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UK economy shrinks in August; pound rises on hopes of bond-buying extension – business live | Business

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Former BOE official: Extending bond-buying would take pressure off government ‘to do what’s needed’

The former Bank of England deputy governor, Sir Charlie Bean, said he wasn’t surprised that the pound had fallen last night on the governor’s remarks – that the central bank would not extend its emergency bond-buying programme beyond Friday. He told BBC radio 4’s Today programme:

Main market participants expected the Bank simply to extend its facility.

If you say you’re going to keep on extending the facility, you take the pressure off the pension funds to do what’s needed, you also take the pressure off the government to do what’s needed and get the fiscal position in order. We shouldn’t forget that this is the prime cause of it.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said:

August’s drop in GDP likely marks the start of a downward trend that will continue deep into next year. The drop was driven by a 1.8% month-to-month fall in output in consumer-facing services sectors, reflecting the intense real income squeeze on households. Indeed, output fell by 5.0% in the arts, entertainment and recreation sector and by 1.8% in the food and accommodation services sector.

The downturn in global goods trade also hit manufacturing output, which dropped by 1.6%. Admittedly, warmer-than-normal weather contributed to the 0.6% fall in the output in the energy supply sector, and greater-than-usual maintenance at oil rigs explains why output in the mining and quarrying sector plunged by 8.2%. But a reversal of both of these blips in September would boost month-to-month growth in GDP by only 0.08pp.

Britain’s biggest business group is also concerned about the economic situation. Ben Jones, CBI lead economist, said:

The UK economy retreated in August. And business surveys, including our own, have turned sharply downwards since the summer and there is an increasing chance that the UK entered a downturn during the third quarter.

Ongoing supply challenges, sharp rises in energy prices, and a tight labour market mean businesses continue to face significant cost pressures, but the Government’s energy price caps provide welcome breathing space.

Rising interest rates are adding further to costs facing businesses and households. In the run-up to the medium-term fiscal plan, business will be looking for reassurance that policy measures will be delivered against the backdrop of a stable macroeconomic environment.

Rachel Reeves, Labour’s shadow chancellor, said the GDP figures show “the economy is still in a dire state because of this Tory government”. She called on the government to reverse its “disastrous mini-budget,” which triggered the financial market turmoil seen in recent weeks.

The facts speak for themselves. Mortgage costs are soaring leaving families worrying about making ends meet. Borrowing costs are up. Living standards down. And we are forecast to have the lowest growth in the G7 over the next two years.

Introduction: UK economy shrinks in August, pound rises on hopes of bond-buying extension

The UK economy contracted by 0.3% in August because of a large drop in manufacturing, pointing to a further weakening of the economy in the third quarter and triggering fears of recession.

Meanwhile, the pound rose 0.3% to $1.0996 this morning on suggestions that the Bank of England could extend its emergency bond-buying programme.

Michael Hewson, chief market analyst at CMC Markets UK, said:

The pound had another choppy day yesterday, rising as high as $1.1180, before sliding sharply on comments from Bank of England governor Andrew Bailey in Washington, that the central bank would not be extending its £65bn gilts programme beyond this Friday, and that pension funds had another three days to shore up their portfolios against further shocks.

Having done so much to stabilise markets in the past few days, including the action to stabilise the linker market yesterday, this hard line could come back and bite the Bank of England hard if it serves to heighten volatility in the days ahead.

However, the Financial Times is reporting that the central bank has signalled privately to bankers that it could extend its bond-buying programme past this Friday’s deadline.

The decline in GDP came after downwardly revised growth of 0.1% in July, according to the Office for National Statistics. Monthly GDP is now estimated to be at the same level as its pre-coronavirus levels, in February 2020.

It said: “There has been a continued slowing in the underlying three-month on three-month growth,” where GDP also fell by 0.3% in the three months to August compared with the three months to May.

Overall production, which comprises utilities, mining and manufacturing, was down 1.8% after a 1.1% fall in July, with manufacturing the main driver, declining by 1.6%.

The service industries slipped by 0.1% after growth of 0.3% in July because of declines in human health, with a drop in the number of hospital appointments and operations, as well as social work, arts, entertainment and recreation, partly due to fewer sports events. Output in consumer-facing services fell by 1.8%, with retail particularly weak, as the cost of living squeeze took its toll on households. Construction grew by 0.4%.

The chancellor, Kwasi Kwarteng, said:

Countries around the world are facing challenges right now, particularly as a result of high energy prices driven by Putin’s barbaric action in Ukraine.

That is why this government acted quickly to put in place a comprehensive plan to protect families and businesses from soaring energy bills this winter.

Our growth plan will address the challenges that we face with ambitious supply-side reforms and tax cuts, which will grow our economy, create more well-paid skilled jobs and in turn raise living standards for everyone.

Renewable power companies will have their revenues capped in England and Wales, after the government bowed to pressure to clamp down on runaway profits.

The announcement late on Tuesday night provoked immediate accusations that Downing Street had performed “another screeching U-turn” – having previously rejected calls to impose a windfall tax on power giants.

David Bharier, head of research at the British Chambers of Commerce, said:

The 0.3% fall in monthly GDP for August 2022 is a warning sign that the economy was already stalling before the market turmoil of recent weeks.

Our research indicates that business confidence is falling at an alarming rate. Volatility in the currency and bond markets following recent government announcements will have only exacerbated this.

Financial markets continue to be shaky. Asian stocks hit two-year lows, as China has no immediate plans to ease its strict Covid curbs, while the dollar rallied, and wobbles in the UK bond market and pound dragged down investor confidence.

European markets fell for the fifth day in a row yesterday, amid concerns over the global economy as the IMF warned about the outlook, as well as warning that the “worst is yet to come”.

The Agenda

  • 1.30pm BST: US producer prices for September

  • 2.30pm BST: European Central Bank president Christine Lagarde speaks

  • 7pm BST: US Federal Reserve minutes of last meeting


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