The UK exits recession

The UK exits recession

The UK economy returned to growth in the first three months of the year, having slipped into a technical recession in the second half of 2023. GDP growth of 0.6% on the previous quarter represents the strongest expansion for two years, and the joint fastest in the G7 alongside Canada.

• While we shouldn’t place too much weight on one data release - GDP numbers are choppy and often heavily revised – first quarter growth was remarkably strong and the rebound was broad-based. This looks like a plausible recovery.

• Services output increased for the first time since Q1 2023, with 11 out of 14 subsectors increasing, suggesting consumer activity was picking up as inflation fell. Manufacturing, which has been a weak spot, also expanded, driven by car production. These gains were only offset a little by a contraction in the construction sector. GDP per head also rose, up 0.4%, after seven consecutive quarters without growth. High frequency Purchasing Manging Indices suggest this strong momentum continued in April. Rising activity in the housing market and higher levels of consumer and business confidence are consistent with a continued economic recovery.

• First quarter growth was strong, but this comes after a sustained period of weakness. The stagnation of the past few years means the total level of output in the UK is just 1.7% higher than it was on the eve of the pandemic, well below the 3.8% and 8.7% growth seen in the euro area and US respectively over the same period.

• The UK recovery fits with a wider, international picture. The euro area returned to growth in first quarter after a weak 2023, while inflationary pressures continued to ease. The US economy, which has bucked the trend of other western economies by growing strongly in 2023 continues to show good growth. Stronger activity overseas should help boost UK exports. The Bank of England has raised its forecast for UK exports this year from a contraction of 0.25% in February to an increase of 2.0% in its latest forecasts.

• The path of UK growth heavily dependent on what happens to inflation and last week brought good news on this front too. Following last Thursday’s rate setting meeting the Bank of England’s Monetary Policy Committee said it now expected underlying inflationary pressures to fade “slightly faster” than previously assumed and consequently “It is likely that we will need to cut bank rates over the coming quarters . . . possibly more so than currently priced into market rates.” The Bank’s new forecasts predict both faster growth and lower inflation than previously expected. For businesses and consumers that is a dream combination. With inflation forecast to continue falling financial markets expect the Bank to cut UK interest rates by around 50bps, to 4.75%, by December.

• The UK economy is on the mend. Barring external shocks, we expect growth to continue through the rest of this year and next year at around trend, or normal, levels.  Falling inflation, rising real incomes and growth in the US and Europe should help to maintain the recovery.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 2.7% at another record close of 8,434 following the news that the UK has exited recession.

Economics

• The UK economy grew by a greater-than-expected 0.6% in the first quarter of the year, meaning the UK is no longer in recession
• The pick up in UK growth was broad-based with increases in both manufacturing and services offsetting a fall in construction output
• UK per capita output grew by 0.4% in the first quarter, the first growth in this measure in two years
• The Bank of England kept its benchmark interest rate on hold at 5.25% but said that: “It’s likely that we will need to cut bank rates over the coming quarters”. Two of the nine-member rate-setting committee voted for a cut
• UK house prices rose by 0.1% in April following a contraction of 0.9% in March according to estimates from Halifax
• The OECD revised up its forecasts for global growth this year to 3.1% with particularly strong growth expected in India, Indonesia, China and the US and called on governments to tackle “worrying” levels of public debt
• US president Joe Biden is expected to announce fresh tariffs on Chinese imports tomorrow, targeting electric vehicles, batteries and solar panels, Bloomberg reports
• A measure of US consumer confidence compiled by the University of Michigan unexpectedly fell to its lowest level since last November as consumers expressed concern over inflation, unemployment and interest rates
• Markets will be closely watching if US inflation slows as predicted on Wednesday, ahead of the Fed’s next meeting in early June
• ECB policymakers said it was “plausible” that interest rate cuts may begin next month, accordingly to recently published minutes of their meeting in April
• Euro area retail sales rose by 0.8% from February to March, the strongest monthly growth since September 2022, in part due to strong growth in Germany and France
• The Swedish Riksbank became the second central bank in Europe to cut interest rates following the Swiss National Bank in March. Although Swedish inflation remains above target – due in part to strong growth in the price of housing – concerns about growth have been increasing with unemployment at 9.2%
• Volkswagen and Daimler-Benz warned that proposed higher EU tariffs on Chinese electric cars would lead to retaliation that would damage sales of European vehicles in China
• Germany did more trade with the US than China in the first quarter of the year, possibly signalling an end to an eight-year era in which China has been Germany’s highest-value trading partner. Lacklustre Sino-German growth, Chinese manufacturers shifting into higher value goods and robust US demand are all possible factors
• Policymakers at Japan’s central bank are growing more concerned over inflation and may respond by tightening monetary policy, according to minutes from their most recent meeting. Unlike most major advanced economies, Japan has barely raised interest rates and continues to purchase assets
• Renewable sources generated a record 30% of global electricity in 2023, driven by growth in solar and wind production

Business

• Airlines IAG, Lufthansa and Air France-KLM predicted strong growth demand for travel this summer driven by strong leisure demand and a continued recovery of business travel
• Jaguar Land Rover announced its highest profit in 9 years on the back of strong sales of its premium vehicles
• US law firm Quinn Emanuel announced it was raising pay for its newly qualified lawyers in London to £180,000, a sign that the market for legal talent in London is heating up again
• Swiss bank UBS reported profits of $1.8bn last quarter, well ahead of expectations. Its takeover of Credit Suisse is expected to be completed by the end of the month

Global and political developments

• Russian forces launched a fresh offensive in the Kharkiv region of Ukraine as they seek to make gains before the arrival of fresh US military aid
• EU ambassadors agreed to use the proceeds from frozen Russian assets for financial and military aid to Ukraine following months of wrangling
• Pope Francis implored Italians to have more children saying that “Without children and young people, a country loses its desire for the future”. Italy has one of the lowest birthrates in Europe. South Korean president Yoon Suk Yeol described the low birth rate in his country as a “national emergency”
• UK Conservative MP Natalie Elphicke defected to the Labour party. Separately, a YouGov poll put Labour on 48% and the Conservatives on 18%
• US president Joe Biden said that he would block shipments of arms to Israel if it invades Rafah amid concerns over the humanitarian consequences
• Scottish National Party MSP John Swinney was sworn in as first minister of Scotland and appointed Kate Forbes as deputy leader
• Adult film star Stormy Daniels testified against former president Donald Trump in court in what is likely to be the only criminal trial before presidential elections in November

And finally… last week the Bangkok Post reported that a married couple had been taken into custody over the alleged theft of 396 million baht from a fermented sausage company owned by the women’s aunt. It is alleged that money was stolen from the pork product manufacturer on over 1000 occasions – bangers and cash