UK manufacturing slowdown; eurozone inflation hits 8.6%; petrol at new record – business live

Financially squeezed households deposited less money into accounts in May than in April, the latest Bank of England data shows.

Around £5.7bn was saved in banks, building societies and NS&I accounts in May, down from a net flow of £6.3bn in April.

With inflation at 40-year highs, and food and energy bills soaring, households have been left with less spare cash to save (unlike during lockdowns, when forced saving jumped)

Consumers also borrowed an additional £800m in consumer credit last month, including £400m more on credit cards.

That’s below the pre-pandemic level, and also less than economists expected. Consumer credit often rises during good economic times, as people are confident they can borrow more.

But it can also be a sign that households are struggling, needing to put essential purchases on credit.

UK petrol and diesel prices have hit record highs again, as June ended with more pain at the pumps.

The average price of a litre of unleaded rose to 191.43p on Thursday, up from Wednesday’s record of 191.25p, Experian Catalyst data shows.

Diesel headed towards the £2/litre mark for the first time, at 199.05p

June was a month of regular price hikes which show no signs of offering relief heading into the weekend, warns the AA.

Jack Cousens, head of roads policy at the AA, urges drivers not to abuse staff at petrol stations, where it now costs over £105 to fill a 55-litre family car:

“With Wimbledon well underway, drivers may be forgiven for borrowing the iconic rant from John McEnroe as they pull up to the pump – YOU CANNOT BE SERIOUS?!

“However, with some reports of aggressive behaviour towards forecourt staff we urge people to channel the zen-like mentality of Roger Federer when refuelling and not abuse staff. It is not their fault which is why the AA is directly challenging the government, retailers and the CMA to find a quick and effective solution.

“The wholesale price of fuel continues to fall, yet drivers and businesses are seeing the price go in the opposite direction. Some drivers are now making two payments per tank as self-service pumps cut out at £99.

“A potential ‘substantial’ cut in fuel duty, which we called for weeks ago, cannot come soon enough. While the retailers keep lobbing the price up, the rest of the nation is desperate to see the price smashed.”

It may be a difficult day in the office for ECB policymakers after inflation soared to 8.6%, more than four times the 2% target, says Alastair George, chief investment strategist at Edison Group:

But low-income consumers face even more diffulties, given 40% increases in energy prices, George adds:

We believe the ECB faces an unenviable task. The supply shock in terms of energy is enormous and likely to worsen as winter approaches and Russia uses energy supplies as a political weapon.

This is putting massive pressure on the eurozone consumer and economic momentum is weakening with PMI indices for new orders already indicating contraction.

In hindsight, the ECB is likely to be seen as hiking rates into a recession.

Fawad Razaqzada, market analyst at City Index and FOREX.com, says stagflation is the key risk facing the Eurozone:

This means the euro is going struggle to shine much even as the ECB has paved the way for aggressive 75 basis point rate hikes in July and September.

Additionally, the fact that inflation has been diverging across the eurozone means the ECB will have a tough time with its anti-fragmentation tool and may make a bigger mess out of the whole situation.

Pushpin Singh, economist at the CEBR, says there will be “significant knock-on effects on the Eurozone economy” if the ECB starts raising interest rates in July, amid the energy crisis.

This comes amid a mounting possibility of a severe gas crisis in Europe, with Russia using gas exports as a means to counter sanctions against it.

Consequently, gas shortages have led to Germany and the Netherlands triggering their own emergency plans to moderate gas usage and supply.

It is likely that if a gas shortage hits the currency bloc, economies will seek to close off supplies to industry first, thereby heralding a drop-off in output in sectors such as manufacturing. In turn, this could result in a reduction in aggregate economic activity and bring recessionary pressures.

Eurozone inflation has hit yet another record high, as Europe’s cost of living crisis deepened.

Consumer prices surged by 8.6% in the year to June, data body Eurostat estimates, accelerating from the 8.1% inflation recorded in May, and higher than forecast.

This latest surge increasing the pressure on the European Central Bank to start raising interest rates from record lows this month.

The increase was driven primarily by energy prices, but food, goods, and services costs also kept rising.

Energy is expected to have the highest annual rate in June (41.9%, up from 39.1% in May), followed by food, alcohol & tobacco (8.9%, up from 7.5%), non-energy industrial goods (4.3%, up from 4.2%) and services (3.4%, down from 3.5% in May).

Inflation has risen steadily for more than a year now, initially fuelled by post-pandemic supply shocks and now by energy prices on the fallout of Russia’s war on Ukraine.

It’s now four times as high as the ECB’s target.

Output growth at UK manufacturers ground to a near standstill in June, the latest sign that the economy is slowing as consumers cut back.

The closely-watched S&P Global / CIPS UK Manufacturing PMI report has also found that business optimism hit a two-year low last month.

Activity rose at the slowest pace in two years, as new orders fell for the first time since January 2021.

And the consumer goods sector was especially hard hit, as household demand suffered a steep retrenchment on the back of the cost-of-living crisis.

The healthcheck on UK factories found that:

• Output growth slows to near-stagnation pace…
• …as new order intakes fall for the first time since January 2021
• Price inflation remains elevated despite further easing

Companies blamed the fall in new business on a range of problems — including the weaker economic outlook, reduced new export order intakes, slower growth of domestic demand, the war in Ukraine, raw material shortages and the slowdown in China.

New export orders contracted for the fifth month running in June — with some firms saying ongoing Brexit-related difficulties and weaker growth had hit orders from the EU.

This pulled the manufacturing PMI down to 52.8 from 54.6 in May. That’s worse than the preliminary “flash” reading of 53.4 taken during June, and nearer the 50-point mark showing stagnation.

Rob Dobson, director at S&P Global Market Intelligence, said:

Domestic market conditions became increasingly difficult and foreign demand fell sharply again, stifled by Brexit, transport disruption, the war in Ukraine and a global economic slowdown.

Business confidence took a hit as a result, dipping to its gloomiest since mid-2020. Jobs growth also slowed sharply amid the increasingly uncertain outlook and recent surge in energy costs.

Dobson warns that economic conditions may worsen:

“There were some welcome signs that supply-chain constraints and cost inflationary pressures may have passed their peaks. However, with these constraints still elevated overall and demand headwinds rising, it is likely that UK manufacturing will see the economic backdrop darken further in the second half of the year.”