• UK economy contracts between July and October by 0.3%.
• Queen’s death and mourning period largely account for a 0.5% upswing in growth in October.
• ‘Ice Troll from Trondheim’ causes chaos for airlines and hospitality firms.
• Oil price rises with Brent Crude back above $76, after a leak in Keystone Pipeline.
• Caution on markets, with FTSE 100 opening lower, ahead of key central bank meetings.
By Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
Caution is in the air in financial markets ahead of a series of crunch central bank meetings around the world this week, with yet more interest rate hikes set to be unwrapped as inflation remains stubborn. The determined pursuit of sharply lower inflation in the UK is chasing away growth, with the economy set to run smack into recession. The latest snapshot from the ONS shows the economy shrank 0.3% between July and October, despite a bounce in the month following the mourning period for the Queen. The monthly rise of the gross domestic product of 0.5% in October is likely to have been more of a temporary upswing rather than the start of a more positive chapter for the economy. A rebound in services largely accounted for the lift, after many companies scaled back promotional events, and workers had a bank holiday for the monarch’s funeral in September. However, production remains flat and while construction grew by 1.1%, more recent data indicate that sentiment in the building sector soured in November. The S&P Global CIPS Construction PMI for the UK showed the sector was barely growing last month, with the residential market being particularly weak. High mortgage rates combined with other cost-of-living headwinds have led to delayed and cancelled sales, or projects being scaled back to save money. Another closely watched survey on the state of manufacturing in the latest Make UK/BDO outlook report makes for gloomy reading. It forecasts that the sector shrank by around 4% this year, with a sharp contraction expected of 3.2% next year. It’s clear the toxic combination of evaporating consumer demand, the labour crunch and high borrowing costs are taking a big toll on companies. That was even before fresh Royal Mail strikes took place, which will have restricted the delivery of key components for some firms. The Bank of England is still expected to raise rates though on Thursday by 0.5%, despite the fragility in the economy which is showing through so starkly as inflationary pressures stay so elevated.
The ‘Ice Troll from Trondheim’ is also shaping to be another highly unwelcome disruption for the UK, just as travel and hospitality-focused businesses were hoping for a last burst of pre-Christmas activity, on the days when transport workers were not going on strike. Snow has caused flights to be cancelled from Stanstead and many more delayed or cancelled at Heathrow and Gatwick. This is another cold airlines really didn’t need to catch, particularly with border staff walk-outs looming at Christmas and New Year. Freezing fog is causing havoc with schedules and now airlines will face refunding and rebooking costs, amid worries of a rising risk-averse sentiment among would-be travellers due to the fresh chaos. For hospitality businesses, this is yet another icy obstacle they will have to navigate just as the strikes have already caused waves of cancellations.
Disappointment has fizzed back into the markets after the latest reading on US wholesale inflation showed it remained persistent, with an increase of 0.3% in November maintained from October. Plenty more rate hikes are expected this month, and well into next year, so policymakers’ deliberations at the US Federal Reserve, the European Central Bank and the Bank of England will be in sharp focus, but monetary policy decisions will also be made in Switzerland, Mexico, Norway, Taiwan and the Philippines.
After falling by more than 10% last week, on global downturn worries, the oil price is on the rise again as supply constraints loom large. The Keystone pipeline from Canada to the US gulf coast remains shut after an oil spill in Kansas Creek. While investigators try to work out what caused the serious leak, repair the damage and assess safety criteria, the pipeline will remain shut, which is set to keep upward pressure on the oil price. The gradual easing of Chinese Covid restrictions is also expected to lead to a further upswing in demand with more relaxed transport rules for truckers expected to ease port snarl-ups, leading to better supply chains and potentially higher orders. However, concerns about the rapid spread of the virus remain. China will have a tough fight on its hands, dealing with an expected explosion of infections while trying to open up the economy.