London’s economic recovery shows ‘levelling up’ struggles; inflation hits services sector – business live

London’s economy is outpacing the rest of the UK, according to new official data which shows the government’s levelling up agenda is struggling.

The Office for National Statistics reports that London’s GDP rose by 1.2% in January-March, much faster than the UK average of 0.8% during the first quarter of 2022.

Wales, at 1%, and the East Midlands, at 0.9%, were the only other regions to grow faster than average.

Northern Ireland was the slowest with 0.4% growth, while the North East, Yorkshire and The Humber, and the South West all matched the average.

The East of England, North West, Scotland, and the South East were all slightly slower with 0.7% growth.

The report also shows that London, and Northern Ireland, are the only economies larger than their pre-pandemic levels in Q4 2019.

The West Midlands’ GDP is still 10% smaller than before Covid-19. That suggests its manufacturing base has been harder hit by the pandemic than the capital, where many employees shifted to home-working.

South Africa’s economy grew faster than expected in the first quarter of this year, lifting it back to pre-pandemic levels.

A strong performance by the factory sector helped South Africa’s GDP increase by 1.9% in January-March, and by 3% more than a year ago, as it emerged from the disruption of the omicron variant.

That beat forecasts of 1.2% quarter-on-quarter growth and 1.7% year-on-year growth.

Statistics South Africa said manufacturing grew 4.9% quarter-on-quarter, while the trade, catering and accommodation category expanded 3.1% and agriculture, forestry and fishing 0.8%.

Mining and quarrying contracted 1.1%.

UK services firms suffed a worrying combination of slower growth and higher prices in May, says Tim Moore, Economics Director at S&P Global Market Intelligence (which compiled the PMI report).

“There were bright spots in customer-facing parts of the economy during May, buoyed by a rapid recovery in consumer spending on travel, leisure and entertainment.

However, hospitality businesses widely reported constraints on recovery from a lack of candidates to fill vacancies and difficulties meeting demand due to ongoing global supply chain disruption.

“Service providers are increasingly concerned about the near-term business outlook, with price resistance among consumers and escalating cost of living pressures set to dampen spending during the second half of 2022.

Growth expectations have dropped in each month since the invasion of Ukraine and are now the weakest since October 2020.”

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, says firms faced rising fuel and food prices, and salaries.

Though there was a glimmer of hope with export orders which were not as flat as in previous months, Brexit customs restrictions and war in Ukraine continued to impact overseas confidence still further.

“One bright spot was strong employment levels. Job seekers still had the pick of the bunch in terms of roles and requested salaries but as capacity levels are reached and new order gaps appear, the window of opportunity is starting to close.

“The sudden fall in the overall index is a cause for worry and was reflected in the sector’s optimism which was the lowest since the height of the pandemic in October 2020.

Recessionary fears are growing bigger and stronger amid the realisation that 2022 as the year of stable recovery has not materialised yet.

Sam Cooper, Vice President of Market Risk Solutions at Silicon Valley Bank, says:

“Despite beating expectations, today’s PMI print is unlikely to move the needle for sterling.

With a deluge of bad news in the form of political tensions, worrying BRC sales data and a chronic labor shortage paired with rampant inflation, long term forecasts for the pound are likely to be revised lower as pressure continues to mount”

Growth across the UK’s service sector slowed sharply last month as rising inflation hits customer demand.

Services firms saw the weakest growth since February 2021, when many businesses were locked down in the pandemic, according to the latest purchasing manager’s survey.

It found that business activity growth eased considerably in May, while profit margins were squeezed by rising prices.

Many firms reported that worries about the economic outlook and heightened risk aversion hit customer demand. But, the hospitality sector had a strong month, helped by the easing of pandemic restrictions.

This dragged the Services PMI down to 53.4 in May, from 58.9 in April — the biggest jump since the survey began in 1996, apart from during Covid-19 lockdowns.

However, it is better than the ‘flash’ reading of 51.8 taken during May.

The survey shows that the cost of living squeeze didn’t abate — firms were hit by a record increase in input costs, and lifted their own prices at an unprecedented speed in response.

Firms were gloomier too, with growth projections lowest since October 2020.

The report says:

The weakest headline index reading since February 2021 mostly reflected subdued business and consumer confidence, with worries about the economic outlook also contributing to softer demand patterns in May.

Travel, leisure and entertainment was the main exception, with hospitality businesses widely commenting on strong consumer demand due to the removal of pandemic restrictions.

The UK’s political instability is not good for the pound, writes Derek Halpenny of Japanese bank Mitsubishi UFJ.

The stance of the PM and his supporters is that a victory is a victory and that it is time to “draw a line” and “move on”. That could prove difficult to do. Two bi-elections on 23rd June are likely to reveal huge swings in favour of Labour and the Lib Dems while the conclusions of an enquiry into whether Johnson lied to parliament and an enquiry into the government’s handling of covid are likely to come after the summer recess.

With 41% of sitting MPs now wishing him to go the outlook does not look good and a divided party is not favourable for getting policies through parliament. The difficult economic outlook that lies ahead will be far more difficult to get through with a PM that lacks support. Difficult policies like altering the framework of the Northern Ireland Protocol that is integral to the relationship with the EU and the Withdrawal Agreement points to further divisions down the road.

We already have GBP forecasts that indicate underperformance and weaker GBP/USD levels than the current spot level through Q3 and the outcome of last night’s vote is consistent with our bearish GBP view.