Introduction: “Good chance” UK fell into technical recession
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Britain may well have slipped into recession at the end of last year, forecasters at the EY ITEM Club believe.
Martin Beck, chief economic advisor to the EY ITEM Club said this morning “there’s a good chance” the economy may have shrunk slightly in the final three months of 2023.
That would mean two negative quarters in a row – after the 0.1% fall in GDP in July-September – meaning a technical recession.
EY ITEM Club have slashed their forecasts for growth in 2023 to just 0.3%, down from 0.6%.
Beck told Radio 4’s Today Programme:
We know that GDP – gross domestic product – shrunk in the third quarter and looking at the high frequency numbers for Q4, there’s a good chance that it may have shrunk slightly again.
The official GDP data for the October-December quarter are due on 15 February.
Headlines declaring the UK in recession would not be good news for the government, as the Conservatives try to plot a tricky path to another election win.
But, as Beck points out, “it doesn’t make a massive amount of difference to the person on the street” if the economy shrank by 0.1% or grew by 0.1%.
And looking ahead, EY ITEM Club are more optimistic about the UK’s future prospects, helped by slowing inflation and likely interest rate cuts by the Bank of England.
Beck says:
We should end 2024 on a happier note than 2023.
The group now expects the economy to grow by 0.9% in 2024, up from the 0.7% growth projected in October. And next year, growth is seen hitting 1.8% (up from 1.7% forecast three months ago).
That’s better news for Rishi Sunak, and chancellor Jeremy Hunt, who is working on his next budget statement which is likely to include tax cuts.
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The agenda
Key events
Hapag-Lloyd: continue to route vessels around Cape of Good Hope
Newsflash: German shipping group Hapag-Lloyd has said it will continue to route its vessels around the Cape of Good Hope until further notice due to attacks on vessels in the Red Sea by Yemen’s Houthi rebels.
Hapag-Lloyd says:
“We continue to monitor and review the situation constantly. As soon as the situation changes, and it is safe again we will route our vessels through Red Sea and Suez Canal.
There were concerns at the World Economic Forum last week that ongoing disruption to shipping would hit trade growth, and push up inflation.
Ngozi Okonjo-Iweala, director-general of the World Trade Organisation, warned Davos that trade growth this year might not hit the WTO’s 3.3% forecast, due to geopolitical conflicts, and the problems in the Red Sea and the Suez Canal.
The value of farmland in England and Wales grew twice as fast as blue-chip shares on the London stock market last year, new research shows.
Knight Frank’s Farmland Index, released this morning, shows that the value of bare land in England and Wales rose by 7% in 2023, trading over £9,000/acre on average for the first time.
That’s almost twice as fast as the 3.8% increase in the FTSE 100 last year.
Knight Frank reckons scarcity of supply and persistent strong demand from a diverse selection of buyers supported farmland prices, in the face of high inflation, rising borrowing rates, weak commodity markets, and a decline in farm subsidies.
Rising prices could also be due to the growth in the nature capital market, which provides farmers with new funding sources, such as carbon sequestration and enhancing biodiversity.
Will Matthews, Head of Farms & Estates at Knight Frank, says:
“The absence of forced sellers has certainly created a unique market dynamic. A persistent low supply makes it challenging to envision farmland trading at levels below those we’ve witnessed. The robust demand and intense competition among affluent buyers frequently pushes values to £10,000 per acre, and large blocks can even exceed £15,000 per acre.”
2023 also ended badly for German exporters.
Exports from Europe’s largest economy to countries outside the European Union fell by 4.0% in December compared to November 2023, the Federal Statistical Office reports.
Exports to the United States fell by 9.9% compared to December 2022, while exports to China fell by 12.7%, and exports to Russia fell by 32.3% compared to the same month last year.
But, German exports to the United Kingdom increased by 19.7% year-on-year.
Stocks have opened a little higher in London this morning, at the start of a new week.
The blue-chip FTSE 100 index has gained 16 points, or 0.2%, to 7479, which still leaves it down 3.2% so far this year after a weak start to 2024.
The FTSE 250 index of medium-sized firms has gained 0.7%, led by thermal processing specialist Bodycote (+4%) which announced a £60m share buyback programme this morning after completing the takeover of US rival Lake City HT for less than expected.
Investors are in a somewhat upbeat mood, after rising tech shares lifted the US S&P 500 to a record high on Friday.
Richard Hunter, Head of Markets at interactive investor, says UK markets also joined the bullish turnaround this morning, albeit at a more measured pace, adding:
The FTSE100 was buoyed by a broad mark-up which included a broker upgrade for Segro. In addition, retailers recovered some poise with gains for the likes of Ocado, JD Sports and Kingfisher ahead of a week which will see an update from Primark owner Associated British Foods.
A broker downgrade to Sage scuppered what little hopes there may have been for strength in UK tech stocks, such as they are.
There’s also a little takeover drama in the City today.
British catering firm Compass Group is has agreed a deal to buy rival CH&CO, as it looks to expand its UK and Ireland business.
CH&CO, which caters to sectors including businesses, sports and universities, is one of the royal warrant holders for catering services ,and cates for some iconic and landmark venues including the Royal Opera House, Kew Gardens, and Abbey Road Studios.
The deal is at an enterprise value (equity plus debt) of £475m.
Economic gloom has also hit UK industrial components manufacturer Trifast, which warned on profits this morning.
Trifast, which makes high end industrial fastenings such as bolts, nuts, screws, rivets and washers, is cutting 10% of its non-operational staff worldwide, after concluding that results this year will be “significantly below” its previous expectations.
Trifast says demand was “volatile” in the last quarter, including significantly lower than forecasted volumes in December.
It told the City that demand was slowing, as “geopolitical events” also hit sales, saying:
The more testing environment that we are now experiencing in 2024 in terms of growth is being severely impacted by a further slowdown in customer demand and volumes across the business and to an extent by the reported macro-economic challenges and geopolitical events.
#TRI Another Day Another Profit Warning ⚠️
A nasty start to the week for Trifast shareholders with revenue to be significantly below expectations at £230m
Job losses looming for c10% of the staff, sad to see 😢 pic.twitter.com/nb568Ijeoq
— Aston Girl (@reb40) January 22, 2024
Shares in Trifast have dropped 20% in early trading.
This is the third profit warning from the company in 15 months. It warned in October 2022 that underlying profits would miss market expectations, then in Febuary 2023 it announced annual profit would fall well below market expectations, and the surprise departure of its CEO.
Sorrell: Geopolitical issues are worrying clients
2023 was a difficult year for S4 Capital, Sir Martin Sorrell’s technology-focused digital advertising, marketing and technology services firm.
S4 has reported this morning that it expects its like-for-like net revenues fell by 4% in 2023 , as cautious clients – particularly in the technology sector – cut back on spending.
Sorrell told Radio 4’s Today programme that last year was ‘tougher’ than in the previous four years since he founded S4. But, the outlook this year is slightly better.
Sorrell says:
This time last year, clients were looking at interest rates rising. The slightly better news this year is that they are now looking at interest rates as falling.
Inflation is coming down quite sharply. It may not reach the core rates that central banks wish, ie 2%, but we’ll see how we go through the year
Sorrell adds that here is a “conflict” between what’s happening economically, and politically, explaining that geopolitical issues are worrying clients:
The three big issues that absorb our clients, or worry our clients, are firstly around US-China relationships, or lack of them, secondly Russia and Ukraine, and third and not least Iran and what’s happening in Gaza with Israel and Hamas.
There are other things as well, but those three obsess them.
Interesting commentary from #SFOR @S4Capital. The US tech market is absolutely booming, with great results being posted and prices at all time highs. Why is the UK the opposite? Suspect lack of ambition is part of it. pic.twitter.com/gBLJymEpEK
— Donald Pond (@DonaldPond6) January 22, 2024
Shares in S4 have risen 5% in early trading, to 42.4p. They hit 870p in September 2021, before falling through 2022 and 2023.
25% rise in UK firms in critical financial distress
Accountancy firm Begbies Traynor has reported a sharp jump in businesses in ‘critical’ financial distress in the final quarter of last year.
Its latest Red Flag Alert report has found that there were more than 47,000 businesses near collapse in the UK at the start of 2024.
That’s a 25% jump on the 37,722 recorded at the end of Q3 2023, and the second quarter in a row in which critical financial distress grew by about a quarter.
Critical financial distress grew rapidly in the last quarter in the Construction (+32.6%), Health & Education (+41.3%), Real Estate & Property Services (+24.7%) and Support Services (+23.6%) sectors.
Begbies Traynor adds that “serious concerns” are growing about the construction and real estate sectors which still represent nearly 30% of all businesses in critical financial distress.
Julie Palmer, partner at Begbies Traynor, says the ‘perfect storm’ of high interest rates, rampant inflation, weak consumer confidence and rising and unpredictable input costs are hitting every corner of the economy.
Palmer adds:
Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, who loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances.
“For some, a better-than-expected Christmas may kick these concerns down the road for a little longer, but the rapid growth in the levels of critical financial distress point to an economy that is waking up to the danger of debt ladened businesses in a higher rates environment.
Share price surge helps largest hedge funds to biggest profits on record
Recession fears haven’t prevented top hedge funds from recording bumper profits last year.
New data shows the world’s most successful hedge funds made their biggest profits on record last year.
Punchy bets on stock markets paid off when share prices surged at the end of 2023, when markets were lifted by hopes of interest rate cuts.
The Financial Times reports:
The top 20 managers made profits for investors of $67bn in 2023 according to research by LCH Investments — up from the previous record of $65bn in 2021.
This performance cemented their dominance over the rest of the industry — the 20 hedge funds which have performed best since their inception manage 19 per cent of assets but they made around a third of annual profits last year, in dollar terms.
Billionaire money managers Chris Hohn and Ken Griffin led hedge funds to deliver one of the best years for clients in 2023, points out Bloomberg.
Today’s forecasts suggest the UK’s period of economic stagnation is slowly coming to an end, adds Hywel Ball, EY UK Chair.
Ball says:
Households and businesses are still facing a tough outlook in 2024, due in part to the lagged effect of interest rate rises, but slowing inflation and anticipated Bank Rate cuts should help build economic momentum as the year progresses.
Business investment, which has been disappointing for some time, is also expected to see a resurgence in the medium term, Ball adds:
A modest contraction is forecast for 2024, but this should be followed by a revival in capital expenditure in subsequent years. Falling inflation and declining market interest rates, coupled with the potential for additional tax cuts in the Chancellor’s spring budget, suggest the UK is at a turning point in 2024 and about to enter a more positive phase of growth.”
Introduction: “Good chance” UK fell into technical recession
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Britain may well have slipped into recession at the end of last year, forecasters at the EY ITEM Club believe.
Martin Beck, chief economic advisor to the EY ITEM Club said this morning “there’s a good chance” the economy may have shrunk slightly in the final three months of 2023.
That would mean two negative quarters in a row – after the 0.1% fall in GDP in July-September – meaning a technical recession.
EY ITEM Club have slashed their forecasts for growth in 2023 to just 0.3%, down from 0.6%.
Beck told Radio 4’s Today Programme:
We know that GDP – gross domestic product – shrunk in the third quarter and looking at the high frequency numbers for Q4, there’s a good chance that it may have shrunk slightly again.
The official GDP data for the October-December quarter are due on 15 February.
Headlines declaring the UK in recession would not be good news for the government, as the Conservatives try to plot a tricky path to another election win.
But, as Beck points out, “it doesn’t make a massive amount of difference to the person on the street” if the economy shrank by 0.1% or grew by 0.1%.
And looking ahead, EY ITEM Club are more optimistic about the UK’s future prospects, helped by slowing inflation and likely interest rate cuts by the Bank of England.
Beck says:
We should end 2024 on a happier note than 2023.
The group now expects the economy to grow by 0.9% in 2024, up from the 0.7% growth projected in October. And next year, growth is seen hitting 1.8% (up from 1.7% forecast three months ago).
That’s better news for Rishi Sunak, and chancellor Jeremy Hunt, who is working on his next budget statement which is likely to include tax cuts.
More here:
