UK public finances: what the experts say
City economist are warning that UK government borrowing is set to be driven higher by the Iran war, following this morning’s (small) drop in the annual deficit in the last financial year:
Lindsay James, investment strategist at Quilter, says:
double quotation mark“The conflict in the Middle East has shown the UK economy remains very exposed to geopolitical shocks. However, there are some encouraging signs that rigid fiscal rules have been having the desired effect thus far, as today’s public sector finance data shows borrowing was £12.6 billion in March. This is £1.4 billion less than the same month last year, and the lowest March reading since 2022.
“Borrowing had been expected to be lower this year as the government had front loaded a lot of its spending plans into its early years, but things could get more difficult from here on out. With inflation on the rise, debt interest climbing again and gilt yields also becoming elevated once more, the fiscal headroom Chancellor Rachel Reeves had established could very quickly run out once again. As such, tax is likely to feature prominently as the lever to pull to help keep the public finances on steady ground, and we have already seen the burden this places on growth.
Ruth Gregory, deputy chief UK economist at Capital Economics, warns that borrowing will probably rise in the current financial year (April to next March).
double quotation markMarch’s figures showed an unexpected undershoot of the OBR’s forecast for public borrowing in 2025/26. But we do not expect this improvement to last long. We think the energy price shock will mean that borrowing overshoots the OBR’s forecast by a huge £29bn for the 2026/27 fiscal year and by about £13bn in subsequent years.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, predicts that March could be the last month of good news on borrowing for a while:
double quotation mark“The good news for the Chancellor is that full year borrowing for 2025/26 came in at £132.bn, down from £151.9bn in the previous financial year, and in line with the latest OBR forecast. The bad news is that the war in Iran means the situation will deteriorate sharply over the rest of this year. That will limit her ability to offer households and businesses a significant bailout if energy prices move higher.
“Looking ahead, March will probably be the last month of good news on borrowing. Gilt yields are down from their 5% peak in March, but are still significantly higher than before the war. Borrowing costs will rise quickly from here though, as higher interest payments on index-linked gilts weaken the near-term fiscal position. At the same time, the economy will almost certainly slow, which could send the unemployment rate trending back up. That would lower income tax receipts and raise welfare spending.
Updated at 03.38 EDT
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UK consumer confidence falls again as consumers get ‘the jitters’
Breaking: UK consumer confidence has fallen for the third month in a row, as people grow more nervous about their personal financial situation and the economy.
Data provider GfK’s Consumer Confidence Index, just released, has fallen by four points to -25 in April, the biggest drop in a year.
That’s the lowest level since autumn 2023, indicating that the disruption and high energy prices caused by the Iran war is alarming consumers.
Illustration: GfK
When asked about the UK economy, the measure for the country’s general economic situation over the last 12 months decreased by eight points to -51.
Expectations for the general economic situation over the coming 12 months fell by six points to -43, GfK reports.
Photograph: GfK
The survey shows that “consumers really do have the jitters now”, according to Neil Bellamy, consumer insights director at GfK.
Bellamy explains:
double quotation markThe anxiety we saw last month has deepened with a four-point fall in April’s consumer confidence headline score to -25. It is a year since we last saw a monthly drop of this size, and we have to go back to October 2023 to find the last time consumer confidence was lower.
The biggest declines are in perceptions of the UK economy, with an eight-point slide in views on the economic picture over the last 12 months, and a six-point fall in the forward-looking measure to -43, its lowest level since February 2023.
Consumers were arguably resilient about their personal finances in March, but this month’s finance measures, looking back a year (-11) and looking forward (-4), have seen significant slides. Everyone is grappling with rapid price rises, especially at the fuel pumps, which are taking a dent out of household budgets, and people know further price hikes are coming.
The only measure to go up is our savings index, often an indication that people are concerned about what lies ahead, so those who can are building contingency funds.
Consumer confidence is deteriorating sharply, with fuel prices and threats of more energy price increases acting as constant reminders of inflation. While the Gulf crisis is intensifying pressures, much of the current strain reflects earlier domestic cost increases. How long can all this disruption and pain continue?”
[This survey was due to be published at midnight, but GfK has released it earlier after it was published ahead of schedule earlier today due to a technical error].
Updated at 09.44 EDT
One in five BP shareholders vote against the chair
BP’s new chair has received something of a rebuke from shareholders today, amid a row over the energy giant’s policies on the climate emergency.
Albert Manifold received 81.8% support from investors at his first BP annual general meeting today, Reuters reports. That’s rather short of the level of support which board members usually receive, especially the chair of a FTSE 100-listed company.
This small wave of opposition isn’t large enough to dislodge Manifold from his seat at BP, though – though it counts as a significant protest vote.
It follows a recommendation from investor advisor Glass Lewis that BP shareholders should vote against its new chair over his decision to exclude a climate resolution from the AGM.
That resolution asked BP to explain how it would create value for shareholders as oil and gas demand declines.
Shareholders also rejected two other resolutions – a proposal to allow online-only shareholders’ meetings, and one (called Resolution 23) to scrap existing climate disclosures. Both fell short of the 75% threshold required to pass.
Mark van Baal, CEO of Follow This, says:
double quotation mark“Defeating resolution 23 signals that shareholders refuse to let BP quietly bury its reporting commitments. The board brought this on itself.”
Another resolution brought by climate activists, requesting BP to justify its upstream oil and gas spending, got 26% of the votes.
Updated at 08.52 EDT
The number of Americans filing new claims for unemployment benefit has risen, but remains low in historic terms.
There were 214,00 new initial claims for jobless support last week, an increase of 6,000 compared with the previous seven days. The previous week’s level was revised up by 1,000 from 207,000 to 208,000.
The financial markets are, again, anticipating two increases in UK interest rates this year.
The money markets are indicating that UK bank rate will have increased by 58bps (0.5 of a percentage poin) by the end of this year, meaning two quarter-point rate rises are fully priced in.
Earlier this week the market only expectd around 30bps, meaning one quarter-point rise was priced in, with a small possibility of a second.
American Airlines has warned that the surge in fuel prices from the Iran war will cost it $4bn this year.
The company has cut its earning guidance today – it now expects to make between a 40 cents per share loss and a $1.10 per share profit this financial year. That’s down from a previous forecast of a profit of between$1.70 to $2.70 per share.
It told investors:
double quotation markBased on the forward fuel curve and the current revenue outlook, the midpoint of the company’s full-year earnings guidance is approximately flat to 2025, despite a more than $4 billion increase in expense related to higher prices for jet fuel.
ShareUK manufacturing output and confidence slumps and costs jump
Sentiment among UK manufacturers has deteriorated sharply, new data from the CBI shows.
The CBI’s industrial trends reports shows that optimism among factory bosses about both the business situation and export prospects have fallen at their fastest rates since the onset of the COVID-19 pandemic.
Its latest Industrial Trends report shows that output and orders both declined in the last quarter, as competitiveness in UK markets deteriorated at a record pace.
The CBI reports:
double quotation markManufacturing output fell in the three months to April, and at a faster pace than in the three months to March. The decline was broad-based, but driven by the food, drink & tobacco, chemicals, metal products and mechanical engineering sub-sectors.
Worryingly, manufacturers expect the decline in new orders to accelerate, with expectations for the next three months close to the weakest since April 2020 (when the global economy was locked down due to the Covid-19 pandemic).
The CBI also reports that cost pressures remain elevated – confirming the message from this morning’s PMI report.
They say:
double quotation markGrowth in average costs per unit of output accelerated in the three months to April, compared with January, and unit costs are expected to rise at the fastest pace for over three years in the coming quarter.
ShareReeves launches investment push at London stock exchnageChancellor of the Exchequer Rachel Reeves (centre) and City Minister Lucy Rigby (third right) with Julia Hoggett, CEO of London Stock Exchange (fourth right) at the market open Photograph: Carl Court/PA
Today’s drop in share prices on the London stock market is a less-than-auspicious start to the UK government’s push to encourage people to invest.
Rachel Reeves launched the retail investment campaign, which will cost up to £50m, by attending the opening of trading at the London stock market. But as lunchtime approaches the market is still down around 1%.
Photograph: Carl Court/PA
The campaign involves a finance “savvy” CGI squirrel to encourage cautious British savers to shift out of cash and start investing.
The aim is to create an industry-wide effort to improve confidence and understanding of investing across the UK.
The choice of a red squirrel to front the chancellor’s investment push seems slightly odd, as they are endangered (yes, and so are the red squirrels….).
Photograph: Carl Court/PAShareFTSE 100 at two-week low
The London stock market has fallen further into the red after this morning’s PMI report showed UK firms were being hit by sharp cost rises.
The FTSE 100 is now down 107 points, or 1%, at 10,369, its lowest in just over two weeks.
Derren Nathan, head of equity research at Hargreaves Lansdown, says the PMi survey knocked shares lower:
double quotation markThe S&P Flash UK PMI for April showed an upturn in both services activity, which reached a two-month high of 52.0, and manufacturing, which was the strongest print in 47 months at 53.6. But there’s a major caveat.
Much of this increased momentum comes from a dash to lock in purchases, on fears of price rises and supply chain disruption from the war. An underlying decline in business confidence and a weak outlook for the labour market tallies with our view that Bank of England lending rates are likely to hold steady until firm progress towards the end of the Iran war is made. The FTSE 100 is down circa 50 points further following the release.
ShareAsos moving some production to UK to avoid supply chain disruption
Sarah Butler
Asos is shifting more production closer to home – to Turkey, Morocco and even the UK – as it tries to offset disruption to shipping caused by the Middle East conflict.
José Antonio Ramos Calamonte, the chief executive of the online fashion retailer, said the group had seen an increase in freight costs and longer delivery times as a result of the conflict which has pushed up fuel prices but he said:
double quotation mark“We are navigating the cost impact through flexibility of different [manufacturing] origins and shipping methods.”
He said the group had already been moving some production from the Far East before the conflict began but that had stepped up so that now about a third of its clothing was made closer to home including Turkey, Morocco and the UK.
“We were ahead of the curve,” he said.
Calamonte said that so far there had not been inflation on costs but if the conflict continued then the price of Polyester was likely to rise but prices of other fabrics such as cotton were coming down. He said there were so many factors at play that the outlook on price was currently “a bit vague”.
Asos said on Thursday that sales fell 9% to £1.17bn in the half year to 1 March but pre-tax losses narrowed to £138m from £241.5m a year before as it shifted away from heavy discounting. Shares in Asos rose 1.3% in morning trading as the company said it attracted 9% more new customers in March, the first month of growth since September 2021.
Asos also said it was pursuing a £7m refund of US tariffs after courts ruled the levies should not have been imposed.
The surge in cost pressures hitting UK companies adds to the dilemma facing the Bank of England, which is due to announce its next decision on interest rates in a week’s time.
Chris Williamson, chief business economist at S&P Global Market Intelligence says:
double quotation markThe UK economy has gathered some renewed momentum in April after the initial impact of the war in the Middle East caused growth to stall in March, but the upturn comes with a catch. The improved rate of expansion is in part a reflection of a short-term boost from a rush to secure purchases ahead of feared price rises and supply shortages linked to the war.
Prices have spiked higher at a rate not previously seen by the survey outside of the pandemic, suggesting inflation could rise more than many forecasters have been anticipating. Prices are rising not just because of surging energy costs, but also due to increases in charges levied for a wide variety of goods and services, with price hikes often stoked by supply concerns. The number of supply delays reported has jumped to the highest on record if the pandemic is excluded.
Business confidence and employment have also been dragged lower by the ongoing conflict, boding ill for growth to weaken in the coming months just as price pressures intensify.
The survey highlights the difficult choices facing policymakers at the Bank of England. The spike in price pressures will add to calls for rate hikes to dampen inflation, but the Bank will need to carefully assess the degree to which economic growth might weaken. While April’s PMI is indicative of the economy rebounding from a flat picture in March to a 0.2% quarterly growth rate, the details of the survey hint strongly that this pace cannot be sustained should the crisis persist.”
ShareBiggest jump in UK service sector cost inflation since at least 1996
Ouch! UK services sector companies have been hit with the biggest jump in cost inflation in at least 30 years, as the Iran war drove up petrol and diesel prices.
A survey of purchasing managers at British firms has shown that service providers experienced a surge in cost pressures, this month, largely due to higher fuel prices.
The acceleration in service sector cost inflation since March was the greatest for a single month since the data began being tracked in July 1996.
This follows yesterday’s inflation report, which showed that fuel prices pushed up costs in March.
Data provider S&P Global also found that overal input cost inflation this month has hit the highest level since November 2022, driven by a rapid increase in raw material prices in the manufacturing sector.
The report says:
double quotation markManufacturing production returned to growth in April, following a marginal decline in the previous month. A number of firms suggested that customers had brought forward orders and sought to build safety stocks in the expectation of rising prices and supply constraints.
That said, there were also some reports that raw material shortages and international shipping disruptions had weighed on production volumes in April.
Overall, the flash UK PMI composite output index rose to 52.0 in April, up from 50.3 in Mach (where 50 points shows stagnation).
However, it also found that business optimism at UK private sector firms fell to its lowest since last April, when Donald Trump’s trade war hit confidence.
Updated at 04.57 EDT