UK recession risk mounts as business falters; mortgage lenders cut rates – business live

While the rest of Europe is still a sea of red, the UK index of blue-chip stocks has turned positive, boosted by AstraZeneca, which reported promising clinical results on a breast cancer drug.

The FTSE 100 index is up 40 points, or 0.5%, at 7,718. AstraZeneca shares rose 2.5% while the online grocer Ocado is the main riser, up 5.2%. AstraZeneca reported that an experimental precision drug it is developing with Japanese drugmaker Daiichi Sankyo slowed the progression of breast cancer in a late-stage trial.

Ocado bounced back (a bit) after a 20% slump in the shares yesterday – its worst drop in 11 years after it was downgraded by a City broker. This wiped nearly £1.4bn off the company’s market value, resulting in paper losses of £32m for the co-founder and chief executive Tim Steiner. BNP Paribas Exane analyst Andrew Gwynn downgraded his recommendation on Ocado to ‘underperform’ from ‘neutral’.

Ocado was a big beneficiary of the shift to online shopping during the Covid-19 pandemic but online sales have fallen back since then, as shops reopened.

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Rupert Harrison, a member of the chancellor’s economic advisory council, said:

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, is somewhat sceptical about the UK going into recession. But he added that the gloomy PMI data further increases the chances that interest rates have peaked at 5.25%.

We are skeptical of the composite PMI’s signal that economic activity is declining quickly, given that real wages have picked up and consumers’ confidence has improved materially over recent months.

The PMI has a track record of signalling downturns that have not materialised. For instance, it averaged 48.5 in Q4 2022, when GDP rose by 0.1% q/q. It also signalled quarter-on-quarter contractions in GDP in 1998 and 2001 that never materialised, as well as a dip in activity after the Brexit vote in 2016, which isn’t visible in the official data…

For now, then, we are sticking with our forecast for a marginal 0.1% quarter-on-quarter increase in GDP in Q3. Needless to say, though, today’s report further increases the chances that the BoE’s tightening cycle is over.

Independent economist Julian Jessop also thinks that the UK can dodge a recession:

Chris Williamson, chief business economist at S&P Global Market Intelligence, which compiled the PMI survey said:

The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK. The steep fall in output signalled by the flash PMI data is consistent with GDP contracting at a quarterly rate of over 0.4%, with a broad-based downturn gathering momentum to hint at few hopes of any imminent improvement.

Underscoring the severity of the UK’s deteriorating situation, September’s downturn is the steepest since the height of the global financial crisis in early 2009 barring only the pandemic lockdown months.

The survey had warned that a revival of growth in the second quarter looked unsustainable, and the third quarter is indeed seeing a mounting toll on the economy from the reality of the increased cost of living and the recent rapid rise in interest rates.

Despite higher fuel prices during the month, firms’ costs grew at a sharply reduced rate overall which, combined with collapsing pricing power amid weak demand, looks set to take further pressure off inflation in the coming months.

Rhys Herbert, senior economist at Lloyds Bank, said:

Yesterday’s pause in interest rate rises will be welcomed as a second piece of good news in as many days for businesses following Wednesday’s lower than expected inflation stats. However, today’s data add further weight to Bank of England concerns that economic activity has weakened and reinforces expectations in the market that interest rates are now at a peak.

Nevertheless, manufacturers and services businesses are still feeling the pressures of a tight labour market that has pushed salaries up and squeezed margins in recent months. Businesses will be hoping inflation continues to head in the right direction and that signs that labour market pressures are easing will both aid recruitment and cap wage demands.

The Bank of England referred to the grim business survey yesterday when it announced that it was keeping interest rates unchanged.

The PMI survey said:

Manufacturing production continued to decrease more quickly than service sector output, but the gap narrowed considerably in September. Service providers recorded a fall in business activity for the second month running and the rate of decline was the fastest since January 2021.

The latest survey highlighted an abrupt turnaround in private sector employment numbers, thereby ending a five-month period of growth. Aside from the pandemic lockdown months, the rate of job shedding was the fastest since October 2009.

Cost pressures eased, with input price inflation posting its biggest monthly fall so far this year, despite reports of pressure on costs from higher fuel bills.

UK business activity shrinks most since financial crisis excluding Covid period

Maximilian Uleer and Carolin Raab, analysts at Deutsche Bank, said:

Contrary to the rest of the eurozone, Germany has merely managed to return to its pre-Covid GDP level and the title “the sick man of Europe” has reemerged in the media. We dislike the title and prefer to see Germany as a “sore athlete”.

Despite the weak GDP growth, the Dax is up 18% since the end of 2019. Germany has been facing multiple challenges, from rising energy costs, its high manufacturing exposure, to weak demand from its export destinations. Some of the challenges are “homemade” and might persist, while others could start to unwind and soon turn into opportunities.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said:

The numbers for PMI services in the Eurozone paint a grim picture, but it’s not all doom and gloom. Sure, activity has been reduced once again and new incoming business has been shrinking for three months in a row. However, companies are hiring in September at a somewhat faster pace than they did in August. Thus, companies still show some resilience and optimism in the face of lower demand. Having said this, we expect the eurozone to enter a contraction in the third quarter. Our nowcast, which incorporates the PMI indices, points to a drop of 0.4% compared to the second quarter.

The Eurozone’s HCOB PMI figures for services are serving up a bitter pill for the European Central Bank to swallow. Input prices, where wages play an important role, have sped up in September for the second month in a row. Output prices continue to be on the increase as well, but upward pressure has softened a bit again. While the latter may bring some comfort to central bankers, the heat on input prices shows that the risk of a wage-price spiral must remain very much on the radar of the ECB.

The main drag continues to come from manufacturing where the order situation deteriorated further. Companies keep reducing the stock of purchased goods. However, the declines in purchasing activity have lost some momentum. Thus, the destocking process may bottom out over the next few months in line with a worldwide trend. This will be an important precondition for the recovery of the manufacturing sector which we expect for the beginning of next year.

Turning to France and Germany, de la Rubia said:

In terms of the weakness in the manufacturing sector, France is catching up with Germany. Indeed, the French PMI heads further south while Germany’s PMI has marginally increased from a very low level. In the services sector, the French services sector is in a much worse state than the German one. At the same time there are signs of a stabilization in Germany services, but further deterioration in France. This may have to do with the fact the luxury goods business and services play a more important role in France than they do in Germany. When things go south, those are the first to feel it, way more than non-luxury business providers.

Eurozone companies suffer sharp drop in new orders – PMI