UK economy continues to stagnate in July
The UK economy continued to flatline in July, but grew by 0.5% in the three months to July, according to the latest official figures.
Economists had expected GDP to rise by 0.2% in July. In June, there was also zero growth.
Key events
GSK ditches experimental herpes vaccine after trial failure
Britain’s second-biggest drugmaker GSK has ditched its experimental vaccine for herpes after it failed in an early to intermediate stage trial – ending efforts to bring the first shot for the condition to market.
The company said the trial for a therapeutic vaccine to treat the herpes simplex virus (HSV) did not meet its efficacy objective, and it won’t be taken into late-stage trials. There were no safety issues.
There are no approved vaccines for the virus, which causes genital herpes, although there is a shot for the herpes virus that causes chickenpox, made by the US drugs giant Merck. The Japanese virologist Michiaki Takahashi invented the first chickenpox vaccine.
GSK said:
Given the unmet medical need and burden associated with genital herpes, innovation in this area is still needed. GSK intends to evaluate the totality of all these data and other studies to progress future research and development of its HSV programme.
GSK shares are down 0.8% on the news, but are still up by about 12% so far this year.
Back to today’s weaker-than-expected UK GDP figures. Philip Shaw, chief economist at Investec, said:
While the relative weakness of the economy in July comes as a surprise, we are not unduly concerned over the outlook for the remainder of the year, not least because survey evidence remains positive. In addition, the positive household income background remains a helpful, if perhaps surprising story – real household disposable incomes grew by 3.3% in the year to Q1 – providing ample ammunition for continued household consumption growth.
It is also worth noting that recent UK economic history is due to be rewritten on 30 September with the publication of the ‘Blue Book’ which will include revisions to GDP since 2023. Changes to the economic profile for the prior period have already been published and these showed that GDP growth in 2022 was revised up to 4.8% from 4.3%. Realistically we cannot guess the scale or even the direction of the forthcoming revisions, but we will be able to make a more definitive judgment after the new figures are released (the monthly GDP series is due on 11 October).
In the context of interest rates, today’s figures do raise modestly the chances that the MPC will ease policy at the next meeting on Thursday week. However the committee is more likely to want to see updated GDP data before rushing to conclusions on the economy and our base case remains that the Bank rate will be held at 5.0%.
WH Smith posts 7% revenue growth, shares jump
Shares in WH Smith jumped by nearly 12% after it said the latest quarter had been strong, in particular its UK stores, and announced a £50m share buyback.
The 230-year-old chain, which sells books and magazines as well as food and drinks, has been closing highstreet stores and is pushing into travel hubs such as railway stations and airports. It said revenues rose by 7% in the year to 31 August, fuelled by 10% growth at its travel division.
Carl Cowling, the chief executive, said:
We have ended the financial year in a strong position, delivering a performance in line with our expectations with good growth across our travel businesses. Our UK division performed particularly well over the peak summer trading period.
We are also today announcing the launch of a £50m share buyback, which reflects strong ongoing cash flow, the receipt of the pension fund buyout cash return, as well as the strength of our balance sheet, with leverage now within our target range.
European shares rise, oil prices push higher
UK and European stocks have made some modest gains. The FTSE 100 index in London has edged 0.1% higher to 8,212 while the German, French and Italian markets are between 0.3% and 0.4% ahead.
In London, mining and commodities stocks are among the main risers, led by Antofagasta, Fresnillo and Glencore.
Oil prices have risen by 1.3% amid concerns about Hurricane Francine disrupting output in the US. Brent crude is trading 91 cents higher at $70.10 a barrel, while US light crude has climbed to $66.66 a barrel.
Rupert Murdoch-owned firm REA makes £5.6bn offer for Rightmove
REA, the Australian property company majority-owned by Rupert Murdoch’s News Corp, has made a £5.6bn offer for Rightmove, the UK’s biggest online real-estate portal.
The Rightmove board rejected the 705p a share offer, worth 18.6% of the enlarged company post-deal, which comes a week after REA confirmed it was considering a cash and share offer for Rightmove.
Shares in Rightmove closed at 555.6p on 30 August, the last trading day before news of REA’s initial interest was revealed in the press, and closed at 670.8p at the end of trading on the London Stock Exchange yesterday. They rose by 1.2%, or 7.8p, to 678.6p in early trading today.
REA said in a statement released on the Australian Stock Exchange today:
REA confirms that on 5 September 2024 it made a non-binding indicative proposal to the board of directors of Rightmove regarding a possible cash and share offer for the entire issued and to be issued share capital of Rightmove. REA was informed on 10 September 2024 that the Rightmove board rejected the proposal.
Rightmove said:
The board carefully considered the proposal, together with its financial advisers, and concluded that it was wholly opportunistic and fundamentally undervalued Rightmove and its future prospects. Accordingly, the board unanimously rejected the proposal … shareholders should take no action.
Economists still expect next rate cut in November
Markets see a near-25% chance of an interest rate cut next week.
Some economists (e.g. Capital Economics) say today’s disappointing GDP data make a rate cut then a bit more likely, but overall economists still think November is more likely.
Thomas Pugh, UK economist at RSM UK, said:
The second consecutive month of no growth in July undershot expectations of 0.2% m/m and is clearly disappointing. But it won’t be enough to convince the Monetary Policy Committee (MPC) to cut interest rates next month, especially as output in the services sector, where the MPC is watching price pressures like a hawk, rebounded. The next opportunity will come in November, when services inflation should have cooled enough to allow another cut.
Turning to the budget on 30 October, he said:
Disappointing growth will also add to the chancellor’s misery ahead of a “painful” budget next month. To really make a difference to the fiscal outlook though, she will have to convince the Office for Budget Responsibility (OBR) that their supply side reforms to the planning system and boosting investment are going to kickstart growth. That looks unlikely without more radical reforms.
The weakness in GDP was concentrated in the manufacturing sector, which fell by 1% m/m. Manufacturing is struggling globally, as surging exports from China, combined with weak global demand, especially for goods, weighs on production. Construction also dropped by 0.4% m/m as a wet July hampered construction efforts.
Liz McKeown, ONS director of economic statistics, summed up the economic picture:
July’s monthly services growth was led by computer programmers and health, which recovered from strike action in June. These gains were partially offset by falls for advertising companies, architects and engineers.
Manufacturing fell, overall, with a particularly poor month for car and machinery firms, while construction also declined.
The 0.1% rise in service sector output in July was driven by retail sales rebounding and fewer strike days, although economists had expected a 0.2% rise. Rob Wood, chief UK economist at Pantheon Macroeconomics, has crunched the numbers.
Wholesale and retail output gained by 0.5%. Health and social work also rose by 0.5%, recovering half of the ground lost in June as junior doctors were on strike for two days in July compared to three in June. With no further doctors strikes planned, healthcare output is expected to jump again in August.
Accommodation and food services did better than expected, rising by 0.9% month-to-month, stronger than the soft industry surveys had signalled.
The downside surprise in services came in the powerhouse professional services sector, where output dropped by 1.3%. Wood said:
That was a correction for unusually strong growth in the first half, when professional services output grew 4.4%. We expect this sector to return to growth in August.
Isaac Stell, investment manager at the Wealth Club, said:
A reversal in the fortunes for the manufacturing and construction sectors is a blow to the new Labour Government that has growth as a central pillar of its agenda.
The usual bright spot was the bounce back in growth for the services sector with the health sector one of the leading contributors, springing back to life following strike action in June.
A notable slowdown in advertising and architects may be indicative of a wider slowdown. With the canaries beginning to look a bit peaky, the chancellor may need to tread more carefully in October.
A September interest rate cut is not certain despite the downbeat GDP data, said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales. He explained:
These figures confirm that the UK economy struggled for momentum in the aftermath of the general election as falling manufacturing and construction output caused overall activity to flatline in July.
The UK’s growth trajectory should slow further in the coming months with higher energy bills and expected tax rises likely to trigger renewed restraint in spending and investment, despite a boost from subdued inflation.
Despite these downbeat figures, a September rate cut is not certain given that some rate setters are still sufficiently nervous over lingering price pressures to delay loosening policy again, at least until November.
“The July GDP print was disappointing: despite the modest boost from the Euros, the UK saw broad-based weakness across the economy,” said Sanjay Raja, chief UK economist at Deutsche Bank.
Growth is normalising from the rapid pace set in the first half of 2024 – this much should be expected. The pace of the slowdown, however, is a little faster than we anticipated – especially in light of the still stellar survey data we’ve seen over summer.
The economy grew by 0.7% in the first three months of the year, followed by a 0.6% expansion in the second quarter but the latest ONS figures suggest the recovery from the mild recession in late 2023 has lost steam.
Economists say this does not mean that the UK will slip back into recession.
Ruth Gregory, deputy chief UK economist at Capital Economics, said:
The economy stagnated in July, but that doesn’t mean the UK is on the cusp of another recession and we still think the stickiness of inflation will keep the Bank on hold in September.
We still think a mild slowdown in GDP growth to more normal rates of 0.3% quarter-on-quarter later this year is more likely than a sudden drop back into recession.
For now, we are sticking to our view that the Bank of England will keep interest rates unchanged in September before cutting rates again in November. But today’s data has made an interest rate cut next Thursday a bit more likely.
Luke Bartholomew, deputy chief economist at abrdn, said:
The economy performed a little softer than expected in July, with GDP flatlining. Industrial production and manufacturing were also weak, rounding off a set of weak UK data.
As ever, though, monthly activity numbers are very volatile month to month, often reflecting more noise than signal. The broader trend remains solid, although it is likely that the underlying pace of growth will slow somewhat over the second half of the year.
Certainly, there is no reason yet for the Bank and England to feel it needs to speed up the pace of rate cuts, and we expect the Bank to keep interest rates on hold next week.
Rachel Reeves: ‘Change will not happen overnight’
Chancellor Rachel Reeves said:
I am under no illusion about the scale of the challenge we face and I will be honest with the British people that change will not happen overnight.
Two quarters of positive economic growth does not make up for fourteen years of stagnation. That is why we are taking the long-term decisions now to fix the foundations of our economy.
Manufacturing was the main culprit behind the drop in industrial output (which also comprises mining and quarrying, and utilities) in July.
Manufacturing output fell by 1% from June, and declined by 0.3% in the three months to July, compared with the previous three months.
Our story is here:
Bloomberg’s political editor Alex Wickham said on X:
NEW: The UK economy unexpectedly stagnated for a second month in July, suggesting that a rapid recovery from recession is now losing momentum
GDP unchanged after flatlining in June too
Economists had forecast a 0.2% increase
Via @tomelleryrees @PhilAldrick @irinaanghel12
— Alex Wickham (@alexwickham) September 11, 2024
Services activity picked up by 0.1% in July following a 0.1% dip in June, but did not show the expected strong pick-up while industrial production declined by 0.8%.
Construction output was down by 0.4% in July.
Services grew more strongly, by 0.6%, in the three months to July. There was also a 1.2% increase in construction output, while production dipped by 0.1% over this period.
Professional, scientific and technical activities was the largest positive contributor to the rise in services output over the three month-period, up by 2%. The next largest contribution came from wholesale and retail trade; repair of motor vehicles and motorcycles, where output increased by 0.7%.
UK economy continues to stagnate in July
The UK economy continued to flatline in July, but grew by 0.5% in the three months to July, according to the latest official figures.
Economists had expected GDP to rise by 0.2% in July. In June, there was also zero growth.
Dollar falls 1% against yen as Harris puts Trump on defensive
The dollar fell by more than 1% against the yen to its weakest level of the year, after Kamala Harris put Donald Trump on the defensive in the first and only television debate in the presidential race last night.
The yen also got a boost from Bank of Japan board member Junko Nakagawa, who reiterated in a speech that the central bank would continue to raise interest rates if inflation and the wider economy moved in line with its forecasts.
The dollar dropped as much as 1.2% to 140.71 yen, a level not seen since 28 December before recovering slightly.
Economists at Daiwa Capital Markets said:
After economic output moved sideways in June, we expect a return to expansion in July with growth of 0.3% month on month, which would leave the three-month growth rate unchanged at a solid 0.6%. Growth will in part reflect the pickup in retail sales of 0.5% that month, when a long-awaited improvement in the weather boosted demand.
Surveys also pointed to growth across the services sector as well as construction, while the manufacturing output PMI rose to the highest level in more than two years. So, although factory production grew in June by the most in four months, we expect the expansion in GDP in July to be broad-based.
Introduction: UK economy forecast to have returned to growth in July
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The UK economy is expected to have returned to growth in July, after flatlining in June.
The latest GDP figures from the Office for National Statistics, out at 7am, are expected to show that the economy expanded by 0.2% in July, after zero growth in June.
Deutsche Bank economist Sanjay Raja, who is predicting a 0.3% rise in GDP in July, said:
What’s driving the increase in output? Mainly, a stronger rebound in services activity, led by a pick up in retail and leisure services. Industrial production output also likely expanded to start the third quarter, lifted in large part by an increase in oil production, and to a slightly lesser extent, manufacturing output. Last but not least, we expect the construction sector to see its third monthly consecutive rise (0.2% month on month).
Where are risks to our nowcast skewed? To the downside, with our modelled estimates having a downward skew relative to our point estimate.
Looking ahead, we continue to see GDP expanding at a steady clip, averaging roughly 0.4% quarter on quarter in the second half. It’s early days, but risks to our quarterly nowcasts are skewed to the upside, raising upside risks to our annual growth projection too.
We are also getting figures for trade and industrial production at the same time.
It’s also US inflation day. The annual headline rate is expected to have fallen to 2.6% from 2.9%, while the core rate, which strips out volatile food and energy costs, is set to have stayed at 3.2%.
Investec economist Ryan Djajasaputra said:
July’s outturn provided further reassurance that inflation remains on a disinflationary path, with the 2.9% print being the first below 3% since March 2021. Early consensus estimates are for a further moderation to 2.6%.
Also today:
The British steel industry is braced for 2,500 job cuts at the Port Talbot steelworks, with thousands more jobs at risk in the UK, as the government prepares a taxpayer-backed deal for the south Wales plant.
The business secretary, Jonathan Reynolds, is expected to outline this morning the details of a rescue deal which will see the government hand the historic Welsh plant’s owners, Tata Steel, £500m to build a new electric furnace – but at the cost of huge redundancies from the closure of its last remaining blast furnace.
Natarajan Chandrasekaran, the chair of Tata Group, told the Financial Times on Tuesday that talks were “going well” and it was “very close” to agreeing a deal.
It is understood the government, which previously promised to “push for job guarantees”, has been unable to protect these jobs, with 2,500 still expected to go in the coming months.
The Agenda
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7am BST: UK GDP for July (forecast: 0.2%, previous: 0%)
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7am BST: UK trade, industrial production for July
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1.30pm BST: US inflation for August (forecast: 2.6%, previous: 2.9%)
