Aurelia Butler

British retail sales contracted in May as consumers tightened their belts amid a deepening of the cost of living crisis, fuelling concerns about a downturn in the UK economy.The quantity of goods bought in Great Britain fell 0.5 per cent between April and May, reversing the expansion in the previous month, according to data published on Friday by the Office for National Statistics.This was only marginally better than the 0.7 per cent fall forecast by economists polled by Reuters, but the May statistic was helped by the figures for April being revised strongly down.However, shoppers spent 0.6 per cent more than in the previous month, even if the volume was lower, laying bare the impact of surging inflation on households’ finances.May’s fall was “driven by a decline in food sales”, said Heather Bovill, ONS deputy director for surveys and economic indicators.She added that feedback from supermarkets suggested that “customers were spending less on their food shop, because of the rising cost of living”. 

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

 Sales of household goods and purchases made at department stores also fell sharply. Bovill said that retailers in these areas reported a “consumer reluctance to spend due to affordability worries and higher prices.”This comes as separate data by the research company GfK, also released on Friday, showed that UK consumer confidence fell in June to the lowest level since records began in 1974.Lisa Hooker, industry leader for consumer markets at PwC, said that the platinum jubilee celebrations and the sunny weather “were unable to outweigh the wider drag of the cost of living crisis on retail sales”.Consumers were being hit by the “triple whammy” of a national insurance tax rise, sharply rising food prices and the significant increase in the energy bill cap in April said Maxim Syn, of global financial services firm Ebury, with household budgets “squeezed from all directions.”The 1.6 per cent contraction in food sales volumes in May follows a surge in annual food inflation to 8.6 per cent, separate official data showed earlier in the week. As a result, many customers are “buying down,” said Helen Dickinson, chief executive of the British Retail Consortium, particularly with food, choosing value range items where they might previously have bought premium goods.The data increase the likelihood of an economic downturn, economists warned. Thomas Pugh, of business advisory firm RSM UK, said that the flow of recent negative data pointed to an economic contraction in May, continuing the lack of growth seen since January. He expected the economy to contract 0.5 per cent in the second quarter. George Lagarias, chief economist at the accountancy firm Mazars, said consumers cutting on spending would bring “the UK economy closer to a recession”.However, markets still expect the Bank of England to raise interest rates in August as it faces the fastest pace of inflation in 30 years, adding further pressure to household finances. Holiday shopping boosted clothing sales in May and workers returning to the office spent more on filling up their vehicles.However, sales volumes fell by 1.3 per cent in the three months to May compared with the previous three months.Retail sales volumes have fallen from their peak in the spring of last year as consumers return to spending in bars and restaurants, not included in the figures, instead of buying groceries.Jamie Rackham, founder of the Facebook group of 194,000 small producers Not On Amazon said: “Everything is costing more to produce at the same time as people have less to spend.” More

Good morning and welcome to Europe Express.EU leaders are reconvening this morning to focus on what has become the dominating topic for their governments back home: the worsening economic outlook. We’ll bring you up to speed with what to expect from today’s summit session. We’ll also hear about the ill-chosen words of French president Emmanuel Macron when expanding on his idea of a European political community and I’ll fill you in on what Balkan leaders had to say after rollercoaster talks with (and about) them at yesterday’s dedicated summit.Grim months aheadThe discussions at today’s euro summit in Brussels are expected to be unusually detailed by recent standards and almost entirely grim in tone, writes Sam Fleming in Brussels. The euro summit format has brought together euro area leaders regularly ever since the debt crisis, and it can be a fairly perfunctory affair when the economic tidings are good. The outlook as leaders meet today is anything but. A survey of companies’ purchasing managers for June, published yesterday, showed the first contraction in manufacturing output for two years, alongside a marked slowing in services growth. Underlying the fading outlook is anxiety about the rising cost of living across Europe — and a realisation that the energy crisis is set to get worse. The decision by Germany yesterday to trigger the second stage of its national gas emergency plan, taking it a step closer to rationing, underscored the threat. It followed a warning from the International Energy Agency this week that Europe needed to get ready for a full shutdown of Russian gas shipments this winter. Christine Lagarde, the European Central Bank president, will be quizzed on this unappealing economic landscape when she sits down with leaders at the meeting. The ECB has already set out what a “downside” scenario driven by worsening energy supply disruptions, gas rationing and surging commodity prices might look like. Instead of continued economic expansion this year and next, the ECB recently said an adverse scenario would entail growth this year followed by a sharp contraction in 2023, alongside a prolonged period of punishingly high inflation. This is not the central scenario being laid out at this stage, but the worsening story in European energy markets means it is by no means out of the question. The bleak message to leaders is there are no easy answers when it comes to addressing the outlook, given the need for the ECB to stay on top of inflation while at the same time avoiding painful divergences in sovereign bond yields. The spectre of a further three-quarter point rate increase by the US Federal Reserve underlines just how damaging the situation becomes when a central bank gets behind the curve. Italy is expected once again to push the idea of implementing price caps on gas deliveries as one way of getting on top of surging costs, but diplomats do not see the idea making headway. Paschal Donohoe, the eurogroup president, emphasises that the eurozone is institutionally far better equipped to respond to all this than during the euro crisis a decade ago, but leaders have few policy levers available they can readily pull. The message, therefore, is hope for the best but prepare for the worst. Chart du jour: Eurozone slowdownEurozone business activity suffered a sharp slowdown in June, according to S&P Global’s purchasing managers’ index, which fell to a 16-month low as companies complained of high inflation, weak demand and political uncertainty.Macron strikes againThe metaphorical ink was barely dry on EU leaders’ “historic” decision to grant Ukraine candidate status when French president Emmanuel Macron took to the press lectern to sketch out what he had dreamt up as a potentially more suitable club for the EU’s would-be members, writes Henry Foy in Brussels.“It is going to take some time. And we are seeing something of an enlargement fatigue phenomenon,” Macron said. “It is a long road to travel. And that is why I have proposed, in the meantime, a European Political Community.”“We need to think a lot more quickly about how to stabilise our neighbourhood. And let’s be honest, maybe we won’t always be living together in the same house, but we will be living on the same street,” he said, delivering a healthy chunk of blunt realism to all those in Kyiv celebrating the achievement of a significant geopolitical milestone. Perhaps Macron’s concept may well turn out to be the solution to the EU’s overcrowded waiting room, but it did not go unnoticed that he was suggesting that an organisation which so far only exists in his head could provide a faster solution for applicant countries to gain some form of bloc status than the EU’s official accession route.Soon after Macron’s press room pitch for his inside-but-outside-the-EU proposal, he joined his fellow leaders back at the summit table to discuss the initiative in more detail.The aim, according to the conclusions agreed by the 27, is “to offer a platform for political co-ordination . . . to foster political dialogue and co-operation.”“Such a framework,” the conclusions state, “will not replace existing EU policies and instruments, notably enlargement.”As one person in the room remarked afterwards: “In private discussions with the other EU leaders, Macron is eloquent and engaged . . . it’s just in public he seems to always put his foot in his mouth.”Balkan let-downThe summit with six western Balkan leaders ran over by nearly two hours and the disappointment was quite apparent when the meeting ended. Later in the evening, it also temporarily held up an agreement which should have been a mere formality on granting Ukraine and Moldova candidate status. Several countries, including Austria, Hungary, Slovenia and Croatia, demanded that Bosnia and Herzegovina be given a similar perspective as Georgia, which can become an EU candidate once it meets a series of conditions, diplomats told Europe Express.“We had intense discussions for 3.5 hours because we wanted to shed light on all aspects, for instance the fate of Bosnia and Herzegovina,” said Austrian chancellor Karl Nehammer. He said Austria insisted that Bosnia also get candidate status if it makes progress this year and that leaders urged the commission to help Bosnia on this path. A video conference with Ukrainian president Volodymyr Zelenskyy was also delayed during the discussions on Bosnia. For the rest of the Balkan states, there were slim pickings, as EU foreign affairs chief Josep Borrell admitted: “We are not where we should be with the western Balkans. Today we should be launching the negotiations with Albania and North Macedonia and I cannot hide my disappointment, certainly.”The two countries are still in limbo as a result of the Bulgarian parliament voting against the government after its prime minister said he planned to lift his country’s veto to North Macedonia and Albania taking the next step on the EU path.Speaking on his way out of the meeting, Bulgarian premier Kiril Petkov said he hoped the parliament back home would revert to the matter and come to a decision soon. Dutch prime minister Mark Rutte even gave a 50-60 per cent chance for a breakthrough next week.But all these consolatory messages fell short of reassuring Albanian prime minister Edi Rama, who likened the EU leaders to a “congregation of priests who were discussing the sex of angels while the walls of Constantinople were falling apart.” “It’s very concerning that even a pandemic and a very threatening war that can turn into a tragic global war haven’t been able to unite them,” Rama said.His counterpart from North Macedonia, Dimitar Kovačevski, echoed the feeling: “What has happened now is a serious blow to the credibility of the European Union.”What to watch EU leaders meet to discuss economic and eurozone matters todayG7 leaders gather in Germany for a summit starting Sunday Smart reads Double standards: Bruegel think-tank is criticising the “questionable discretionary decision” to let Croatia join the euro area, but not Bulgaria, a country that also fulfils the criteria for membership. Metaverse, not European: Efforts to realise the metaverse will take decades and are more likely to be led by incumbent American and Chinese big tech companies than European challengers, writes Ifri in this policy paper. More

The risks of the US and Europe sliding into recession have picked up sharply, economists have warned ahead of the G7 summit that begins this weekend in Bavaria. Economists on both sides of the Atlantic told the Financial Times they had become increasingly pessimistic following the Federal Reserve’s decision to go big on rate rises to counter soaring inflation, and on mounting concerns over Europe’s gas supply in the run-up to winter. Holger Schmieding, chief economist at Berenberg Bank, said the balance had now “tipped” in favour of an economic contraction next year in the US and Europe. “What used to be a rising risk has now turned into the base case.” Goldman Sachs doubled the risk of the US entering a recession this year from 15 per cent to 30 per cent, with a 48 per cent probability of a recession over a two-year horizon in the wake of the Fed’s first 75 basis point rise since 1994. “US recession risks are uncomfortably high and rising. I would put them at 40 per cent in the next 12 months, and more or less even odds over the next 24,” said Mark Zandi, chief economist of Moody’s Analytics. He added that Europe was even more vulnerable. “To avoid recession, the global economy needs a bit of luck and for the economic fallout from the coronavirus pandemic and Russian aggression to wind down quickly, along with some deft policymaking by the Fed and other central banks,” Zandi said.G7 leaders will discuss the state of the global economy at their working lunch on Sunday, with inflation set to dominate proceedings. Ukraine’s President Volodymyr Zelenskyy will take part remotely by video link in Monday’s talks, which will focus on the crisis prompted by Russia’s war.The global economic outlook has been darkening since Russia’s invasion of Ukraine in February sent energy and food prices spiralling. Over the course of June central banks from Washington to Zurich raised rates by bigger margins than markets had expected, signalling they would do whatever it takes to rein in surging inflation — even if that means triggering a recession.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Gas supply to Europe has become more uncertain following Russia’s decision to cut flows to many countries. Supply chain disruptions resulting from China’s zero-Covid policy continue to weigh on growth prospects. The Fed’s rise prompted private sector economists to downgrade their US forecasts for 2023 by the biggest margin so far this year, with even larger downgrades than those made at the start of the Ukraine war, according to Consensus Economics, which tracks growth and inflation forecasts. Peter Hooper, economist at Deutsche Bank and a former Fed official who in April became one of the first on Wall Street to forecast a recession, warned that the inflation picture in the near term “does not look good”, meaning the central bank may need to raise rates even more aggressively than currently expected. The bank has since pulled forward its contraction call to the middle of next year. “It will be exceedingly difficult to fine tune this to the point of bringing inflation down with only a half a percentage point increase in unemployment over the next couple of years,” he said.Economists also cut sharply their 2023 outlook for the eurozone, the UK and eight in 10 other countries and regions tracked by Consensus Economics. Neil Shearing, chief economist at Capital Economics, said the recession risks are highest in Europe, where the inflation-induced cost of living crisis is coupled with possible gas shortages. Like in the US, the UK and the eurozone are also dealing with inflation at multi-decade highs. The International Energy Agency warned this week that Europe must prepare immediately for the complete severance of Russian gas exports this winter. Martin Wolburg, senior economist at insurer Generali, said: “If Russia were to fully cut gas supply to the EU, a euro area recession would become the new base case with the German economy hit especially hard.”Katharina Utermöhl, senior economist at insurer Allianz, was more optimistic: “The strong post-lockdown rebound in the sectors most impacted by the pandemic — notably travel and hospitality — should keep the eurozone economy afloat over the summer months.” In the UK, the Bank of England is expected to raise rates even though it expects the economy to stagnate over the next two years. “The big picture is that the economy may be only fractionally larger this time next year than it was before the pandemic,” said Thomas Pugh, economist at RSM UK, a tax and consulting firm.

Official sector forecasts by central banks and multilateral organisations such as the OECD and IMF still show the world’s big advanced economies growing this year and next. However, Fed chair Jay Powell acknowledged this week in congressional hearings that a US recession was “certainly a possibility”, while pledging that the central bank’s commitment to restoring price stability is “unconditional”. Additional reporting by Guy Chazan in Berlin More

Is it time to buy the dip? You might think it’s far too early to ask that question — and I’d be inclined to agree — but it hasn’t stopped investors from asking it.Considering the pull back in US markets (the S&P 500 is down about 18 per cent year-to-date, and the tech-focused Nasdaq an even steeper 30 per cent) the urge to either “buy the dip” or change strategy is perhaps understandable. Yet, as further tightening looms, very sensible people are warning that this is just phase one of the bear market. Now that the froth has been blown off valuations, the next risk is that company earnings will undershoot analysts’ expectations — particularly worrisome for cyclical stocks as consumers and businesses tighten the purse strings — leading to a further leg down. Nevertheless, I was intrigued to read that in the US, small-caps and value stocks are already proving popular with investors. Here in the UK, there’s not much “dip” to buy, owing to the peculiar sector composition of the FTSE 100 (very little tech, but lots of big oil, big miners and banks). Total returns including dividends have only declined by about 2 per cent year-to-date, although the feared “earnings recession” could change all that. It’s a different story for UK small-caps. Total returns on the Numis smaller companies index have dipped 18 per cent in the same period, and an even steeper 26 per cent on the Numis Aim index.Stock market academics Paul Marsh and Scott Evans at the London Business School, who compile the Numis indices, note that small-caps have historically done badly in interest rate tightening cycles and recessions. However, over the long-term, they tend to outperform. Although Prof Marsh studiously avoids getting into forecasts, even he wonders if this sell-off in small-caps has been overdone. Tempted? Aside from my regular monthly investments into my stocks and shares Isa, the only dip I’m planning on buying now is one that you’d serve with crudités. Yet as inflation rises, I’m becoming more eager to deploy some of the cash reserves I’ve built up and, like many private investors, I’m willing to take a long-term view. Could it be time to put some selected UK small-cap plays on my watchlist? I must confess to a nostalgic affection for the shallow end of the UK market. I covered plenty of small-cap and Aim-traded companies on the Investors’ Chronicle 15 years ago; the allure of getting into the next big thing at the bottom had a particular appeal to our stockpicking readers. Worsening economic conditions will be more challenging for this sector, but at a stock level, some companies could turn out to be stronger than others. However, selecting single stocks is high-octane investing. You need to be prepared to do tons of research and, even then, you need a well-diversified portfolio — you’ll be reliant on a few hoped-for winners to make up for the inevitable lossmaking disasters. Risky, yes — but undoubtedly a much more fun way to lose your money than investing in crypto! There’s a dwindling amount of professional research, but investors can get their heads around the company business model by attending AGMs and meeting management teams, where they have a high chance of actually getting to ask a question. Additionally, certain Aim-traded companies benefit from inheritance tax exemptions if held for over two years, increasing their appeal to older readers. Considering the pitfalls, this is one area where outsourcing the excitement to a specialist fund manager makes more sense. One manager confidently predicting a return to a stockpicker’s market is Katie Potts of the Herald Investment Trust, which specialises in small-cap tech and media stocks.“There are few periods in the economic cycle where fund managers can forecast company profits better than they [the companies themselves] can,” she says. “We’re seeing lots of different management teams, and can quickly see the significance of changes across the board whether that’s labour costs or who’s clever enough to have contracts with prices linked to RPI and who isn’t.” One of the trust’s biggest sectors is software — which Potts argues is more defensive than it might first appear due to recurring revenues from businesses with rental and maintenance contracts. But the tightening labour market could be an opportunity for growth: “There’s even bigger incentive to automate — and that needs technology.” When looking at factors to avoid, small companies with high levels of debt look particularly vulnerable in a recessionary environment where interest rates are rising. Gervais Williams, veteran small-cap manager at Premier Miton, says investors should be wary of smaller companies that are cash flow negative.“We are going to see the strong overtake the weak,” he predicts. However, this also presents opportunities for smaller companies generating surplus cash who could gain market share, or pick up the stragglers debt-free from administrators. Another big concern is how well consumer-facing companies are placed to hold on to current profit margins. In his meetings with management teams, Williams quizzes them relentlessly about customer services metrics: “Those who don’t know the answers stand out”. And then there’s the “Lord Lee strategy” — taking an ultra-long view on selected small-caps (and dividend income while you wait) in the hope they will eventually be taken over at a significant premium. At present, £120mn of the Herald Investment trust’s portfolio is under the hammer (including healthcare software maker EMIS Group and FTSE 250 publisher Euromoney) and Potts says private equity money is driving a good slug of that.“Valuations are coming down to a level where trade buyers and private equity seem to be on the hunt very aggressively,” she adds. A final lesson from my Investors’ Chronicle days. Small companies tend to have wider bid/ask spreads, and some can be relatively illiquid — we used the term “lobster pots” as it can be easy to get your money in, but much harder to get it out again.

You might not be ready to snap up any bargains, but if you’re sitting on cash, it’s getting harder to be patient as inflation continues to rise. So far this year, my investments have had a very domestic theme indeed. I’ve paid to extend the lease on my flat (another column will follow in due course) as well as spending on home maintenance, replacing all kinds of stuff now that’s likely to conk out within a few years, by which time the price of fixing or replacing it will have soared. My husband’s best investment idea? Buying six months’ worth of wine when Waitrose had its last 25 per cent off deal. Predictably, buying this “dip” proved to be a false economy, albeit a highly enjoyable one. Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb More

TOKYO (Reuters) -Japan’s annual core consumer inflation topped the central bank’s target for a second straight month in May, data showed on Friday, highlighting the intensifying pressure on the country’s fragile economy from soaring global raw material costs.The data challenges the Bank of Japan’s view that the recent rise in prices is temporary, and does not warrant withdrawing monetary stimulus. But with wage growth subdued, many analysts expect the BOJ to remain firmly focussed on stimulating a sluggish economy rather than fight inflation with interest rate hikes.The nationwide core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.1% in May from a year earlier, data showed, matching a median market forecast.It stayed above the BOJ’s 2% target for a second straight month, following a 2.1% rise in April which was the fastest pace of increase in seven years.The core-core CPI, which strips away both volatile food and fuel costs, was up 0.8% in May from a year earlier after climbing by the same pace in April.”Food prices are rising quite significantly even as wage growth remains slow. This may hurt consumption and make retailers hesitant of further passing on costs to consumers,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.”I don’t think core consumer inflation will hit 3% unless a broader range of daily goods and services prices rise.”While soaring fuel costs remained the key driver of the rise in CPI, the pace of year-on-year increase in energy prices slowed to 17.1% in May from 19.1% in April.But prices of food excluding volatile vegetable, meat and fish rose 2.7% in May, marking the fastest growth since 2015.In a glimmer of hope, separate data released by the BOJ on Friday showed the price companies pay each other for services rose 1.8% in May year-on-year.The increase, which was the fastest annual pace since 2020, partly reflected a rebound in demand for services as COVID-19 infection numbers fell, the data showed.Rising fuel and food prices, blamed on Russia’s invasion of Ukraine and a weak yen that inflates the cost of imports, are expected to keep Japan’s core consumer inflation above the BOJ’s 2% target for most of this year, analysts say.But there is little to cheer for the BOJ, which views such cost-push inflation as temporary and a risk to consumption, with households facing rising living costs and slow wage growth.BOJ Governor Haruhiko Kuroda has repeatedly said the central bank will keep monetary policy ultra-loose until robust domestic demand and strong wage growth become key drivers of inflation. More

WASHINGTON/LONDON (Reuters) – The U.S. units of major European lenders including Deutsche Bank (ETR:DBKGn), Barclays (LON:BARC) and Credit Suisse sailed through the Federal Reserve’s annual “stress tests” on Thursday, showing they hold enough capital to weather an economic shock. For the seven European bank subsidiaries the Fed oversees with more than $100 billion in assets, the average capital ratio — a measure of the cushion a bank has to withstand potential losses — remained well above the regulatory minimum of 4.5%. It was also higher than the average ratio for the broader group of 34 banks tested, according to a Reuters analysis of the results. The average capital ratio for the seven European lenders stood at 15.2%, compared with 9.7% for the 34 banks. Deutsche Bank’s U.S. operations had the highest ratio of all banks at 22.8%, while Credit Suisse was the third-highest of the group with a ratio of 20.1%. HSBC was the straggler of the foreign pack with a ratio of 7.7%. Under its annual stress test exercise established following the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets would fare against a hypothetical severe economic downturn. The results dictate how much capital banks need to be healthy and how much they can return to shareholders.This year’s severely adverse scenario saw the economy contract 3.5%, driven in part by a slump in commercial real estate asset values, and the jobless rate jumping to 10%.The other four European subsidiaries tested were UBS America Holdings, Santander (BME:SAN) Holdings USA, and BNP Paribas (OTC:BNPQY) USA.While the scenarios were devised before Russia’s invasion of Ukraine and a sharp jump in inflation, the tests should reassure policymakers that Europe’s top lenders are resilient enough to withstand a possible recession this year or in early 2023.The Bank of England said this month it was satisfied lenders were no longer “too big to fail,” although it did call for greater clarity on how much liquidity three major banks including HSBC would require if they needed to be wound down in a future crisis.The European Banking Authority is scheduled to run its next EU-wide stress test in 2023 but investors are on high-alert for evidence of a fall in asset quality at European banks, as borrowing rates begin to rise from historic lows.In 2020 the Fed changed how the test works, scrapping its “pass-fail” model and introducing a more nuanced capital regime.See an EXPLAINER on the stress tests here: More