Graeme Wearden 

Pound slides as UK economy shrinks in November – as it happened

Rolling coverage of the latest economic and financial news, as UK slowdown persists and airline Flybe seeks help
  
  

Workers on the production line at Nissan’s factory in Sunderland.
Workers on the production line at Nissan’s factory in Sunderland. Photograph: Owen Humphreys/PA

Finally, the FTSE 100 has closed 29 points higher at 7,617, up 0.4% today.

That’s thanks to the weaker pound, which cushioned stocks from fears about weak UK growth.

Fiona Cincotta of City Index says:

The FTSE jumped higher on the open boosted by trade deal optimism and the pound tumbling.....

Recession fears and rate cut expectations dragged the pound sharply lower in early trade. The monthly GDP reading for November printed significantly worse than expected at -0.3% with the manufacturing sector acting as the biggest burden on the economy amid continued Brexit uncertainty and slow global demand.

House builders had a good day, she adds.

House builders outperformed thanks to a helping hand from broker upgrades, with Taylor Wimpey jumping over 2.5%. Following from the Conservative victory in the elections the outlook for the sector and house prices in general has improved. This seems slightly at odds with the pound falling on recession fears.

Tomorrow’s trading update from Taylor Wimpey and building material supplier Grafton could give further insight into the health of the sector. Whilst retailer dominated last week, house builders will take centre stage this week.

Summary: Interest rate cut speculation weighs on the pound

Time for a recap.

  • There are some signs of a Boris Bounce in the UK, with estate agents Savills reporting a pick-up in demand after last month’s election.
  • European stock markets have started the new week poorly. The Stoxx 600 index has lost 0.3%, with losses in Frankfurt, Paris, Milan and Madrid.

  • But Wall Street has seen some early gains, on hopes that the US and China will sign a Phase One trade deal this week. Tesla has hit a record high.

Updated

Tesla hits record high

Over on Wall Street, shares in electric self-driving car maker Tesla have hit a record high.

Tesla traded over $500 for the first time ever, up 4%, as the New York stock market opens for another week.

Investors are piling in after investment bank Oppenheimer hiked its price target on Tesla, saying:

We believe the company’s risk tolerance, ability to implement learnings from past errors, and larger ambition than peers are beginning to pose an existential threat to transportation companies that are unable or unwilling to innovate at a faster pace.

This means Tesla’s share price is up 50% in the last year, as fears over its financial stability have eased.

Other tech stocks are also higher, lifting the Nasdaq by 0.4% in early trading. The benchmark Dow Jones industrial average is up 0.1%.

Updated

CME: 49% chance of a UK rate cut this month

Today’s weak UK growth figures, and recent dovish comments from Bank of England officials, mean a January interest rate cut is now virtually an even-money chance.

That’s according to CME Group, the derivatives and options marketplace.

Its BoEWatch Tool tracks the probability of a rate move at upcoming Bank of England Monetary Policy Committee meetings, based on futures prices.

It shows a 49% chance that the BoE cuts rates on 30 January, and a 51% chance that they leave them at 0.75%.

This suggests that future UK economic data could move the markets -- particularly the ‘flash’ PMI surveys due on Friday 24th January. They will show whether activity rose or fell at service sector companies and factories this month.

Updated

Environmentalists in Exeter don’t share concerns over Flybe’s future.

Instead, the local Green Party point out that airlines are a major contributor to the climate emergency, and that flying between regional airports is unsustainable both financially, and for environmental reasons.

A very fair point. But without serious investment in other transport networks, flying will still appeal.

For example, today’s flight from Exeter to Belfast was scheduled to take 80 minutes. Driving would take over 10 hours, while train takes around 15 hours.

Speculation continues to swirl over Flybe’s future, with the airline still looking for government support to prop up its finances.

Flybe continues to operate services as usual -- with flights still taking off on time despite the risk of blustery conditions in parts of the UK today.

But there is still concern that the regional airline may not get the support it needs.

Aviation consultant John Strickland fears that Westminster politicians may not bail out the Exeter-based firm.

He told the Press Association:

“It’s a difficult sector. Regional flying is the poor relation in aviation terms.

“It’s certainly not been helped by the options for surface transport, from driving through to trains.

“On top of that you have the Air Passenger Duty burden on tickets which is an issue for competitiveness.

“It’s a very large airline in terms of regional activity, having 80-plus aircraft.

“It’s always seemed to me that was unusual, relative to the consortium who’s bought it.”

“It was always going to be a challenge to be able to turn this around.

“If it’s going to succeed, to me it’s always seemed it would have to be done in a way that the airline would shrink to some extent.

“I cannot see the Government doing much of anything except give warm words because they didn’t help out Monarch or Thomas Cook.

“I just can’t see a political will to get involved, so it’s going to depend on somebody putting money in.”

In other news, Britain posted a record trade surplus in November -- although the underlying picture isn’t quite as impressive.

The ONS reports that the UK racked up a monthly surplus of £4.0 billion, mainly driven by a £3.0 billion increase in exports of unspecified goods.

Unspecified goods includes ‘non-monetary gold’ (where swings in London’s bullion market can distort the trade figures).

But strip out unspecified goods, and November 2019 still saw a monthly trade surplus of £0.7 billion. That’s largely due to a £1.6bn drop in machinery imports, and a £1.3bn drop in transport equipment, during the month.

This may partly be due to companies stockpiling goods in October in case of a disorderly Brexit.

The ONS also reports that Britain racked up a larger trade deficit with the EU, underlying the importance of a post-Brexit trade deal. It says:

  • The UK’s trade in goods deficit widened £0.7 billion to £29.9 billion in the three months to November 2019, as imports grew faster than exports, while the trade in services surplus widened £1.7 billion to £28.8 billion.
  • The trade in goods deficit with EU countries widened £1.8 billion to £23.9 billion in the three months to November 2019, while with non-EU countries it narrowed £0.6 billion to £3.8 billion.

Full story: UK economy shrank before election

Today’s weak growth report piles pressure on the Bank of England to consider cutting interest rate soon, says my colleague Richard Partington:

The British economy shrank in November following a fall in consumer spending and a downturn in manufacturing before the election, raising pressure on the Bank of England for an interest rate cut.

In a reflection of the political uncertainty hanging over families and businesses before last month’s vote, the Office for National Statistics (ONS) said gross domestic product (GDP) had fallen by 0.3% in November from the previous month.

Most major sectors of the economy except construction recorded a drop in output, including the country’s usually dominant services industry – which includes retail, hotels and finance.

The latest snapshot comes as momentum towards an interest rate cut builds after three members of the Bank of England’s rate-setting committee signalled that weakness in the economy could warrant lower borrowing costs within months to support jobs and growth.

The pound came under selling pressure on Monday, dropping by around 0.7% against the US dollar, to $1.2980, and the euro, to €1.1675, amid rising expectations that the Bank’s monetary policy committee (MPC) could cut rates as soon as its next meeting on 30 January.

There are some signs that the UK economy may be picking up speed.

Savills, the estate agents, told the City this morning that business has picked up since the December general election.

Saville now expects profits to hit the upper end of its guidance, thanks to a pick-up in property transactions.

But it also warned shareholders that uncertainty over Britain’s future relationship with the EU could weigh on the economy in 2020:

“Looking to the year ahead, increased political stability in the UK should maintain improved sentiment in real estate markets...

Nevertheless, some caution may remain until the full impact of Brexit is better understood.”

UK GDP: the key charts

Today’s growth report contains several charts showing how the UK economy fared in November, and over the last quarter.

This one shows how the economy barely grew in September-November, with annual growth sliding to its weakest since 2012.

This table highlights how services and manufacturing both contracted in November alone:

These charts show how services sector growth weakened steadily in recent months.....

...while industrial production has contracted for months.

Javid: We must move on from Brexit

The Chancellor of the Exchequer, Sajid Javid, is promising measures to spur the economy in his budget, in two months time.

He also appears to blame Brexit deadlock for the growth slowdown, saying:

“Uncertainty has held our economy back for too long. We are getting Brexit done so we can move on and chart a new course for our economy.

In my Budget on 11 March we will lay the foundations for a decade of renewal that will unleash Britain’s potential by levelling up across our great country.”

TUC General Secretary Frances O’Grady has called on the government to take steps to boost growth:

“These figures are bleak news for the economy and working people with vital industries like manufacturing in the doldrums.

“The government has run out of excuses. It must come up with a plan to boost growth and living standards across the country.

“Warm words are not going to cut it.”

John Hawksworth, chief economist at PwC, says the UK economy is stuck “in the doldrums”, having only grown by 0.1% in the last quarter.

November saw a decline in estimated output in most major sectors except construction, although this was offset by small upward revisions in previous estimates of GDP growth in September and October. The weakening of the dominant UK services sector in the autumn is notable and business surveys suggest that output in this sector remained flat in December.

All of this data, however, relates to a period of heightened economic and political uncertainty last autumn due to Brexit and the general election. It is too early to say for sure if economic momentum will pick up in the new year now the political situation is clearer, but our latest survey of the financial services sector with the CBI does suggest some boost to optimism since the election.”

John McDonnell MP, Labour’s Shadow Chancellor, says Britain’s weak growth is due to the UK government’s failure to invest in public services.

“Our production sector and manufacturing growth are suffering as a result of ongoing Tory mismanagement and incompetence.

“Labour will continue to hold the Government to account for its disastrous economic record, and fight for the investment that is needed to restore public services and tackle the climate emergency.”

The pound has sunk to its lowest level since 27 December, and has fallen for eight of the first nine trading days this year.

Updated

Markets: rate cut now 50% chance

The City now reckons there’s an even chance of UK interest rates being cut in a fortnight’s time.

Peter Dixon, economist at Commerzbank, says:

With a growing chorus on the MPC apparently open to the prospect of a rate cut, if the data points in that direction, today’s release might well tip the balance of one or two members ahead of the meeting on 30 January, where the market probability assigned to a 25 bps cut has risen to 50% versus 5% at the start of last week.”

There’s a serious danger that the UK economy will have shrunk in the final quarter of 2019, given November’s grim performance.

That would put Britain half-way into recession again.

Howard Archer of IT Item Club says:

There now looks to be a very real chance that the economy contracted marginally over the fourth quarter of 2019; at best it may have stagnated. Barring further revisions to the back data, GDP will have needed to grow 0.3% month-on-month in December just for GDP to have been flat quarter-on-quarter over the fourth quarter

In fact, the economy looks to have had a difficult December overall.

However, it’s also possible that activity and business confidence will be boosted this year, following December’s decisive election result.

Matthew Cady, investment strategist at Brooks Macdonald, says there’s a significant chance that the Bank of England cut interest rates at its next meeting on 30 January.

UK GDP for November has come in at negative -0.3%. This is quite a bit weaker than had been expected. Consensus had been looking for zero growth month on month. Against this, both September and October were revised up by 0.2% and 0.1% points respectively.

The weaker GDP print today puts beyond doubt that the next Bank of England meeting at the end of January is going to be a ‘live’ meeting.

Last week, governor Mark Carney suggested the Bank could move ‘promptly’ if the UK economy was weakening.

Yesterday, policymaker Gertjan Vlieghe said he’d vote for a cut if the economy doesn’t bounce back following December’s election. Vlieghe’s comments were already pushing the pound down this morning, before the GDP figures landed.

UK slowdown: what the experts say

Garry Young, Director of Macroeconomic Modelling and Forecasting at the NIESR thinktank, says UK growth has “petered out”.

GDP was virtually flat in the three months to November and the latest surveys point to further stagnation in December.

While there is some evidence of an improvement in business optimism following the general election, it is doubtful that this will do much to change the short-term economic outlook of further lacklustre growth.”

Car production and pharmaceuticals helped to drag UK manufacturing down in the last quarter, flags up economist Rupert Seggins.

The BBC’s Dharshini David points out that UK industry is pulling growth back

Over the last three months, the UK service sector grew by just 0.1% while construction expanded by 1.1%.

But Britain’s production sector, including manufacturing, shrank by 0.6% over the last quarter -- with Brexit uncertainty hitting orders and forcing some carmakers to schedule temporary shutdowns in case of a disorderly exit from the EU.

ONS: Weakest growth since 2012

The Office for National Statistics’ head of GDP, Rob Kent-Smith, says UK growth has hit its lowest level in seven years, on an annual basis.

“Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing.

“The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture.

“Long term, the economy continues to slow, with growth in the economy compared with the same time last year at its lowest since the spring of 2012.

Chart: A volatile year for UK GDP

Today’s GDP report shows that the UK economy has slowed for two months running.

As you can see, it shrank in April-June, then bounced back with 0.4% growth in July-September, avoiding a recession.

But growth slowed to 0.2% in August-October, and then just 0.1% in September-November (as we’ve just learned).

The pound has fallen sharply this morning, falling below $1.30 for the first time in 2020.

Sterling fell as low as $1.2968, down nearly a cent today, as November’s weak GDP figures spook the City.

Traders reckon there’s a rising chance that UK interest rates are cut soon, perhaps at the Bank of England’s meeting at the end of January.

Updated

Brexit uncertainty, and the threat of crashing out of the EU without a deal in October, hurt the economy in November.

The ONS says:

Production fell by 1.2% in the month of November 2019, following growth of 0.4% in October. Within production, manufacturing fell by 1.7%.

This was largely driven by large falls in the manufacture of transport equipment, food, and chemicals.

These industries were also the main drags on growth in April 2019, just after the UK’s original planned date to exit the European Union, as this chart shows:

UK GDP shrank 0.3% in November

NEWSFLASH: Britain’s economy contracted in November, amid uncertainty over the general election.

UK GDP shrank by 0.3% during the month, a sharply contraction than economists expected, with manufacturers and services companies both struggling.

The service sector shrank by 0.3% during the month, according to the Office for National Statistics, while manufacturing output fell by an alarming 1.7%.

But... the economy actually grew by 0.1% in the September-November quarter, which is better than expected.

More to follow....

Aviation expert: Raising new financing will be hard

Professor Loizos Heracleous of Warwick Business School fears that Flybe may struggle to obtain new funding.

He points out that the airline industry has seen plenty of failures recently (including Monarch, Flybmi and Thomas Cook).

“Attracting new finance will be no easy task. The aviation industry is an unattractive industry in terms of performance and returns on investment at the best of times.

“It is saddled with high cost assets, namely planes, and key costs that fluctuate uncontrollably, mainly fuel, which accounts for around a third of total airline costs. On top of that they face high regulation, often aggressive unions, low barriers to entry that increase competition, and high bargaining power of buyers.

Heracleous adds that rising fuel costs and political uncertainty are eating into profits, meaning more bankruptcies are inevitable:

For example, in 2017 we saw 79 new airlines enter the market, while 25 went bankrupt. The failure rate was even higher in Europe, where 29 airlines were started and 14 went bankrupt.

In the medium to long term the European aviation industry may move towards higher levels of consolidation where the weakest players get weeded out or taken over.

Rob Burgess, editor of frequent flyer website www.headforpoints.com, says Flybe appeared to making progress -- but has struggled through the quiet winter trading period.

The new strategy seemed sensible, moving away from leisure routes and focusing on ‘visiting friends and family’ and business travel. The least cost-efficient aircraft have been removed from the fleet and new routes have been announced.

On the bulk of its routes Flybe has no airline competition and there is, somewhere in there, a small but very decent airline waiting to get out

A quick glance at Flybe’s route map shows how the airline plays an important role in Britain’s economy, especially for companies and households outside major cities.

For example, a passenger in Exeter can fly direct to Edinburgh or Glasgow in Scotland, across the Irish Sea to Dublin or Belfast, or over the Channel to Jersey, Geneva and Amsterdam.

Flybe also provides direct flights from John O’Groats - the far north of Scotland - to Edinburgh and Aberdeen, and thus indirect flights to major cities in England.

Boris Johnson has pledged to do more to help Britain’s regions, so he might note how Flybe provides important air links for Teeside (where the Conservatives have bolstered their support).

Exeter MP: Flybe plays a vital role

Exeter MP Ben Bradshaw says the government should help Flybe obtain the financial help it needs to keep running.

He points out that the airline plays a crucial role, operating flights from airports across the country. It also employs 400 people at its headquarters at Exeter Airport.

Bradshaw says (via Devon Live):

“The priority must be to secure Flybe’s long term future by restoring profitability. The airline provides valuable connectivity throughout the U.K., vital for the regions, including our own, as well as good, skilled jobs and training locally.

Brexit and the way the Government’s aviation taxes hit a regional airline like Flybe have been a double whammy for the company and I would expect the Government to work closely with its management to secure the future of such a strategically important business.”

Updated

Pilots: What's going on?

Balpa, the union for UK pilots, is demanding answers about Flybe’s future.

Brian Strutton, Balpa’s general secretary, says:

“I am appalled that once again the future of a major UK airline and hundreds of jobs is being discussed in secret with no input from employees or their representatives.

“According to reports, the airline could have collapsed over the weekend which would have been devastating news.

“This is an appalling state of affairs and we demand that the owners of Flybe - Virgin, Stobart and Cyrus - and the Government departments involved stop hiding and talk to us about Flybe.

“We have a right to be consulted and the staff have a right to know what is going on.”

Flybe’s financial crisis is surprising, given the company had seemingly been rescued a year ago.

The Virgin Atlantic-led consortium which took control of Flybe a year ago pledged to inject £100m into the struggling airline -- a £20m working capital loan and £80m to invest.

But this money doesn’t appear to have been enough, given the scale of Flybe’s problems (fuel costs, competition from other services, weak consumer confidence, economic uncertainty....)

As Simon Calder writes in the Independent today:

It appears that the scale of Flybe’s problems were even bigger than the consortium anticipated. The losses have been exacerbated by the miserable winter that the airline is experiencing.

Demand remains soft, and some competing rail links are improving – in southwest England, for example, new rail timetables introduced on GWR a month ago dramatically improved services from Devon to London, damaging the appeal of the Flybe link from Exeter to the capital.

Some aviation insiders suggest that credit-card acquirers have increased demands for upfront cash, which is often a problem among ailing airlines.

There are also claims that the Virgin-led consortium is alarmed at the amount of additional cash that it is having to pump in – throwing good money after bad was one description.

Good news: Flybe appears to be operating as normal today.

Its live arrivals and departures screen shows that some flights have taken off from across Europe today, with other services scheduled for later.

The UK government won’t reveal details of its talks with Flybe.

A Department for Transport spokesperson says only that:

“We do not comment on speculation or the financial affairs of private companies.”

Flybe insists that it is still operating as normal, but isn’t denying that it’s seeking financial help from the government.

A spokeswoman says:

Flybe continues to focus on providing great service and connectivity for our customers, to ensure that they can continue to travel as planned.

We don’t comment on rumour or speculation.”

They’ve tweeted this message too:

Introduction: Flybe locked in survival talks

Good morning, and welcome for our rolling coverage of the world economy, the financial markets, the eurozone and business.

The future of Europe’s largest regional airline is in focus this morning, with 2,000 jobs on the line.

UK-based Flybe is urgently seeking government help to find emergency funding to keep the company going, according to Sky News.

The Exeter firm is reportedly locked in survival talks with officials at the Department for Business, Energy and Industrial Strategy and the Department for Transport (DfT), seeking extra financing to cover its rising losses.

The crisis comes just a year after Flybe was rescued by a consortium led by Virgin Atlantic, and months after travel giant Thomas Cook went under.

Sky’s Mark Kleinman says that EY, the accountancy firm, has been put on standby in case Flybe falls into administration

He says:

The government is understood to have been briefed on the crisis at Flybe in the last few days, with more than 2,000 jobs at risk if the company collapses.

One source close to Flybe said on Sunday night that the Department for Transport and Department for Business, Energy and Industrial Strategy had been working to determine whether the government could provide or facilitate any emergency financing to the company.

Flybe operates from 27 airports across the UK, from John O’Groats in Scotland to Southampton on the English south coast, plus Manchester, Edinburgh, Liverpool and London Heathrow.

It also flies to and from France, Germany, Ireland, Italy, the Netherlands, Luxembourg and Switzerland.

It came close to collapse a year ago, before Virgin Atlantic, Stobart Group and Cyrus Capital Partners swooped in to buy Flybe’s operating assets.

More to follow....

Also coming up today

New GDP data will show how Britain’s economy fared in November, in the run-up to the general election. Economists predict the economy flatlined during the month, and shrank slightly in the September-November quarter.

European stock markets are expected to open flattish, as investors watch events in Iran and await the US-China trade deal signing ceremony on Wednesday.

The agenda

  • 9.30am GMT: UK GDP for November 2019. Expected to show no growth in the month, and a -0.1% contraction in the last quarter.
 

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