Pound hits 15-month high as UK GDP shrinks in May; sickness threat to economy – business live

Published on Luglio 13, 2023

From 3h ago

The pound has hit a fresh 15-month high this morning, after the UK economy shrank by less than expected in May.

Sterling traded at $1.306 against the US dollar for the first time since April 2022, up 0.5%.

The rally follows this morning’s GDP report showing a smaller contraction than feared in May despite the extra bank holiday to mark King Charles’ coronation and ongoing strikes.

The pound has gained almost 8% against the dollar this year, lifted by the prospect of rising interest rates to cool inflation.

Yesterday it hit $1.30 for the first time in 15 months, after a surprisingly large fall in US inflation raised hopes that the US Federal Reserve could soon end its cycle of rate increases.

As covered earlier, the smaller-than-feared drop in GDP in May could encourage the Bank of England to keep raising interest rates.

Victoria Scholar, head of investment at interactive investor, says:

The pound hit a 15-month high this week against the US dollar after US CPI fell to 3% in May while the UK still struggles with sky-high price pressures with growing potential interest rate differentials boosting the allure of sterling.

GBPUSD is in the green this morning, trading above the key $1.30 handle and the pound is also higher against the euro.”

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Key events (18)UK (24)OBR (11)Bank of England (6)Office for Budget Responsibility (6)US (3)

Over in the high court, a judge has quashed legal changes brought by the government to let agency staff fill in for striking workers.

It’s a victory for a group of unions, including Aslef, the RMT and Unite, who joined in legal challenges to “strike-breaking” regulations announced last summer by the government as it faced widespread industrial action across rail and other sectors.

In a verdict delivered today, Mr Justice Linden ruled that the approach taken by ministers was “so unfair as to be unlawful and, indeed, irrational.”

In a written ruling, Mr Justice Linden said he would “quash the 2022 regulations”.

Unions argued that the changes to regulations announced by the then business secretary, Kwasi Kwarteng, undermined the right to strike, and were made unlawfully.

Responding to the judgment, Unite general secretary Sharon Graham said:

“This is a total vindication for unions and workers. The government’s decision to allow employers to recruit agency workers to undermine legal strike action was a cynical move to back their friends in business and weaken workers’ legal rights to withdraw their labour.

“It was entirely counterproductive as rather than weaken industrial action it has hardened attitudes and unnecessarily extended strikes. This ill-thought out, divisive legislation must be consigned to the dustbin of history.”

The UK’s public finances are in a “very risky period” after a series of major shocks that have driven the nation’s borrowing costs to rise at the fastest rate in the G7, the Treasury’s tax and spending watchdog has warned.

The independent Office for Budget Responsibility warned national debt could surge to more than 300% of gross domestic product (GDP) by the 2070s, up from about 100% today, and warned the government is not taking measures to make big changes in the short term.

It said the government faced a “number of challenges” in meeting Rishi Sunak’s target to get the national debt falling as a share of national income within five years’ time.

Despite promises made by successive Conservative-led governments to reduce Britain’s debt pile, the OBR said the objective was only achieved in three out of the last 12 years – and by a relatively small 3.4 percentage points in total.

In a downbeat assessment in its latest fiscal risks report, the OBR said other governments were also facing heightened pressure on their public finances from rising global interest rates pushing up the cost of servicing debt.

However, it warned the UK had the highest level of inflation-linked debt among G7 economies, making it more vulnerable to shocks, with debt interest costs rising in the UK at twice the pace of any country in the club of advanced economies between 2019 and 2022.

Rachel Reeves, the shadow chancellor, said:

“This report just how far we are falling behind our peers, how exposed our economy is and again highlights that the government is failing to take action in areas like energy security to help get bills down.”

Today is a “watershed moment” as the Office for Budget Responsibility recognises that growing sickness is among the gravest fiscal risks faced by UK, says the IPPR thinktank.

Chris Thomas, head of the IPPR’s landmark Commission on Health and Prosperity, says:

“Today, the OBR has concluded that better health is one of the clearest paths to prosperity in the UK – but that, through a decade of austerity, a global pandemic and an NHS crisis, the UK is off-track and well behind other comparable countries. On the same day, NHS waiting lists have hit new highs, and the NHS in England has admitted it may not meet the prime minister’s pledge to reduce these before the next election.

“This is a watershed moment. IPPR research also shows that sickness is harming earnings, driving millions out of the labour market, and blocking economic justice across the country. On the flipside, these challenges represent opportunities – if the right policies, and political courage, can be found.

“If we want prosperity for all, we must deliver good health for all. We call on ministers to commit to a health equivalent of net-zero – a 30-year commitment to make the UK the healthiest country in the world. That means a bold agenda for NHS reform, but also putting in place the foundations of a healthy life: better housing, top quality education and good work.”

The OBR has also highlighted that the UK has had the second-highest burden of disease in the G7 after the US since 1990.

Today’s Fiscal Risks report shows that the UK has the lowest healthy life expectancy at birth of any major developed economy bar the US, and had a slower rate of progress over the 2010s than all apart from the US and Canada.

Improvements have stalled across most countries since 2010, and the disease burden rose slightly in the US, Canada and the UK in the years immediately prior to the pandemic, the report says.

The OBR points out that the UK has persistently higher mortality rates from cancers and respiratory diseases than other advanced economies, and higher rates of adult obesity than Germany, France, Italy and Japan,

Adverse shocks to the UK’s financial health seem to have become “more frequent, severe, and costly,” the Office for Budget Responsibility warns today.

Today’s Fiscal Risk report says the UK has been hit by a succession of shocks – the Covid pandemic, the energy and cost-of-living crisis, and the sudden interest rate rises in 2022. They have proved twice as costly as all similar shocks in the second half of the last century.

It says:

So far this century, we have experienced three major shocks, adding around 20 per cent of GDP to debt on average. This is twice the intensity and twice the fiscal cost of the shocks that the UK witnessed over the latter half of the 20th century.

If such shocks were to be repeated into the future, this could add a further 125 per cent of GDP to the already unsustainable levels of debt implied by the above baseline dynamics taking debt to 435 per cent of GDP by the mid-2070s.

The UK is more vulnerable than many other advanced economies to shifts in global sentiment, the Office for Budget Responsibility warns.

Today’s fiscal risks report points out that more UK debt is in the hands of private foreign investors than most other G7 countries.

The OBR says:

The UK Government has historically relied upon a large pool of long-term domestic savers, in particular pension and insurance funds, as end investors in its debt. However, over the course of this century the share of UK government debt in foreign (non-official) hands has almost doubled from 13 to 25%, the second highest in the G7 and 2 percentage points below France.

This potentially renders the UK public finances more vulnerable to sudden changes in global investor sentiment regarding the relative attractiveness of UK sovereign assets.

That risk, in part, arises from the likely reduction over time in the demand for sterling debt from pension funds with sterling liabilities, which has generated a fairly inelastic demand for gilts.

The OBR also highlights how the UK’s debt servicing costs are set to rise, partly because a slice of the debt mountain is linked to inflation.

Today’s report says:

The share of UK gilts whose value is directly indexed to RPI inflation (‘index-linked gilts’) has risen from about 10% in the late 1980s to around 25% last year, more than twice as much as the second largest advanced-economy issuer, Italy, at 12%.

The OBR warns that reducing the NHS’s record waiting lists will only have a small impact on Britain’s labour shortage.

Today’s Fiscal risks and sustainability states that only a relatively small proportion of those inactive for health reasons are on the NHS waiting list.

Thus:

While the disruption to and difficulties in accessing NHS services may have played a role in the worsening physical and mental health of the working-age population during this period, tackling the NHS waiting list alone is likely to make only a modest difference in the number of people out of work.

We estimate that halving the NHS waiting list over five years – returning it to its mid-2015 level of around 3 1/2 million – would only reduce working-age inactivity by around 25,000.

Newsflash: the UK national debt could hit 300% of GDP by the 2070s, as the aftershocks of the early 2020s continue to pose risks to the UK public finances, Britain’s fiscal watchdog has warned.

The Office for Budget Responsibility has just issued its latest Fiscal Risks and Sustainability Report.

And it warns that the public finances have come under growing pressures, due to the Covid-19 pandemic, rising health-related economic inactivity from 2020, the energy price shock, and now rising interest rates

These challenges have already pushed UK public debt above 100% of GDP in May (for the first time in over 60 years) and the cost of servicing it to a 40-year high, the OBR warns.

And the watchdog warns that the national debt could triple, as a share of the economy, within 50 years.

It says:

Against this more vulnerable backdrop, an ageing society, a warming planet, and rising geopolitical tensions no longer loom in the distance but pose significant fiscal risks during this decade, and could push debt above 300 per cent of GDP by the 2070s.

The OBR cites three key threats to the public finances: the aging baby boomers, global heating, and rising security threats.

They all pose significant fiscal risks in this decade, the OBR fears.

It says:

as the ‘baby boom’ cohorts enter retirement and high inflation ratchets up the cost of the triple lock, state pension spending is expected to be ?23 billion in today’s terms (0.8 per cent of GDP) higher in 2027-28 than at the start of the decade;

as global temperatures rise and the 2050 deadline for reaching net zero draws closer, rising take-up of electric vehicles is expected to cost ?13 billion a year in forgone fuel duty by 2030, while the public investments needed to support the decarbonisation of power, buildings, and industry could reach ?17 billion a year by that date; and

in response to growing security threats in Europe and Asia, the Government has said it aspires to increase defence spending – for the first time in seven decades – from 2 to 2.5 per cent of GDP, at a potential cost of ?13 billion a year in today’s terms.

It’s a weighty report, and the OBR are helpfully tweeting the key points now:

UK lenders have reported the biggest increase in mortgage defaults since the aftermath of the financial crisis.

Today’s Bank of England credit conditions survey shows that a net balance of 30.9% of lenders said the default rate on secured loans to households had risen in the second quarter of 2023. That’s the highest reading since the second quarter of 2009.

Looking ahead, 41.2% of lenders expect mortgage defaults to rise in the June-August quarter, the highest proportion since the end of last year.

Mortgage defaults have been low since the 2008-09 crisis, with lenders offering forebearance rather than choosing to repossess homes.

Last month the government announced a new Mortgage Charter, to force lenders to offer support to struggling mortgage-holders.

For mortgage payers, the latest economic growth figures are a disappointment, my colleague Phillip Inman writes.

The 0.1% contraction in gross domestic product (GDP) between April and May tells the Bank of England that the jump in interest rates over the previous 18 months has only had a mild dampening effect on the economy.

A majority of the central bank’s decision-making body – the monetary policy committee – have shown they want to see a much bigger downturn to reduce consumer spending before they pause regular increases in the cost of borrowing.

As such, a further interest rate rise from 5% looks likely next month, whatever the inflation rate for June turns out to be when it is published next week. More here.