Pound tumbles after retail sales fall in deepening cost of living crisis – business live | Business

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UK consumer confidence crisis: the first sign of trouble, said Kallum Pickering, senior economist at Berenberg Bank.

Confidence surveys, which are published well ahead of official economic statistics, often provide the first indication when something shifts in the underlying economy. For this reason, we should not ignore the recent batch of consumer confidence data for the UK. Across a range of measures for current sentiment and expectations, the data in April are close to or exceed their survey lows.

As our chart shows, the signal that the current level of confidence is sending is not ambiguous: real consumption is probably declining at present as the UK gets battered by rising inflation and global supply challenges, which have been amplified by Putin’s war and lockdowns in China. The key question is whether the shock will persist for long enough to cause a recession. With an unusually uncertain near-term outlook, this is not easy to answer. At a minimum, the data suggest investors should be prepared for a bad outcome.

He added:

The Bank of England is in a serious bind: After reacting late to surging prices, the BoE (along with the US Federal Reserve) is now chasing rising inflation with a succession of interest rate hikes. The fourth such hike looks likely at the upcoming 5 May meeting – when policymakers will lift the bank rate by a further 25bp to 1.0%. While the BoE has little choice but to react to the inflation surge, it is clearly running the risk of a policy error by continuing to tighten as the recession risk rises.

If consumers demand fewer products amid the confidence plunge, that will dampen prices and lower the risk of persistent excess inflation. If workers fear recession, they may just be happy to keep their jobs and not push any erstwhile advantage in wage negotiations. Inflation will be higher than expected in the near term due to Putin’s war, but the surge may be followed by a period of disinflation at rates below 2% for a while thereafter.

In a worst-case scenario, the BoE may be unwittingly tightening into a recession that is already underway, as well as reacting to an inflation problem that may go away mostly on its own.

India and the UK will press ahead with talks on a bilateral free trade agreement, Boris Johnson and the Indian premier, Narendra Modi, have said, after the UK made clear it was willing to make immigration part of any deal, reports our political editor Heather Stewart from Delhi.

The pair appeared to differ on how rapidly an agreement could be made – Johnson suggested it could be ready by the festival of Diwali in late October, but Modi pointed to the end of the year.

Johnson said: “As the next round of talks begin here next week, we are telling our negotiators, get it done by Diwali in October.”

Modi said there had been “good progress and we have decided to make all efforts to conclude the FTA [free trade agreement] by the end of this year”. Three rounds of talks had already been held.

European stocks are sliding, as traders are bracing for further interest rate hikes following hawkish comments from central bank officials.

The FTSE 100 index in London is down about 0.6% at 7,583 while European indices have slid more than 1%. The pan-European Stoxx 600 has fallen 1%.

US Federal Reserve chairman Jerome Powell said yesterday that a half-point (50 basis point) rate increase “will be on the table” when the bank meets on 3-4 May. The comments came after the European Central Bank’s vice president Luis de Guindos backed an end to the central bank’s bond purchasing programme in July and said it could raise rates that month, in September or later.

Money markets are now pricing in nearly 85 basis points of ECB rate hikes this year, rather than 70 bps early on Thursday, before ECB officials spoke. They are pricing in a 25 bps move by July. The latest eurozone PMI data was better than expected and showed a pick-up in growth, and inflationary pressures, in April.

Meanwhile, the Bank of England governor Andrew Bailey was more cautious, and the latest gloomy retail sales and business survey data on the impact of high inflation and the cost of living crisis suggest that the Bank may hike by a quarter point, rather than a half point, at its May meeting.

Here is our full story on the March decline in retail sales in Britain:

Dean Turner, economist at UBS Global Wealth Management, said:

A disappointing set of PMIs, coming on the back of a very weak retail sales release, highlights that the cost-of-living squeeze is hitting economic activity hard. Meanwhile, price pressures continue, but there is some evidence that firms passing these on to consumers is starting to negatively impact demand, offsetting the boost from the end of covid restrictions.

Growth in the second quarter was likely to be weaker than in the first three months of the year as the covid reopening boost faded. And, to be clear, in level terms the PMIs show an economy that is still growing. However, the loss of momentum here and in the data more generally highlights the risk of the economy stalling in current quarter. Nevertheless, we still think that the Bank of England will press on and hike rates next month, but they are likely to pause earlier than markets currently expect.

Sterling sold off on this morning’s data, falling to a 17-month low against the dollar. We still see the pound higher this year, as a lot of bad news is already in the price. However, it is likely to be a tricky period for the pound in the short term.

The UK services PMI dropped materially from March’s 10-month high, while the new orders index plunged to 54.6, from 60.4 in February. The slowdown also caused firms to slow their pace of hiring; the employment index fell to 55.8—its lowest level since April 2021—from 58.4 in March.

The manufacturing PMI remains broadly unchanged following the sharp drop in March but while the output index improved, the new orders index fell to just 51.2, its lowest level since June 2020, while growth in employment slowed too, noted Gabriella Dickens, senior UK economist at Pantheon Macroeconomics. She said:

April’s PMI figures add to evidence that the sharp decline in households’ real disposable income is starting to put the brakes on the economic recovery.

UK exporters are starting to be hit by a drop in demand in key trading partners; the new export orders balance dropped to 47.3, from 49.4, and remained below its eurozone counterpart for the sixteenth consecutive month.

Meanwhile, both manufacturing and services firms are becoming increasingly worried about the outlook for demand amid the intensifying squeeze on real incomes; the future output index of the composite PMI fell to an 18-month low of 68.0, from 72.2.

Record inflation and war in Ukraine hit UK demand

Bert Colijn, senior eurozone economist at ING, has looked at the PMI data.

Consumers are ignoring the purchasing power squeeze for now as reopening effects boost service sector growth while manufacturing cools. We now expect the European Central Bank’s first rate hike to be in the third quarter.

The eurozone economy continues to face challenges ahead. Prolonged high inflation will start to weigh more on household consumption over time with weaker demand for goods spilling over into services demand when catch-up demand fades. Also, investment will be weighed down by higher interest rates and weakening credit conditions in the coming months. Supply chain problems are already an issue now and are set to remain problematic given the build-up of containers in Shanghai and continued disruptions related to the war.

Nevertheless, this is a clear hawkish signal to the ECB. With this PMI signalling continued economic recovery, risks to the inflation outlook remain skewed to the upside and that is likely to be another argument for the ECB to move faster than initially expected. We now expect a first hike to happen in the third quarter and another one in the fourth but keep a close eye on the growth environment as outperformance of expectations could mean more hawkish surprises are in store.

The Co-op is removing use-by dates from its own-brand yoghurt in an attempt to address the problem of millions of pots that are still safe to eat being wasted each year, reports our consumer affairs correspondent Zoe Wood.

Instead, starting next month, the Co-op’s own yoghurts will carry a best-before date, with shoppers encouraged to “use their judgment” to gauge if they are edible. About 42,000 tonnes of yoghurt – £100m worth – is thrown away in British homes each year because it is out of date, according to the food waste charity Wrap. Half are dumped in unopened packs.

Nick Cornwell, the Co-op’s head of food technical, said the “acidity of yoghurt acts as a natural defence. We’d encourage shoppers to use their judgment on the quality of their yoghurt if it is past the best-before date,” he said. “Yoghurt can be safe to eat if stored unopened in a fridge after the date mark shown, so we have made the move to best-before dates to help reduce food waste.”

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Chris Williamson, chief business economist at S&P Global said:

April saw a two-speed eurozone economy. Manufacturing came close to stalling due to ongoing supply constraints, rising prices and signs of spending being hit by risk aversion due to the war. However, April also saw manufacturers suffer due to a shift in demand from goods to services amid looser pandemic restrictions, most notably via a record surge in spending on activities such as travel and recreation.

Common across both sectors, however, was a further surge in cost pressures, driven by soaring energy and raw material costs, as well as rising wages. Average prices charged for goods and services rose at an unprecedented rate in April as these higher costs were passed on to customers, sending a worrying signal that inflationary pressures continue to build.

The eurozone has therefore started the second quarter on a stronger than anticipated footing, confounding consensus expectations of a slowdown. However, the weakness of the manufacturing sector is a major concern as it points to an economy that is not firing on all cylinders. Similarly, the ever-rising cost of living suggests that service sector growth could cool sharply once the initial rebound from the opening up of the economy fades.

Policymakers may nevertheless tilt to a more hawkish stance, reflecting the persistence of unprecedented inflationary pressures at a time of encouragingly robust economic growth.