Newsflash: UK economy returns to growth in August
The UK economy returned to growth in August, as activity picked up after a worst-than-expected slump in July.
GDP rose by 0.2% in August, the Office for National Statistics reports, which matches City expectations.
The services sector grew by 0.4% in August, the Office for National Statistics reports, but there was a contraction in the production sector and in construction.
However, July’s GDP report has been revised down to show a fall of 0.6%, worse than the 0.5% first estimated.
Key events
Ex-Formula One boss Bernie Ecclestone has pleaded guilty to fraud
Newsflash: Ex-Formula One boss Bernie Ecclestone has pleaded guilty in a London court on Thursday to one count of fraud for making dishonest representation to Britain’s tax authority.
The 92-year-old appeared at Southwark Crown Court and pleaded to one count of fraud by false representation, just over a month before he was due to stand trial.
Reuters reports:
Prosecutors said Ecclestone made untrue or misleading representations to HM Revenue and Customers at a July 2015 meeting, when he said he “established only a single trust” in favour of his daughters.
Ecclestone, accompanied by his wife Fabiana, spoke only to confirm his name and to enter his plea.
Back in July 2022, Ecclestone was accused of fraud after an investigation by UK tax authorities allegedly found undeclared assets worth more than £400m overseas.
In August 2022 he pled not guilty.
UK lenders expect rise in loan defaults
More UK households defaulted on their secured loans, such as mortgages, in the April-June quarter, and the situation is expected to worsen in the July-September quarter.
The Bank of England’s latest credit conditions report, just released, shows that losses and default rates on secured loans to households increased in Q2, and were expected to increase in Q3.
That suggests that the increase in UK interest rates, which began in December 2021, have left some households unable to meet their mortgage payments or car financing packages.
Lenders also reported that they restricted the availability of secured credit to households in Q2, and expect to cut back further in Q3.
The 2023 Credit Conditions Survey – Q3 shows demand for lending continue to wane & is expected to remain lacklustre over winter, as mortgage buyers tread carefully, watching for further movement on rates & prices before purchasing. @bankofengland pic.twitter.com/b8EJ7F2PH6
— Emma Fildes (@emmafildes) October 12, 2023
Hina Bhudia, partner at Knight Frank Finance, said:
“Demand for mortgages is set to decline over the coming three months. Transaction activity in the property market is slowing and many borrowers are still rolling off sub-2% deals and are eager to put off refinancing where they are able to do so.
“Borrowers that do act are generally opting for trackers. For many people, the risk that monthly payments increase in the event of another interest rate hike is worth taking if it gives them the opportunity to see cuts in their monthly outgoings next year. Typical two year trackers at 75% LTV are still above 5.50%, while retail bank tracker products sit a little over 1% above the base rate.
Lenders also reported that overall demand for unsecured lending increased in April-June, and was expected to increase slightly in Q3.
That may show that consumers are relying on credit cards to pay bills. The Bank of England explains:
Within the overall figure, demand for credit card lending and other unsecured lending both increased in Q2. Credit card lending was expected to increase further in Q3 and other unsecured lending was expected to remain unchanged.
Melanie Baker, senior economist at Royal London Asset Management, fears the UK will not avoid a recession.
Baker says:
“Despite past ONS revisions improving the Covid-era backstory for GDP, since early 2022 it still looks like the UK economy has barely grown.
“The past three months have again been bumpy for UK GDP, and the economy looks on track for a fall in GDP in the third quarter. The extra bank holiday hit output in May, June bounced back stronger than expected, then July saw a bigger than expected fall. Taking all these months together, GDP hasn’t grown since April. If, say, the economy grew another 0.2% month-on-month in September, that would leave Q3 tracking a 0.1% quarter-on-quarter fall in GDP.
“For now, the picture of the economy coming from the data is lacklustre. Given how much monetary policy tightening we’ve had it is still somewhat surprising that the UK economy has managed to avoid recession so far. I am not convinced it will continue to do so. PMI business surveys are looking consistent with falls in private sector output and the labour market has been showing more signs of weakness.
Analysts at Investec predict the UK economy will stagnate or shrink slightly over the third quarter of this year.
Following the news that the economy returned to growth in August, after July’s contraction, Investec’s Sandra Horsfield says:
UK monthly GDP figures published this morning reported that output rebounded in August, by 0.2% on the month, in line with both our and the consensus forecast.
Coming after a 0.6% fall in output in July (initially reported as -0.5%) this leaves the possibility of a contraction in GDP in Q3 as a whole on the table. Indeed, in the absence of revisions to back data next month, it would take a monthly rise of 0.4% in output to prevent a quarter-on-quarter drop over Q3. More likely is a zero or small negative quarterly print.
This is likely to be welcomed by the Bank of England as an indication that the tough medicine of very rapid rate rises is starting to take effect – without, so far, hinting at a deep recession.
In the foreign exchange markets, the Russian rouble has jumped in value after Moscow introduced capital controls to support the currency.
Last night, Russia said Vladimir Putin had signed a decree reintroducing capital controls for some exporting firms.
These companies will be required to sell their earnings from foreign sales on the domestic market for roubles.
First Deputy Prime Minister Andrei Belousov said in a statement that:
“The main purpose of these measures it to create long-term conditions for increasing the transparency and predictability of the FX market, reducing the opportunity for currency speculation.”
The rouble has gained almost 3% against the US dollar this morning, to around 96.8 to the $1.
Last week it fell through the 100/$ mark for the first time since mid-August, which prompted Russia’s central bank to hike interest rates from 8.5% to 12%, and Putin to consider reintroducing capital controls.
Russia is having to pull out all the stops this week to prevent the weak rouble from falling through the 100 roubles = 1 dollar psychological barrier.
For comparison, in 2013 it took:
30 roubles to buy a dollar (98 today)
€0.75 to buy a dollar (0.94 today)
£0.65 to buy a dollar… pic.twitter.com/apT5G29rAg— Timothy Phillips (@TSJPhillips) October 11, 2023
More surveyors report falling UK house prices than at any time since 2009
UK house prices are falling at the fastest extent since 2009, after the financial crisis, a new poll of the country’s surveyors has found.
A greater proportion of surveyors are reporting falling UK residential property prices than at any time since after the financial crisis, the Royal Institution of Chartered Surveyors (RICS) reported this morning.
The RICS house price balance, which measures the difference between the percentage of surveyors seeing rises and falls in home prices, fell to -69 for September, slightly worse than the -68 recorded in August.
RICS reports that “house prices remain on a downward trajectory at the national level”, adding:
While almost all parts of the UK are witnessing house prices retreat, downward pressure appears most significant across the West Midlands and the South East of England.
For renters the rental outlook remains grim with @RICSnews surveyors forecasting further growth over the next year, averaging 5% nationally, as a result of the persistent demand & supply imbalance pic.twitter.com/ANGxc9Yq1d
— Emma Fildes (@emmafildes) October 12, 2023
KPMG fined record £21m over Carillion audit failures
Britain’s accounting regulator has fined KPMG a record £21m for audits of Carillion, the builder that imploded in 2018 and prompted a root and branch review of auditing standards.
“The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined that credibility and the public trust in audit,” said Elizabeth Barrett, executive counsel for the Financial Reporting Council (FRC).
“This is reflected in the financial sanction imposed on KPMG LLP, the highest ever imposed by the FRC.”
UK GDP: Political reaction
The health of the economy will be a key factor in the next general election campaign, with the IMF warning this week that the UK will be the slowest-growing nation in 2024.
This morning, chancellor of the exchequer Jeremy Hunt has welcomed the pick-up in GDP in August, saying:
“The UK has grown faster than France and Germany since the pandemic and today’s data shows the economy is more resilient than expected. While this is a good sign, we still need to tackle inflation so we can unlock sustainable growth.”
But Labour shadow chancellor Rachel Reeves says:
“Under the Conservatives, Britain’s economy remains trapped in a low growth, high tax cycle that is leaving working people worse off.
“Labour will get our country building again so we can boost growth, make working people better off and get Britain’s future back.”
Apollo to buy Wagamama owner in £506m deal
In the City, the owner of eatery chain Wagamama is being taken over by a US private equity firm in a £500m+ deal.
The Restaurant Group (TRG) has agreed to be bought by a vehicle owned and managed by Apollo Global, at a price of 65p per share – a 34% premium to its closing price last night.
That values TRG at approximately £506m.
Apollo says it has closely followed TRG over many years and believes it is:
…a high quality and leading company in the casual dining market with an attractive portfolio of concepts and brands and an experienced management team with a clear vision and strategy for the future direction of TRG.
TRG has been hit by soaring energy and raw material prices over the last 18 month or so.
Last month, it agreed a deal to sell its Frankie & Benny’s and Chiquito chains to Cafe Rouge owner Big Table Group.
TRG’s chair, Ken Hanna, also recently agreed to step down after growing pressure from activist investors.
Here’s NIESR, the independent research institute, on this morning’s UK GDP report:
Today’s ONS figures suggest that monthly #GDP grew by 0.2 per cent in August, following a fall of 0.6 per cent in July, driven by increased output in the services sector – particularly in the professional, scientific and technical activities, and education subsectors – which
1/3
— National Institute of Economic and Social Research (@NIESRorg) October 12, 2023
was partially offset by declines in production and construction sector output. #GDP increased by 0.3 per cent in the three months to August relative to the previous three month period; however, with higher-frequency indicators for September pointing to declining output in
2/3
— National Institute of Economic and Social Research (@NIESRorg) October 12, 2023
the major sectors as well as muted spending, it is unclear whether we can expect overall #growth in the third quarter of this year.
3/3
📈Stay tuned as our full analysis will be out shortly⬇️https://t.co/k40Ii3Afea
— National Institute of Economic and Social Research (@NIESRorg) October 12, 2023
Hussain Mehdi, macro & investment strategist at HSBC Asset Management, warns that the UK faces an “elevated recession risk”, despite GDP rising 0.2% in August.
Mehdi explains:
“A sequential pickup in growth in August was widely expected following the prior month’s weather and strike-related disruption. However, more contemporaneous economic indicators could paint a picture of an economy flirting with recession amid tight monetary policy and persistently high inflation.
We believe there is a good chance the Bank of England is done with its hiking cycle and that rates are more likely to remain higher-for-longer in the UK given sticky wage growth.
After a poor July, the UK economy bounced back in August, says Neil Birrell, chief investment officer at Premier Miton Investors.
But, Birrell also warns there is a real risk of recession, saying:
Like a number of other economies, the UK economy continues to confound not just the worst, but most expectations in remaining relatively robust.
The Fed has indicated it will proceed carefully on policy and the Bank of England must do the same as it balances the inflation versus growth equation. Recessionary risk remains real, but the damage that could be done by ongoing high inflation is a threat.”
