US economy shrank unexpectedly for first time since 2020 – business live
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US economy shrinks for first time since 2020
The US economy shrank unexpectedly in the first quarter of this year, for the first time since early in the Covid-19 pandemic.
US GDP fell by around 0.35% in January-March, new data shows, or at an annualised rate of 1.4%.
Surging inflation, the Omicron variant, and supply chain problems all dragged on growth.
Economists had expected the US economy to keep growing, at an annualised rate of 1.1%, after strong growth of 6.9% in the last quarter of 2021.
This is the first contraction since the second quarter of 2020, when the pandemic hit.
It suggests America’s economy is at greater risk of a downturn, as inflation soars and the Ukraine war hits the global economy.
The drop was partly due to a fall in business inventories, as companies ran down their stocks.
Net trade also weakened sharply, with annualised exports down 5.9% and imports jumping 17.7% (which will subtract from GDP).
Consumer spending and business investment continued to rise.
Richard Flynn, Managing Director at Charles Schwab UK, says the figures are likely to cause concern.
The US economy accelerated incredibly sharply as we exited the acute phase of the pandemic and this pace of growth continued until late last year. Whilst the healthy labour and housing market are positive indicators, today’s figures confirm there is now no shortage of headwinds facing the US economy, including the consequences of the Russian invasion of Ukraine, persistently high inflation, and tightening monetary policy.
“Consumer confidence is low. We’re in a period of counter-cyclical inflation – when high prices put downward pressure on demand and growth. The Fed’s eye is on inflation as it tightens monetary policy in a bid to slow aggregate demand and cool price rises.
With high inflation and low growth expectations, it may be difficult for the Fed to raise rates without slowing growth. Economic data has been generally weakening recently, which is likely to persist, increasing the probability of a downturn.”
Updated at 09.44 EDT
Paul Ashworth of Capital Economics predicts America’s central bank, the Federal Reserve, will not be deterred from lifting US interest rates sharply next week:
The unexpectedly severe 1.4% annualised decline in first-quarter GDP growth probably won’t stop the Fed from hiking interest rates by 50bp next week, since officials will chalk it up to the temporary impact of Omicron and point to the strength of underlying demand – with the growth rate of sales to private domestic purchasers accelerating to a very healthy 3.7%.
Net export subtracted a massive 3.2% points from overall GDP growth, with inventories subtracting an additional 0.8% points. Exports fell by 5.9% annualised while, as shipping congestion eased, imports increased by 17.7%. The negative contribution from inventories was inevitable after stock building added 5.3% points to fourth-quarter GDP growth, which was as strong as 6.9%.
The other source of weakness in the first quarter was the public sector, as fiscal support was withdrawn, with government expenditure falling by 2.7%.
Economists: US recovery holding up despite Q1 slide
The US economy is now technically on the brink of recession (two negative quarters in a row), after shrinking in the January-March quarter, but economists are suggesting this isn’t likely.
Robert Frick, corporate economist at Navy Federal Credit Union, argues that the recovery is still on track, once you recognised that weak trade and softer business inventories pushed GDP down in Q1.
“GDP contracted in the first quarter by 1.4%, which is a scary drop from 6.9% growth in the fourth quarter of last year, but not scary when you look at the underlying numbers in two categories—trade and inventories. In the other two categories that count most, business and consumer spending, first quarter GDP did well, and clearly those categories are accelerating now into the second quarter.
Also, while GDP is an imperfect short-term measure of economic health, better measures such as employment and consumer spending indicate the expansion is steady and on track.”
Other economists also insists the US isn’t about to drop into recession, as CNBC explains:
“This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“Net trade has been hammered by a surge in imports, especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory.
This cannot persist much longer, and imports in due course will drop outright, and net trade will boost GDP growth in Q2 and/or Q3.”
Here’s more reaction:
Economists are pointing out that US consumer spending and business investment remained strong in the last quarter, despite the economy shrinking.
Instead, it was the drop in inventories, along with falling exports and lower government spending, that pulled GDP down, the Bureau of Economic Analysis data shows:
US economy shrinks for first time since 2020
The US economy shrank unexpectedly in the first quarter of this year, for the first time since early in the Covid-19 pandemic.
US GDP fell by around 0.35% in January-March, new data shows, or at an annualised rate of 1.4%.
Surging inflation, the Omicron variant, and supply chain problems all dragged on growth.
Economists had expected the US economy to keep growing, at an annualised rate of 1.1%, after strong growth of 6.9% in the last quarter of 2021.
This is the first contraction since the second quarter of 2020, when the pandemic hit.
It suggests America’s economy is at greater risk of a downturn, as inflation soars and the Ukraine war hits the global economy.
The drop was partly due to a fall in business inventories, as companies ran down their stocks.
Net trade also weakened sharply, with annualised exports down 5.9% and imports jumping 17.7% (which will subtract from GDP).
Consumer spending and business investment continued to rise.
Richard Flynn, Managing Director at Charles Schwab UK, says the figures are likely to cause concern.
The US economy accelerated incredibly sharply as we exited the acute phase of the pandemic and this pace of growth continued until late last year. Whilst the healthy labour and housing market are positive indicators, today’s figures confirm there is now no shortage of headwinds facing the US economy, including the consequences of the Russian invasion of Ukraine, persistently high inflation, and tightening monetary policy.
“Consumer confidence is low. We’re in a period of counter-cyclical inflation – when high prices put downward pressure on demand and growth. The Fed’s eye is on inflation as it tightens monetary policy in a bid to slow aggregate demand and cool price rises.
With high inflation and low growth expectations, it may be difficult for the Fed to raise rates without slowing growth. Economic data has been generally weakening recently, which is likely to persist, increasing the probability of a downturn.”
Updated at 09.44 EDT
Veterinary groups have criticised the decision to delay checks at the UK border on imports of EU animal and agrifood products.
They fear this latest suspension could threaten health, because sanitary and phytosanitary checks would continue to take place away from the border at ‘places of destination’, potentially giving pests and diseases more opportunity to enter the UK.
Port operators are also concerned that the money they’ve spent on infrastructure for Bexit checks could have been wasted.
The FT has the details:
James Russell, senior vice-president, of the British Veterinary Association, said the government’s move “flies in the face” of ministers’ commitment to preserving high levels of animal and human health in the UK at a time when diseases such as African swine fever had already had a catastrophic impact in parts of Europe.
“We urge the government to abandon these plans and close off the threat of causing significant damage to our food and farming industries,” he said.
Tim Morris, chief executive of the UK Major Ports Group, said port operators feared the facilities they had built “will be highly bespoke white elephants”. “Government needs to engage urgently with ports to agree how the substantial investments made in good faith can be recovered,” he said. “We will of course be working closely with the government on its new vision of a slimmer and smaller regime of border checks.”
There would have been ‘devastating’ disruption to food shipments to the UK if EU import controls hadn’t been delayed again, says Shane Brennan, chief executive of the Cold Chain Federation (which represents firms in the UK’s temperature-controlled supply chain).
That highlights how the UK still wasn’t ready to handle the impact of Brexit at the border, leading to today’s delay.
UK delays post-Brexit food checks on EU imports until end of 2023
As predicted earlier, the UK has — again — dropped plans to impose further checks on goods entering the UK from the European Union.
The change means restrictions on the imports of chilled meats from the EU and border checks on plant and animal products will not be introduced in July.
Instead, Brexit opportunities minister Jacob Rees-Mogg said a “new regime of border import controls” will be established by the end of 2023.
Taking the opportunity to kick import controls further into the future, Rees-Mogg has said it would be “wrong to impose new administrative burdens and risk disruption at ports” when costs are already rising due to the energy price shock and the Ukraine war.
Instead, the Government is accelerating its transformative programme to digitise Britain’s border, he explains. But in the meantime, goods from the EU will continue to arrive in the UK with minimal checks.
Rees-Mogg told MPs in a statement:
No further import controls on EU goods will be introduced this year. Businesses can stop their preparations for July now. We will publish a Target Operating Model in the Autumn that will set out our new regime of border import controls and will target the end of 2023.
The move, he says, would save British businesses up to £1bn in annual costs when importing goods.
Federation of Small Businesses national chair Martin McTague has welcomed the latest delay:
“Imposition of full import controls this summer would have meant yet another burden for small firms which are already wrestling with new trade rules and spiralling operating costs.
However, the EU introduced full customs controls back in 1 January 2021, meaning UK exporters have faced extra red tape and trade frictions for 16 months now. EU firms will continue to sell goods into Britain without those rules.
Here are the changes that now won’t start in July:
And here’s the BBC’s Faisal Islam:
The logo of the Russian energy company Gazprom is seen on а station in Sofia. Photograph: Spasiyana Sergieva/Reuters
Energy companies in Europe are considering opening Russian accounts to pay for gas from Gazprom after Vladimir Putin’s regime cut off supplies to Poland and Bulgaria and insisted other countries must pay in roubles.
Big gas distributors in Germany and Austria confirmed they were seeking ways to continue to make payments after Putin signed a decree at the end of March calling for a “special procedure for foreign buyers’ fulfilment of obligations to Russian suppliers of natural gas”.
The decree stipulates that non-Russian buyers of gas must open special “K” type rouble and foreign currency accounts at Gazprombank, the third-largest bank in Russia.
Gazprombank was set up to be a service provider to Gazprom, the state-owned gas producer that has a monopoly on exports via gas pipelines to Europe.
The German distributor Uniper and Austria’s OMV confirmed they were considering how to comply with the decree.
A spokesperson for Uniper, one of Germany’s main buyers of gas from Russia, on Thursday confirmed it was in talks with Gazprom “in close coordination with the German government” over “concrete payment modalities”, but that it would continue to pay in euros for now.
“Uniper can say for its contracts: we consider a payment conversion compliant with sanctions law and the Russian decree to be possible.
For our company and for Germany as a whole, it is not possible to do without Russian gas in the short term; this would have dramatic consequences for our economy.”
The Financial Times reported that companies in Hungary and Slovakia, as well as Italy’s Eni, were also considering signing up for the accounts in the hope of securing continued supplies, despite the European Commission saying that doing so could breach sanctions.
Here’s the full story:
Reuters has heard that some European traders have started to pay Russia for gas sales in roubles, while large clients have yet to do so.
“Several traders, maybe more than five, have startedpayments,” one source said on condition of anonymity because they were not authorised to speak to the media.
The cost of living crisis, on top of the pandemic, drove company insolvencies in England and Wales to a 10-year high in the last quarter.
Christina Fitzgerald, President of insolvency and restructuring trade body R3, explains that many firms are choosing to fold:
“This has been the busiest quarter for corporate insolvencies since 2012 as firms who have struggled with the economic consequences of the pandemic are now having to deal with the sharp rise in inflation. These statistics provide further proof that while the Government’s Covid support measures prevented an initial sharp rise in corporate insolvencies, the economic damage caused by the pandemic couldn’t be mitigated away forever.
“The main cause of the increase in corporate insolvencies this quarter is an increase in Creditors Voluntary Liquidations (CVLs), which are now at a level not seen for more than 60 years. It seems more and more directors feel they can’t carry on trading and are choosing to close their business’s doors before they are forced to.
Fitzgerald adds that companies face a critical time:
“The figures published today reflect the tough climate businesses have been operating in over the last quarter. At a point where many businesses needed a return to normality, rising fuel and energy costs have put them under additional strain, and the effects of the increased cost of living has prevented the spending boom many were hoping for from happening.
“Although the economy has largely returned to pre-Covid levels in many respects, and consumer spending has increased, rising inflation and stagnant wage growth have left many people unwilling and unable to spend money on anything other than the basics.
“Businesses have also faced the end of the final set of Covid measures and creditors can once again issue winding-up petitions against companies for debts of £750 or more (with the exception of landlords with Covid rent arrears).
Updated at 07.39 EDT
Personal insolvencies have also jumped this year, to a three-year high, as the cost of living crisis leaves people unable to repay their loans.
There were 32,305 individual insolvencies in England and Wales in January-March, which is a 17% jump on the previous quarter.
Individual insolvencies in England and Wales Photograph: HMRC
It shows that household finances have been under rising pressure this year, as inflation rose to 30-year highs.
Joe Cox, Senior Policy Officer at Jubilee Debt Campaign, says the UK faces a debt crisis.
“The clear and alarming upward trend in personal insolvencies shows that a debt crisis is overwhelming UK’s households.
The government needs to stop burying its head in the sand and take urgent action by writing-down large amounts of problem debt to give millions weighed down by arrears a chance to reset their finances and rebuild their lives.”
Updated at 07.34 EDT
The cost of repaying government support is also pushing some businesses to insolvency.
Svend Pearce, founder of the Watford-based small business accountant and bookkeeper, Bficient, says:
“While it’s pleasing the pandemic appears to be under control, the debt accumulated by many companies to stay afloat is substantial.
Much of the assistance came in the form of cheap loans with a grace period to commence repayment after 12 months. It’s sadly now payback time and the pain many businesses are now experiencing is real. Bounce Back and CBILS loan repayments are proving a significant drain on companies’ working capital.
Restructuring any business is equally not without cash drains and so many directors will conclude that the battle is simply too great, future prospects too bleak and that further loans would simply be pouring fuel onto the fire.
Insolvencies at 10-year high as firms feel squeeze
Company insolvencies in England and Wales have more than doubled so far this year to the highest level in a decade.
Surging costs and the withdrawal of some Covid-19 support packages have left firms struggling to keep afloat.
There were 4,896 company insolvencies across England and Wales in January-March, the Insolvency Service reports, which is 112% higher than in Q1 2021, and the highest recorded since 2012.
It was driven by a record number of creditors’ voluntary liquidations, in which directors voluntarily put their business into liquidation in order to pay its debts.
There were 4,274 CVLs in Q1, the highest quarterly level since the start of the series in 1960.
Insolvencies in England and Wales Photograph: HMRC
This is the first full quarter since the UK’s furlough scheme ended on 30 September 2021, while other schemes are being phased out.
Hospitality firms also missed out on Christmas trading due to the Omicron variant, which would normally tide them through the January lull.
Plus, companies across the economy are hit by increased commodity and energy prices, supply chain disruption, and a tightening cost of living squeeze.
Samantha Keen, UK Turnaround and Restructuring Strategy Partner at EY-Parthenon, warns that many firms are seeing their margins being squeezed.
“Looking ahead, it’s likely we’ll see further waves of insolvencies among larger businesses as the impact of rising costs affects their bottom line.
Businesses in sectors most affected by fluctuations in cost and supply chain pressures and changes in business confidence, such as retail, food producers, and high energy users – such as chemical and paper manufacturers – are likely to be most vulnerable.
Nigel Fox, director in the restructuring and recovery services team at Tilney Smith & Williamson, warns that companies could also face an economic downturn.
Now that the government’s measures to support businesses have ended, it is more important than ever for directors to regularly review their company’s finances and prepare projections to ensure that they know where their business is likely to be heading so that they can take any corrective action that is needed before it is too late. For any directors who are worried about the financial position of their business, we recommend seeking professional advice as early as possible. The earlier that advice is sought then the greater number of options there will be for the business.
The importance of directors paying close attention to the health of their business has become critical as a result of a number of factors. Inflation in the UK has now risen to 7%, the highest rate it has been for 30 years. In addition the rising price of energy for businesses, for which there is no cap, leaves them very exposed. Climate change, whether directly or indirectly, also threatens almost all industries. Whether these and other factors will result in the UK falling into recession later this year is unclear, but the slender growth of UK GDP by just 0.1% in February – below expectations – means that this cannot be ruled out.
Updated at 07.34 EDT
More work is needed to protect the financial system from shocks such as the Ukraine war and the Covid-19 pandemic, a senior Bank of England official warns.
Sarah Breeden, the BoE’s executive director for financial stability strategy, says these recent shocks have shown that the system remains vulnerable to panics.
She cites the ‘dash for cash’ in March 2020 which hit government bond markets and drove up the cost of borrowing, and the links between energy and commodity markets and the real economy, shown clearly by the Ukraine war.
In a speech at Lancaster University this morning, Breeden says:
Let me briefly mention a few of the lessons from our experience in Covid-19.
First the capital framework does not in practice support use of bank capital buffers in a stress as we intended. And that would have mattered a lot in the absence of the substantial government support for the corporate sector. Second, we need to change our approach to stress testing in a stress if we are to avoid those stress tests further amplifying any downturn. And third, in a shock of roughly half the size of the global financial crisis, it was only large-scale use of central bank balance sheets that calmed dysfunction in the system of market-based finance.
We are continuing to learn through the Russia-Ukraine crisis too. We are exploring concentrations in, and interconnections across, energy and other commodity markets, the financial system, and the real economy, as well as the potential for feedback loops between them. And we have observed too that commodity markets are relatively opaque.
We must now develop the macro-prudential framework to reflect the lessons from these recent stresses.
Here’s the full speech.
Unilever warns of more price rises
Unilever has confirmed that more price rises are coming, as it is hit by ‘extreme’ increases in raw material costs.
That would be on top of the 8% rise in prices in the first quarter of the year, as cost pressures began to mount.
Reuters has the details:
“As far as pricing and volumes, I think we are in unchartered territory,” Chief Executive Alan Jope said on an earnings call.
“While we’re acutely aware of the pressure on consumers, we believe that increasing prices in response to this extreme commodity cost pressure is the right thing to do.”
Analysts said prices were only going to go higher.
Unilever’s full-year costs “are going to quadruple versus a year ago. That’s why the pricing needs to be so high, and that’s why the price is going to go much higher,” Barclays’ Warren Ackerman said. “This is not the peak.”
“The worry is what will happen to volumes when pricing goes up more?”
In the first quarter, Unilever hiked prices the most in Latin America – by 16.4% – and in other emerging markets.
As flagged in the introduction, Unilever now expects its input cost inflation would reach €2.7bn in July-December, a jump of €1.2bn on its previous forecast.
The increase in oil, grain, other agricultural costs, and fertiliser following the invasion of Ukraine is hitting many consumer goods makers. Unilever, whose brands also include Knoor stock cubes, Hellmann’s mayonnaise and Magnum icecreams, is clearly exposed.
And while it raised prices by over 8% in the first quarter of the year, sales grew 7.3% after volumes fell 1% as some customers shifted to cheaper, own-brand options.
Updated at 05.23 EDT