UK economy returns to growth Newsflash: The UK’s short, shallow, recession is over. The UK economy grew by 0.6% in the first quarter of this year, the Office for National Statistics has reported. That’s stronger growth than expected. The ONS says the recovery was driven by the services sector, and industry: In output terms, services grew by 0.7% on the quarter with widespread growth across the sector; elsewhere the production sector grew by 0.8% while the construction sector fell by 0.9%. In expenditure terms, there were increases in the volume of net trade, household spending and government spending, partially offset by falls in gross capital formation. This rise in GDP means that the economy is no longer in a technical recession, after activity fell in the third and fourth quarters of last year. FTSE 100 ends week at new closing high A late update: The FTSE 100 share index has finished the day at a new alltime high of 8433 points. That’s a gain of 52 points, or 0.6%, and means the blue-chip share index has racked up its third weekly gain in a row. It’s been on quite the rally since mid-April. Matt Britzman, equity analyst at Hargreaves Lansdown, says: “It’s Friday afternoon, the sun’s out, and the FTSE 100 has closed at an all-time high – no this is not a dream. Investors are finally starting to look at UK businesses and see reasons to be optimistic. The Bank of England held rates steady earlier in the week but hinted at rate cuts to come. Meanwhile, economic growth came in better than expected, but crucially not too much better to drive up fears it could cause inflation to spike. This comes on the cusp of major UK banks reporting over the past couple of weeks, and there was a huge array of optimism from management teams around the outlook for the UK. Many will look at this run and assume it has no legs, UK investors have been beaten down too many times in the past. UK bulls will argue it’s been long overdue, with the market suffering from a hefty valuation discount to global peers for some time. Next week’s jobs and wages data will be key for momentum, markets will want to see continued signs that stickier elements of inflation are easing, or it’ll raise fresh questions about if and when rate cuts might come.” Closing post Time to recap…. The UK is officially out of recession after figures showed the economy grew by 0.6% in the first three months of the year. The Office for National Statistics (ONS) said the period from January to the end of March marked a return to growth after a mild recession in the second half of 2023. It was the strongest rate of quarterly growth since the end of 2021, and a better performance than expected by economists, who forecast growth of 0.4% in the first quarter. The downturn came to an end after an increase in activity across the services sector, which has flourished since the turn of the year as wages have outstripped inflation, easing the pressure on consumers. However, forecasters expect the UK to grow slowly this year as high interest rates and last year’s inflation surge continue to take their toll on disposable incomes. The Bank of England has predicted that a lack of momentum in the economy means gross domestic product (GDP) will grow by only 0.5% this year. The Bank kept interest rates unchanged at 5.25% on Thursday but indicated it may begin cutting them from June. Economists broadly hailed the pick-up in growth, which suggests the UK economy may do better this year than expected. Optimism over economic prospects, and hopes that interest rates will soon be cut, helped to push the UK’s FTSE 100 to a new intraday high of 8455 points today – on track for another strong week. Deutsche Bank has lifted its forecast for UK growth this year, saying: We now expect UK GDP to expand by 0.8% (previously: 0.5%), converging with the OBR’s central projection, but sitting some way above consensus (0.3%) and the Bank of England’s now slightly stale growth forecast (0.5%). We maintain our GDP growth projections for 2025 and 2026 at 1.5% and 1.6%, respectively (Figure 10). Climate Choir Movement sing at Standard Chartered AGM Over in the City of London today, Standard Chartered has been accused of being complicit in environmental destruction by environmental activists, at its annual general meeting. A group called the Climate Choir Movement sang a tune called “Fossil Fuels are Trouble”, a reworking of Taylor Swift’s hit “I Knew You Were Trouble” They say Standard Chartered is complicit in environment destruction and human rights violations in the Philippines and Mozambique. Jo Flanagan, co-founder of the Climate Choir Movement, says: “Last year we sang at Barclays AGM. In March we occupied and sang in the Houses of Parliament. And today we say to Standard Chartered ‘your standards are twisted’. While they continue to invest in dirty gas and coal, global warming has exceeded temperatures of 1.5 degrees Celsius over a 12-month period. This is a dire warning to humanity — a warning that some bankers still do not seem to heed.” Jaguar Land Rover reports record sales as luxury car demand booms Luxury carmaker Jaguar Land Rover (JLR) has reported its highest ever yearly sales and its biggest profit in nearly a decade. In a sign that JLR’s customers are not cutting back, the auro maker has reported £29bn revenues in the year to March, over a quarter higher than the previous year. This was driven by record sales of its Range Rover vehicles. Around 133,000 vehicles had been ordered at the end of the financial year, three quarters of which were for Range Rover, Range Rover Sport and Defender models. The group’s pre-tax profit hit £2.2bn, the highest amount since 2015, it said. Customers clearly weren’t put off by a wave of thefts of Range Rovers, which has pushed up the cost of insuring the cars. Inded, JLR reports that there is strong interest in its Range Rover Electric, with over 28,700 sign ups to the waiting list since opening in December 2023. With less than 90 minutes trading to do, the UK’s FTSE 100 share index is on track to post its second-best week of the year. It’s gained around 2.8% this week, rising to a new alltime high of 8,455 points today, its best weekly gain since a fortnight ago. George Lagarias, chief economist at Mazars, sees plenty of positive signs from UK large caps (companies with a high market capitalisation), saying: For one, the rally was broad-based, with only a handful of stocks underperforming. Even more important, the outperformers centred largely around the consumer discretionary sector. Following this morning’s positive Q1 GDP print, on the back of a strong services sector, the stock market seems even more confident that British consumers will manage to bring the UK economy back towards trend growth.” Berenberg: UK economy is finally catching up Today’s UK GDP report shows that the economy is “finally catchig up a bit”, says Holger Schmieding, chief economist at Berenberg bank. Schmieding explains: After years of self-inflicted Brexit turmoil, the UK economy can – from a somewhat depressed level – expand at a pace at least in line with that of its biggest trading partner, the Eurozone. The solid gain in GDP reduces the need for an immediate rate cut. Schmieding adds that the UK economy has underperformed the US and the Eurozone since the start of the pandemic, telling clients: The slump in 2020 was deeper and the subsequent recovery levelled off in 2022 even more so than in the Eurozone in the wake of the surge in energy and food prices. The strong Q1 GDP data partly correct an unexpectedly weak finish to 2023 Iceland chair: customers still paying price of Truss calamity Richard Walker, the executive chairman of Iceland Foods, says it is “immeasurably wrong” of the government to tell people to be grateful the recession is over. Speaking to Radio 4’s The World At One, Walker explains that consumers are still suffering from the cost of living squeeze, even though the economy is growing. Walker – who quit the Conservatives last October – says: My customers are still paying the price of the Truss calamity. Inflation is still baked in and day-to-day living expenses are still very much affected. We’ve had years of price rises now, and people do feel worse off, because they are. Walker adds that Iceland recently conducted a survey of 4,000 customers – it found that 94% said conditions are not getting any better. Many cited sub-par public services and unaffortable childcare. He adds: I think it’s immeasurably wrong of the government to tell people to feel grateful that we’ve exited recession. Sunak: confidence is returning to the economy Rishi Sunak has insisted that “things are starting to feel better” and that confidence in the economy is growing after the UK economy moved out of recession, PA Media report. On a visit to Siemens Healthineers factory in Eynsham, Oxfordshire, Sunak claimed that the Government’s economic plan was working. Sunak told Siemens workers: “After undoubtedly a difficult couple of years that the country has had, actually now things are starting to feel better. “Confidence is returning to the economy and the country, and I hope that you’re starting to feel that too.” Sunak, and chancellor Jeremy Hunt, were shown Siemans machines at the factory and given a demonstration of the magnet technology being developed at Eynsham. NIESR: UK GDP Expected to Grow by 0.6% in Q2 The UK economy is likely to keep growing at a decent pace during the current quarter, according to the National Institute of Economic and Social Research (NIESR). They are predicting GDP will rise by 0.6% in April-June, matching the forecast-beating 0.6% expansion reported in January-March this morning. NIESR say: The fact that the UK’s GDP growth transitioned into positive territory after experiencing the shallow recession in the second half of 2023 is encouraging. However, the UK economy has largely flatlined following the initial stages of post-pandemic recovery. To escape the low-growth trend into a new and sustained era of high output growth requires structural changes and public investment. We expect that monthly GDP will continue its momentum in April, growing by 0.1 per cent relative to March, driven by growth mainly in services and production, particularly Agriculture. Indeed, the S&P Global/CIPS UK services PMI reported an optimistic balance of 55.0 in April up from 53.1 in March. In line with this positive sentiment, we now forecast GDP to grow by 0.6 per cent in the second quarter of 2024, mainly driven by services sectors. ECB: June rate cut is plausible The European Central Bank is poised to start cutting its key interest rates next month, the record of their last meeting show. The minutes of the ECB’s April meeting, where it left borrowing costs on hold, have been released – and show that policymakers were more confident that the “disinflationary process” was continuing. This indicates that the ECB’s governing council could vote for a rate cut next month, if new economic forecasts suggest inflation is indeed falling. The minute say: Members concurred that the most recent information had broadly confirmed the March staff projections, thus increasing their confidence that the disinflationary process was continuing At the same time, important new data – including new staff projections – would be released ahead of the June meeting, allowing the Governing Council to make a more comprehensive assessment. While progress had been seen, monitoring the triangle between wages, productivity growth and profits continued to be key. It was seen as plausible that the Governing Council would be in a position to start easing monetary policy restriction at the June meeting if additional evidence received by then confirmed the medium-term inflation outlook embedded in the March projections. Huw Pill also declines to say whether he was at the dovish, or hawkish, range of the seven MPC policymakers who voted to hold interest rates at 5.25% this week. Pill says the Monetary Policy Committee contains a healthy range of views, which are expressed fully and richly – a strength of the UK central bank, he explains. Pill also suggests it won’t be hard to find out where he lies on the hawk-dove range…. [the other six policymakers who voted for no change include governor Andrew Bailey, who was dropping dovish hints yesterday that rates might fall faster than expected. But noted hawks include Catherine Mann and Jonathan Haskel, who earlier this year both wanted to raise rates higher]. BoE chief economist Huw Pill also cautions that the Bank’s medium-term inflation forecasts don’t necessarily give a signal on rate moves at the next meeting (in June) or the one after (in August). Those forecasts suggest inflation will be below target at the end of the Bank’s forecast horizon. Pill also refuses to be lured by a question on the impact of the upcoming UK election. He tells the Bank’s agents that the central bank is independent, and makes its decisions without political influence. It’s forecasts are conditional on the announced policy of the government of the day, he adds. BoE"s Pill: a little ill advised to just focus on June meeting The Bank of England’s chief economist, Huw Pill, is briefing the Bank’s agents now following yesterday’s interest rate decision. Pill says the Bank has sent a “relatively clear signal” that it is comforted by recent falls in inflation, which do raise the prospect of reducing the amount of restrictive monetary policy in the system. But, if rates are to be cut, there needs to be sufficient evidence that the downward path of inflation is strong enough to justify it, Pill says. Pill explains that he is focused on the underlying components of inflation, not the headline rate – which dropped to 3.2% per year in March. He also suggests it’s “a little ill-advised” to just focus on the June meeting – reminding agents that governor Andrew Bailey said yesterday a June rate cut was neither ruled out nor a fait accompli. Will Britain’s strong recovery deter the Bank of England from cutting interest rates? Gabriella Dickens, G7 economist at Axa, thinks not – and is expecting the first cut next month. Following today’s GDP report, Dickens told clients: More broadly, the recovery was the result of stronger households’ spending amid the recovery in real incomes and stronger demand underpinning a rebound in the manufacturing sector. Momentum is strong, and the composite Purchasing Managers’ Index remains consistent with growth of around 0.3% quarter-on-quarter in Q2. We have revised up our 2024 GDP forecast to 0.6%, from 0.4%. For now, we think the Bank of England’s Monetary Policy Committee will largely look through the strength in activity, as long as inflation and labour market data evolve as it expects. We continue to forecast the first rate cut in June. The Bank should be focused on inflation, rather than GDP, as it’s mandate is to get CPI to 2% in the medium term. Yesterday, its latest forecasts showed that CPI inflation is on track to fall to 1.6% in three years, based on the current market path of interest rates (suggesting rates may need to fall faster than expected…). Analysis: It"s better news, but not boom-boom Britain The first quarterly expansion in a year. Recession receding into the rear-view mirror. A stronger performance in recent months than the Bank of England and the City had thought likely. Faster growth in early 2024 than any other member of the G7 group of leading industrial nations. When you are in as deep a political hole as the current government you seize on any good news, and there was plenty for Jeremy Hunt to choose from in the latest figures from the Office for National Statistics. The figures were proof that the economy was returning to “full health for the first time since the pandemic”, the chancellor said. Yet when people look back on the early months of 2024 they will probably remember the relentlessly awful weather rather than a time when the economy was cooking with gas. Boom-boom Britain it certainly isn’t. To be sure, the UK has emerged from recession but the downturn in the second half of 2023 was a much more modest affair than some of the monster downturns of the past 50 years. The hollowing out of manufacturing in the early 1980s was a genuine slump, as was the housing market crash in the early 1990s and the near collapse of the banks in the global financial crisis of 2008. The bigger picture is that Britain’s growth performance during the current parliament has been extremely weak….. City economists are likely to upgrade their forecasts for UK growth during 2024, following this morning’s news of 0.6% growth in January-March. As Sky News’s Ed Conway points out, this is a welcome return to ‘trend growth’ Simon French of Panmure Gordon predicts this will trigger some growth upgrades: With independent consensus for UK growth of 0.4% in 2024 - we are at 1.2% YoY - then Q1 24 growth of 0.6% means that economist upgrades will [begrudgingly] emerge over the coming days. James Smith of ING suspects growth will only be slightly slower in the April-June quarter: The bottom line is that the economy is entering a brighter period. The timing of the March bounce provides a nice starting point for the second quarter, where growth could easily come in at 0.4% or 0.5%. Professor Costas Milas, of the University of Liverpool, has crunched the data, and tells us: Today’s first estimate of 0.2%, q-on-q4 growth for 2024Q1 is higher than yesterday’s estimate of -0.1% produced by the Bank of England. This will create a momentum effect which is bound to lift next quarter’s growth from q-on-q4 growth of 0% (as estimated by the BoE) to something considerably higher. Whether this momentum effect is able to generate additional inflation remains to be seen. As things stand, it is more likely than not that the Bank’s MPC will keep interest rates on hold in June. Needless to say, things might change until then! The stock market rally in London today has helped to lift the pan-European Stoxx 600 share index to a new alltime high. Hopes of interest rate cuts in the eurozone in June, and a strong earnings season, are both lifting shares. In Paris, the French CAC 40 has also hit a fresh record high this morning too (jumping 0.8% to 8256 points). The broad picture is that the UK economy is entering a period of stronger growth, says ING developed markets economist James Smith: “The UK economy powered out of its technical recession in the first quarter, judging by the initial GDP figures released today. The economy expanded by a whopping 0.6% quarter-on-quarter. Admittedly the data underlying that number has been pretty volatile. Some caution should be taken when interpreting these figures, just like the weaker numbers at the end of last year. Still, it tallies with other economic indicators which suggest the economy is entering a period of stronger growth. The purchasing managers indices are the most obvious example, and these are consistent with continued momentum in the second quarter. Even here though, there is some debate over whether the numbers are being artificially boosted by “residual seasonality” (i.e., not properly adjusting for seasonal trends after the pandemic).