UK economy improves but challenges remain for Sunak

Today’s top stories

• The Bank of England needs to revamp its economic model to avoid repeating its failure to forecast surging inflation, according to a review by former Federal Reserve chair Ben Bernanke.

• The US proposed raising tens of billions of euros in debt to fund Ukraine using profits generated by frozen Russian state assets.

• The dollar notched up its strongest weekly performance since 2022 after hot US inflation figures caused ripples through world markets and led traders to reverse bets on early interest rate cuts by the Federal Reserve.

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Good evening.

UK Prime Minister Rishi Sunak received a much needed dose of positive economic news this morning as fresh data raised hopes that the country was emerging from recession.

Gross domestic product rose 0.1 per cent in February, down from January’s revised 0.3 per cent but in line with expectations, thanks to improved production in sectors such as carmaking and food. The news helped push the benchmark FTSE 100 index towards a record high.

The data points to a likely expansion of the UK economy in the first quarter. That would mark the end of the technical recession the UK slipped into at the end of 2023, defined by two consecutive quarters of negative growth. Retail industry data, released earlier this week, also pointed to signs of a recovery as price pressures eased.

Whether a slowly improving economy is enough to save Sunak from defeat in the upcoming general election is another matter.  

The opposition Labour party, some 19 points ahead of the Conservatives according to the FT poll tracker, is putting the economy at the front of its campaign. It is highlighting what it sees as the long-term failures of the government.

Rachel Reeves, shadow chancellor, said that the Conservatives “cannot fix the economy because they are the reason it is broken”.

“After 14 years of Conservative economic failure, Britain is worse off with low growth and high taxes,” she added.

Hopes that Sunak’s party might benefit from lower mortgages have faded after unexpectedly high inflation in the US dented hopes on both sides of the Atlantic for imminent interest rate cuts.

Traders are now expecting just two cuts this year from the Bank of England, in contrast with the more than six that markets anticipated in January. That scenario was given credence by BoE policymaker Megan Greene, who wrote in the FT yesterday that investors had underestimated the risk that inflation would remain high for longer in Britain than in other advanced economies.

Chancellor Jeremy Hunt admitted in December that interest rate cuts were essential for the Tories’ prospects of re-election. He told the FT that falling interest rates were “probably the moment when people will begin to have more confidence about their own personal prospects and the prospects of their family”.

In the meantime, Britons are still grappling with a biting cost of living crisis: data this week showed the population increasingly reducing the amount they save and invest as price rises continue to weigh on household finances. 

Still, if all else fails, Sunak has other irons in the fire.

As we reported yesterday, the prime minister has built a close relationship with bosses at Blackstone, fuelling speculation about his post-election future. At a groundbreaking ceremony for the private equity giant’s new London headquarters, the PM, according to people who witnessed or were briefed on the event, quipped: “Where’s my office?”

Need to know: UK and Europe economy

Private investors have piled into UK government bonds this year to lock in attractive yields while interest rates remain at a 16-year high.

A return to growth in demand for mortgages provided further evidence that the UK property market is stabilising.

The European Central Bank kept interest rates on hold at 4 per cent but signalled it was considering a cut at its next meeting in June. Officials attempted to downplay the impact of the higher than expected US inflation data.

Need to know: global economy

The global economy may have avoided recession but faces a decade of “tepid growth” and “popular discontent”, the IMF’s managing director Kristalina Georgieva warned. She added that “inflation is not fully defeated, fiscal buffers have been depleted and debt is up, posing a major challenge to public finances in many countries”.

China’s exports fell sharply in dollar terms in March as lower prices for its goods hit producers, highlighting the challenges facing Beijing as it turns to manufacturing and trade to revive the economy. Weak inflation data meanwhile has exacerbated concerns over consumer demand in China.

In sharp contrast to the Opec cartel, the International Energy Agency said oil use was slowing after a mild winter and normalising demand from China. Prices have been steadily rising over supply concerns due to the conflicts in the Middle East and Ukraine.

Industrial metals including copper and zinc have outperformed global stocks this year as traders bet on a revival of demand. New capacity, as well as a slowdown in US and EU project closures, meant global coal use increased last year for the first time since 2019.

Forget boomers vs millennials, the next conflict is millennials vs each other as a chunk of the cohort benefit from inherited family wealth, writes chief data reporter John Burn-Murdoch.

Need to know: business

US banks’ reporting season is under way. First-quarter profits at JPMorgan Chase rose 6 per cent, despite the bank paying an extra $725mn charge to cover the costs of last year’s regional bank failures. Citigroup reported better than expected profits of $3.4bn after it shed thousands of jobs in a revamp. BlackRock reported record assets under management of $10.5tn thanks to strong equity markets and the popularity of its new spot bitcoin exchange traded fund. Profits at Wells Fargo fell from $5bn to $4.6bn.

Private equity pioneer KKR is predicting a revival in global IPOs and takeover activity after a two-year slowdown.

TSMC’s decision to bring its latest technology to the US is a boost for President Joe Biden’s quest for supply chain security but still leaves Washington short of being able to completely produce the most complex chips needed for AI in the US.

The electric vehicle revolution is running out of steam, says the FT editorial board. Governments need to do more to reduce obstacles such as the lack of reliable charging networks.

Western pharma companies are on the hunt for alternative suppliers following a US crackdown on Chinese ingredient producers.

Pressure of a different sort is building on Japanese companies: shareholder activists are urging them to disclose the value of their often fabulous hoards of fine art.

Science round up

Sea surface temperatures in March were the warmest on record for the 12th month in a row, while on land they hit new peaks for the 10th month in succession. A scientist at the Copernicus Climate Change Service was left asking whether this year is “a blip, a phase change, whether the climate system is broken and behaving in a different way to what we expect.”

The widely used Prostate-Specific Antigen or PSA screening test for prostate cancer is over-diagnosing insignificant cases while still missing some of the most aggressive cancers, according to a new study.

Although brain-computer interfaces or BCIs have been around since the 1990s, Elon Musk’s Neuralink has generated huge amounts of interest and helped attract vast sums for start-ups that see BCI uses beyond medtech.

Professor Peter Higgs, the Nobel Prize-winning particle physicist whose prediction of the Higgs boson helped revolutionise understanding of the universe, died this week, aged 94. His groundbreaking theoretical work in the 1960s was triumphantly confirmed by experiments at the Cern particle accelerator almost half a century later.

Some good news

New excavations at Pompeii, the ancient Roman city buried in an eruption from Mount Vesuvius in AD70, have uncovered stunning new artworks. The frescoes, said to be among the finest found among the ruins so far, will be featured in a BBC documentary later this month.

Source: Economy - ft.com