Bank of England: Global economic conditions have worsened.
Global economic conditions have worsened, putting pressure on the finances of UK households and businesses, the Bank of England has warned.
In its latest Financial Stability Report, just released, the Bank of England warns that “The economic outlook for the UK and globally has deteriorated materially”, with inflationary pressures rising sharply following the war in Ukraine.
The Report says:
Prices of essential goods such as food and energy have risen sharply in the UK and globally, and the outlook for growth has worsened. This is largely a result of Russia’s illegal invasion of Ukraine.
Like other central banks around the world, we have increased interest rates to help slow down price increases. Markets have been volatile and financing conditions have tightened.
These higher prices, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt. Given this, we expect households and businesses to become more stretched over coming months. They will also be more vulnerable to further shocks.
More to follow….
Key events:
Russia’s invasion of Ukraine means there is a danger of further significant disruption in the commodity markets, says BoE governor Andrew Bailey.
He points to the surge in volatility in commodity prices, which led to a rise in margin calls (on traders who had been caught out by these moves)
In particular, Bailey cites the London Metal Exchange, which was forced to suspend trading in nickel for a week after prices rocketed [with one major trader caught in a short squeeze]
The Financial Stability Report points out that commodity markets can be concentrated among a few “large, opaque and, highly interconnected participants”, which means shocks can spread quickly.
The FPC will continue to monitor the sector, Bailey says, and stands ready to work with other authorities as necessaryto ensure the resilience of the financial sector.
Bank of England governor Andrew Bailey is holding a press conference now, to outline the report.
He emphasises that global financial conditions have tightened significantly in recent months, as today’s report states, but that the UK banking system remains strong.
Despite the weaker outlook, the UK banking system remains strong.
Bailey also says the Bank will start its annual stress test of the banking sector in September, after delaying it from March so that lenders could focus on managing the associated market disruption from the Ukraine war.
It will test the resilience of the UK banking system to several potential downside risks, including:
Deep simultaneous recessions in the UK and global economies, real income shocks, large falls in asset prices and higher global interest rates.
The results should be published in the middle of next year.
Bank of England tells lenders to brace for economic storm
With an economic storm looming, the Bank of England has confirmed it is telling UK banks to ramp up their capital buffers.
Its Financial Policy Committee (FPC) confirmed that the BoE will double the counter-cyclical capital buffer (CCYB) rate to 2% July next year, meaning they will have more capital in reserve.
The FPC says:
To help ensure UK banks have the resilience to lend in stress, we will increase the UK CCyB rate from 1% to 2% from July 2023.
[this increase was first proposed last December].
The Bank adds that it stand ready to vary this rate in either direction in the future, depending on how risks develop.
Household finances likely to become more stretched
The Bank of England is clear that the cost of living crisis will pile more pressure on the finances of households and businesses.
With interest rates rising, it will be harder for familes and firms repay or refinance debt, meanin they will become more stretched.
Plus, falling real incomes will add to the strain on borrowers.
The Bank says:
The combination of inflationary pressures, slower economic growth and tightening financial conditions will adversely affect households’ and businesses’ finances in the near term.
The FPC assesses that UK household and corporate debt vulnerabilities have increased somewhat since December and are likely to increase further.
Bank: Equity markets likely to remain volatile
Turning to the financial markets, the Bank points out that stocks have had a torrid year (global shares are down around 20% since January, hammering pensions and ISAs).
The worsening economic outlook has caused markets to be volatile in recent months, it says, with more turbulence likely:
Equity prices have fallen sharply this year and are likely to continue to be volatile. And the Russian invasion of Ukraine has resulted in very high levels of volatility in commodity markets. This has put pressure on businesses that use or trade commodities.
Some businesses that are very exposed to commodity markets may face sharp falls in their profits.
But the wider UK financial system has so far been resilient to the stress facing commodity markets, the Bank points out:
UK businesses that were previously able to access funding from financial markets have continued to be able to.
But there are still risks in these markets that could affect UK financial stability. It is crucial that international work coordinated by the Financial Stability Board is successful in tackling these risks.
Outlook for the economy is very uncertain, warns BoE
A number of risks could affect UK financial stability, the Bank of England warns, given the ‘very uncertain’ economic outlook.
It says:
The Russian invasion of Ukraine could cause more disruption to global energy and food markets. There are also risks from abroad that could indirectly affect the UK.
Risks for borrowers with higher levels of debt will be greater if prices increase faster than expected, growth is weaker than expected or it becomes harder to borrow. In the past we have highlighted that lending to businesses with higher debt burdens, including in the US, could be a particular risk to the UK financial system.
Countries with high levels of government debt will also be impacted if interest rates increase further or if growth is weaker than expected. For example, some countries in the euro area have seen a big increase in interest rates on government debt recently.
And in China, disruption caused by Covid and a vulnerable property market continue to be risks that could affect the stability of the UK financial system.
Bank of England: Global economic conditions have worsened.
Global economic conditions have worsened, putting pressure on the finances of UK households and businesses, the Bank of England has warned.
In its latest Financial Stability Report, just released, the Bank of England warns that “The economic outlook for the UK and globally has deteriorated materially”, with inflationary pressures rising sharply following the war in Ukraine.
The Report says:
Prices of essential goods such as food and energy have risen sharply in the UK and globally, and the outlook for growth has worsened. This is largely a result of Russia’s illegal invasion of Ukraine.
Like other central banks around the world, we have increased interest rates to help slow down price increases. Markets have been volatile and financing conditions have tightened.
These higher prices, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt. Given this, we expect households and businesses to become more stretched over coming months. They will also be more vulnerable to further shocks.
More to follow….
Back in the markets, the euro has slumped to a two-decade low against the US dollar amid fears of a eurozone recession.
The euro has dropped by 1% to $1.0316, as traders fear that soaring energy costs will push the region into a downturn.
Today’s PMI, showing a slowdown in growth, won’t have helped.
In the travel sector, British Airways is reportedly planning to axe flights for up to 105,000 holidaymakers this month.
Britain’s biggest airline has told airport slot authorities that it is cancelling more than 650 flights from Heathrow and Gatwick in order to avoid a repeat of last month’s travel chaos, the Daily Telegraph says today.
More than 76,000 seats are being axed from Heathrow and 29,400 from Gatwick on flights to more than 70 destinations including Malaga, Ibiza, Palma, Faro and Athens.
A Government “amnesty” on the rules on airport slots is in place until Friday, which allows airlines to change schedules without facing a potential penalty. That could mean other airlines also make cancellations to summer flights this week, in an attempt to avoid further disruption at airports.
UK firms are planning price hikes as they battle their own rising costs, the struggle to build operating capacity and a shortage of raw materials caused by war and continuing supply chain disruption.
So says Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply:
Another deterioration in the UK marketplace meant new order growth dropped for a fourth month in a row to its weakest since February 2021, indicating the direction of travel for service activity in the coming months.
This is unlikely to change any time soon as consumer reluctance to spend will increase with cost-of-living pressures dominating priorities, and purchases perceived as non-essential going on the back burner for now.
UK services firms plan further price rises this year
UK services firms are planning to keep hiking prices as they pass on higher input costs to their customers.
Service sector companies raised their prices at a rapid pace again in June, with the rate of price inflation only fractionally lower than May’s record high, according to the latest snapshot of the economy, from S&P Global.
Some 37% of services firms surveyed said they raised prices in June, while only 2% cut them — and many said they were aiming for further price rises this year.
That is a sign that consumers face more inflationary pressures, backing up Sainsbury’s warning today that the squeeze will intensify.
Two-thirds of firms reported a rise in their average cost burdens in June — such as energy, fuel and staff wages.
Tim Moore, economics director at S&P Global Market Intelligence, explains:
“June data highlighted the second-fastest rise in input prices since the survey began 26 years ago, driven by intense wage pressures and rapid increases in fuel costs.
Staff shortages added to demand and supply imbalances, with subsequent constraints on business capacity acting as a further incentive to defend margins from escalating operating expenses.
Around 37% of the survey panel reported an increase in their charges since May and many commented on plans to push through further price rises in the second half of 2022.
The survey of UK purchasing managers also found that new orders growth fell to the lowest since February 2021, during the national lockdown. Firms blamed the cost of living crisis and pessimism about the economic outlook.
Stubbornly high inflationary pressures and signs of weaker customer demand pushed business optimism to the lowest since May 2020.
The overall service sector PMI, which measures activity, rose to 54.3 from 53.4 in May, and also above the “flash” reading of 53.4 taken during June.
After a positive start, shares have dropped in London while European stocks are now flat.
The FTSE 100 index of blue-chip shares is down 46 points, or 0.64%. Financial stocks, mining companies and oil producers are in the fallers, suggesting recession fears are rising.
Sainsbury’s are up 1.7% after its first-quarter results.
Supply shortages push UK June car sales to lowest since 1996
It’s official: UK car sales last month were the worst for the month since June 1996 (when many were more focused on football than automobiles).
Trade body SMMT has reported that:
- June new car registrations fall -24.3% to 140,958 units – weakest performance for the month since 1996.
- Ongoing challenges in component supply, exacerbated by restrictions in China, hamper industry’s ability to fulfil demand.
- Year to date registrations reach 802,079 units – a fall of -11.9% on last year, and second weakest first half for 30 years.
Battery electric vehicles sales grew 14.6% year-on-year, while drivers continued to shun diesel (down over 46%).
The semiconductor shortage is stifling the new car market even more than last year’s lockdown, says Mike Hawes, SMMT chief executive:
Electric vehicle demand continues to be the one bright spot, as more electric cars than ever take to the road, but while this growth is welcome it is not yet enough to offset weak overall volumes, which has huge implications for fleet renewal and our ability to meet overall carbon reduction targets.
With motorists facing rising fuel costs, however, the switch to an electric car makes ever more sense and the industry is working hard to improve supply and prioritise deliveries of these new technologies given the savings they can afford drivers.”
Eurozone downturn looms as growth slows in June
Business growth across the euro zone has slowed to a 16-month low, according to a new poll of companies that suggests Europe’s economy could shrink this quarter.
Manufacturing production fell in June, for the first time in two years, while the services sector grew more slowly.
Worryingly, inflows of new work stalled in June, ending a 15-month sequence of growth, while factory order book volumes declined at the steepest rate since the depths of the initial COVID-19 lockdown in May 2020.
That’s according to S&P Global’s final composite Purchasing Managers’ Index (PMI), seen as a good guide to economic health. It fell to 52.0 in June from May’s 54.8, slightly better than the preliminary 51.9 estimate, but nearer to the 50 point mark showing stagnation.
This sharp slowdown raises the risk of the region slipping into economic decline in the third quarter, said Chris Williamson, chief business economist at S&P Global Market Intelligence:
The manufacturing sector is already in decline, for the first time in two years, and the service sector has suffered a marked loss of growth momentum amid the cost of living crisis.
Household spending on non-essential goods and services has come under particular pressure due to soaring prices but business spending and investment is also waning in response to the gloomier outlook and tightening financial conditions.
Shoppers are switching to Sainsbury’s economy own-brand products due to the squeeze on budgets, CEO Simon Roberts tells reporters.
But premium range items are still in demand for special occasions.
“We are seeing some switching into economy own-label, clearly as we expected, and that’s the reason why Sainsbury’s quality Aldi-price match is playing such an important role.
“We are also seeing at the same time premium sales remaining resilient.”
Union: Train drivers’ strike could bring “massive” disruption this summer
The head of the UK train drivers’ union has warned of “massive” disruption this summer as his members vote on their first national strike since 1995.
Walkouts over pay would further inflame Britain’s travel chaos, with the union Aslef balloting drivers at 10 train companies over industrial action.
Mick Whelan, general secretary of drivers’ union Aslef, has told the Financial Times that:
“It will be far more disruptive than it has been in the past. We do not go on strike very often.”
“We believe [strikes] will have a massive effect….There will be a summer of disruption.”
This could come on top of industrial ation by RMT union members, who have already held one walkout last month
The Transport Salaried Staffs’ Association (TSSA) union, whose members manage control rooms, signalling and power for train operators and Network Rail, is also holding a strike ballot.
Our transport correspondent Gwyn Topham wrote about the situation here:
and here:
