Bank of England warns of recession risks as it raises interest rates to 1% – business live

UK economy to shrink in 2023, warns Bank of England

The Bank of England’s latest forecasts show there is a serious risk of the UK falling into recession, as it hikes interest rates in an attempt to tackle inflation.

The Bank latest forecasts imply UK GDP could fall by nearly 1% in the final quarter of this year, when the energy price cap is lifted again (taking inflation to 10% this autumn).

Next year looks alarmingly weak too. The Bank has cut its growth forecast for 2023 to show a contraction of 0.25%, from a previous estimate of 1.25% growth.

It cut its growth projection for 2024 to just 0.25%, from a previous forecast of 1.0%.

My colleague Richard Partington has the details:

Here’s the BBC’s Faisal Islam:

UK households face an even more painful squeeze on their living standards than forecast three months ago:

The Bank of England warns that the surge in energy and goods price will have a material impact on disposable incomes, with inflation taking an even bigger bite:

UK GDP growth was expected to slow sharply over the first half of the forecast period. That predominantly reflected the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins.

Total real household disposable income was projected to fall by 1¾% in 2022, which was a greater fall than in the February projection. Four-quarter consumption growth was expected to slow materially over the first half of the forecast period.

Updated at 07.28 EDT

Bank: Inflation to hit 10%

The Bank of England has warned that UK inflation is going to hit 10% before the end of the year.

Explaining today’s increase in interest rates to 1%, the Bank warns that it sees double-digit inflation looming.

Consumer price inflation, which hit 7% in March, is expected to hit 9% in April due to the jump in the energy price cap.

It is then seen peaking “slightly over 10%” in the last quarter of 2022, when energy bills are likely to rise again in October.

That will mean an even worse cost of living squeeze for millions of households.

The Bank says:

As economies around the world opened up after Covid restrictions eased, people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.

Higher energy prices have also played a big role. Large increases in oil and gas prices have pushed up petrol prices and energy bills.

Services inflation is picking up a little.

Russia’s invasion of Ukraine has led to more increases in the prices of energy and food.

We expect inflation to rise further to around 10% this year.

Prices are likely to rise faster than income for many people. That means that people will be able to buy less with their money. The UK economy has been recovering from the effects of Covid, but we expect the increased cost of living to lead to slower growth overall.

The Bank of England can’t do anything about the global supply problems or the energy prices that are currently pushing up inflation.

But we do have tools to make sure inflation comes back down to our 2% target. The main tool we use to bring inflation down is to increase interest rates.

We raised the UK’s most important interest rate (Bank Rate) from 0.1% to 0.25% in December 2021, to 0.5% in February 2022, and then again to 0.75% in March.

This month we have raised Bank Rate to 1%.

We expect inflation to fall back next year and be close to our target in around two years.

Updated at 07.13 EDT

BoE raises interest rates to 1%

The Bank of England raised interest rates to their highest since 2009, despite concerns that the UK economy risks falling into recession.

The BoE’s nine rate-setters voted 6-3 to raise Bank rate by a quarter-point to 1%, from 0.75%, due to the rise in inflation to 30-year highs.

But three policymakers – Catherine Mann, Jonathan Haskel and Michael Saunders – called for a bigger increase to 1.25% to stamp out the risk of the inflation surge getting embedded in the economy.

More to follow…

Musk secures $7bn funding from investors including Larry Ellison for Twitter deal

Elon Musk has secured $7bn in new funding from investors to help finance his $44bn takeover of Twitter.

An SEC filing shows that Oracle co-founder Larry Ellison is providing $1bn, with a string of others including crypto trading firm Binance ($500,), Sequoia Capital ($800m) and Qatar Holding ($375m) also on board.

At the same time, Musk’s margin loan, secured on some of his stake in Tesla, has been reduced to $6.25bn from $12.5bn announced earlier.

The filing also shows that Musk will keep talking other shareholders, including former CEO Jack Dorsey, to contribute shares to the proposed acquisition.

Also, existing investor Saudi Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, will roll 35 million shares into the bid vehicle. That stake is worth $1.9bn at Musk’s offer price.

UK business activity slows to three-month low

Growth across the UK services sector has dropped to its lowest in three months – another warning light flashing on the economic dashboard.

The UK Composite PMI Output Index, which measures activity at UK companies, dipped to 58.2 in April from 60.9 in March. That still shows growth, but the slowest since the start of the year.

New order growth hit at a four-month low, and confidence fell. UK companies also hiked their prices at the fastest pace on record – in response to a record jump in their own costs.

The report, by S&P Global and CIPS, says:

The slowdown reflected intense cost pressures and the war in Ukraine. In fact, input costs rose at the fastest pace in the history of the series which stretches back more than 24 years.

Accordingly, output charges also increased at a record pace. Strong inflation was seen across both sectors, but was more pronounced in manufacturing. Companies continued to expand staffing levels rapidly in April, albeit at a softer pace. Meanwhile, business confidence dropped to the lowest in a year-and-a-half.

The services sector, which makes up around three-quarters of the economy, was hit by a sharp slowdown in new business.

Andrew Harker, Economics Director at S&P Global, explains:

“The twin headwinds of the cost of living crisis and the war in Ukraine started to bite on the UK service sector during April, as evidenced by a sharp slowdown in new order growth to the lowest in the year so far.

Worryingly, companies seem to be expecting impacts to be prolonged, with business confidence dropping to the lowest in a year-and-a-half.

German factory orders fall as global economy weakens

German factory orders havs slumped, as the Ukraine war disrupts supply chains and adds to inflationary pressures.

Demand for Made In Germany goods plunged 4.7% in March from the previous month, driven by a decline in orders from overseas.

That’s worse than the 1.1% drop forecast, and indicates the global economy is weakening as the rising energy and commodity prices drive up inflation.

Overnight, China’s services sector has recorded the second-steepest drop in activity on record, as tighter Covid-19 restrictions hit the industry.

The Caixin purchasing managers’ index, which tracks the state of the economy, plummeted to 36.2 in April from 42 in March. Firms reported a sharper fall in new business and employment, amid new lockdowns and other restrictions.

Any reading below 50 shows contraction, and this is the fastest decline since the start of the pandemic.

Shares in publishing group Reach have tumbled 20% after it reported a drop in advertising revenues as brands tried to avoid appearing next to articles about the Ukraine war.

Reach, which has over 130 national and regional brands in print and online including the Daily Mirror and Daily Express, reported that print revenues fell 4.2% in the four months to 24 April, while advertising revenue shrank 10.1%.

Reach says:

Over the past two months the market has experienced reduced advertiser demand and lower average yields, with the war in Ukraine significantly reducing the level of ‘brand safe’ content for news publishers.

Digital growth slowed, with revenue up by 9.3% year-on-year, compared with growth above 25% during 2021.

Reach adds that costs (such as energy and newsprint) have also risen:

We still anticipate broadly flat group revenue for the year, though with a higher mix of circulation revenues and lower digital contribution than previously expected as a result of more challenging trading conditions.

The impact of further recent newsprint inflation is fully reflected in our cost expectations for the current financial year, with actions now underway to help mitigate the impact on operating profit.

UK auto sector cuts 2022 sales forecast amid cost of living squeeze

The SMMT also warns that the squeeze on household incomes and geopolitical uncertainty will both hit car sales this year, as it lowered its sales forecast for this year.

The sector faces further economic headwinds, with rising inflation, not least due to the spiralling energy and fuel costs squeezing household incomes, and further supply chain and other uncertainties arising from the global political situation and the effects of the Russian invasion of Ukraine.

More positively, however, drivers able to invest in a new vehicle can still reap benefits, as interest rates remain historically low, grants for BEVs will be in place until at least early 2023, and running costs associated with new electric cars are generally lower than those of petrol or diesel.