Saturday, November 23, 2024

UK economy continues to stagnate, confounding forecast of growth – business live

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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.

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Key events

The PrettyLittleThing founder Umar Kamani said he was returning to the fast fashion brand, and one of his first changes will be to reintroduce free returns for its royalty customers.

Retail Week described it as a “shock return” after he left the business last year.

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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.

People walk past a WH Smith store in London. Photograph: Peter Nicholls/Reuters
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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.

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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.

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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.

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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.

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