed bag of results, leaving investors grappling with a multitude of uncertainties.

On the one hand, China’s headline Q1 GDP figure of 5.3% exceeded expectations, suggesting a stronger-than-anticipated start to the year and providing a glimmer of hope for meeting annual growth targets.

However, the optimism surrounding GDP was tempered by lacklustre performances in other key economic indicators.

Asia-Pacific markets have fallen into the red, with China’s Shenzhen Composite index down 2.3%. Hong Kong’s Hang Seng has lost 1.5%, and Australia’s S&P/ASX 200 is down 1.7%.

Concerns over tensions in the Middle East, along with anxiety over how soon central banks will start cutting interest rates, are dampening risk appetite among investors.

The agenda

  • 7am BST: UK unemployment report

  • 10am BST: ZEW index of eurozone economic sentiment

  • 10.15am BST: Treasury Committee hearing with Clare Lombardelli, newly appointed deputy governor at the Bank of England.

  • 1.30pm BST: US building permits and housing starts data for March

  • 2pm BST: IMF releases its latest World Economic Outlook

  • 3.15pm BST: IMF releases its latest Global Financial Stability Report

Updated

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