US economy shrank unexpectedly for first time since 2020 – business live

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Rolling coverage of the latest economic and financial news.

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European market close

Stocks in Europe have ended the day higher, despite the suprise fall in US economic growth last quarter.

In London, the FTSE 100 closed 84 points higher at 7,509, up 1.1%, led by Standard Chartered (+14%), Aveva (+6.75%) and Whitbread (+4.3%).

Germany’s DAX (+1.35%) and France’s CAC (+1%) also gained.

David Madden, market analyst at Equiti Capital, says the announcement the US economy contracted at an annual rate of 1.4% in the first quarter of this year was a big surprise.

It is worth remembering the economy expanded by 6.9% in the final quarter of last year, so it is a major deceleration.

Two consecutive quarters of negative growth defines a technical recession. Keep in mind, the Russian invasion happened more than halfway through the first quarter, so if the first three months saw a negative reading, it does not bode well for the second quarter. Despite the pull back, the US dollar is still up 0.5% on the day, which speaks volumes about the strength of the currency. In light of the -1.4% growth report, the Fed might look to rein in its hawkish commentary because negative growth and higher borrowing costs is not a good combination.

 

The unexpected drop in US GDP in 2022 Q1 is not that unexpected given the uncertainty gripping the US, argues Professor Costas Milas of University of Liverpool.

Prof Milas has plotted the U.S. output gap (output relative to potential in the U.S) along with a measure of ‘aggregate uncertainty’ in the US.

That measure covers financial, economic, epidemiological and geopolitical uncertainty, which have all risen recently:

© Provided by The Guardian A chart of US economic output gap vs uncertainty Photograph: Professor Costas Milas

He explains:

Their correlation is astonishingly high and equal to -0.62 which suggests a very damaging impact of rising uncertainty on the U.S. economy.

The figure draws from my recent piece for LSE Blog Politics where I argue that rising uncertainty is a very reliable predictor of U.S. and U.K. output. In other words, once uncertainty is taken into consideration by the Fed and the Bank of England (as early as next week), sharp and rapid rises in interest rates are far from certain.

Pound hits 21-month low as US dollar hits two-decade high

In the currency markets, the US dollar has climbed to its highest level in two decades.

The dollar index hit a 20-year high against a basket of currencies today. It extended its recent surge as rival currencies falter, and traders anticipate sharp increases in US interestg rates this year.

The yen weakened to a new 20-year low after the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds, to keep government bond yields low.

The euro has also weakened, on concerns over the eurozone economy if gas supplies from Russia are cut off.

The pound has also dropped again, hit by concerns over the UK’s economic health.

It has lost another cent to hit a new 21-month low to $1.245, with traders concerned that the British economy is being hit by weak consumer confidence, a cost of living crisis, rising input costs and supply chain disruption.

Biden blames technical factors for GDP decline

© Provided by The Guardian The south facade of the White House in Washington DC.

US president Joe Biden has blamed ‘technical factors’ for the drop in GDP in the first quarter of the year.

In a statement, Biden points out there were bright points in the growth report, such as rising consumer consuption:

The American economy — powered by working families — continues to be resilient in the face of historic challenges. Last quarter, consumer spending, business investment, and residential investment increased at strong rates. The number of Americans on unemployment insurance remains at the lowest level since 1970.

Later this morning, I will meet with small business owners who are creating and growing their businesses at a historic rate.

While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength.

Biden also urges Congress should agree a bipartisan innovation bill to bolster US supply chains and make more in America. More here.

Those ‘technical factors’ would include the drop in business inventories, which knocked GDP lower.

But growth was also pulled down by the slump in net trade, as America’s imports jumped as exports fell (as explained earlier).

 

The number of Americans filing new claims for unemployment support remains low, in a sign that the jobs market remains solid.

There were 180,000 ‘initial claims’ filed last week, down from 185,000 the previous week, data today shows.

Initial claims reflect whether more people are being laid off. After surging over 6 million in April 2020, claims have fallen back as the economy reopened.

With firms struggling to hire staff, claims fell to 166k earlier this month, the lowest in over 50 years.

 

The US GDP report captures many of the cross currents in the world’s largest economy, says Matt Peron, director of research at Janus Henderson Investors:

While consumer spend, probably the most important piece, powered ahead at +2.7%, even that had some underlying pockets of softness, especially in hard goods. Inventories and trade brought down the overall number, and inflation was hot.

Taken together this will likely not assuage fears that the economic picture is cloudy, with significant risks, and cracks already evident.”

 

KPMG US senior economist Ken Kim also argues that the US economy is in better shape than the headline GDP figure suggests.

Kim says there’s a “low likelihood of a recession this year”:

Two swing factors, inventories and trade, pulled GDP lower. Excluding these two measures, a core version of GDP growth, referred to as “final sales to domestic purchasers,” showed a solid increase of 2.7% in Q1 2022.

The best way to interpret today’s GDP data is to combine this quarter and last quarter’s growth rates. In Q4 2021, real GDP growth clocked in at a super-charged rate of 6.9%. The average for the two quarters works out to 2.8%, still a respectable rate of economic growth.”

 

A surge in US defense spending this year will help keep the economy out of recession, predicts Charles Hepworth, investment director at GAM Investments:

Here’s his take on the 1.4% drop in US GDP in the last quarter (on an annualised basis)

“Consumer spending was marginally weaker-than-expected, no doubt with some price pressures affecting behaviour, but the big hit came through in the overall trade inputs with net imports dragging growth into the red for the quarter. This print is confusing, as on the surface you would be forgiven for thinking all is not well economically speaking.

“Take out the trade deficit and the picture is less alarming. This is what the Fed will be focused on when they raise rates again in less than a week. There is little doubt that the next quarter’s numbers will be firmly back in the positive, due to a massive ramp up in government spending in defence.

Nothing to see here that alters the Fed trajectory, as they will be looking past the wood for the trees and this data release does nothing to change that.”

Full story: US economy saw ‘unexpectedly severe’ drop in first three months of year

14:52 Dominic Rushe

The US economy shrank in the first three months of the year, contracting by -0.4% in the first quarter, or -1.4% on an annualized basis, its weakest quarter since the early days of the pandemic.

Economic growth slowed markedly at the start of the year. In the last three months of 2021 US gross domestic product (GDP) – a broad measure of the economy – grew by 1.7% or 6.9% on an annualized basis.

The Commerce Department said the slowdown was caused by a drop in private inventory investment, exports, federal government spending, and state and local government spending.

Consumer spending, the largest component of the US economy, grew 0.7% in the first quarter despite the impact of the Omicron wave of the coronavirus.

Here’s the full story:

Related: US economy saw ‘unexpectedly severe’ drop in first three months of year

US economy shrinks for first time since 2020

The US economy shrank unexpectedly in the first quarter of this year, for the first time since early in the Covid-19 pandemic.

US GDP fell by around 0.35% in January-March, new data shows, or at an annualised rate of 1.4%.

Surging inflation, the Omicron variant, and supply chain problems all dragged on growth.

Economists had expected the US economy to keep growing, at an annualised rate of 1.1%, after strong growth of 6.9% in the last quarter of 2021.

This is the first contraction since the second quarter of 2020, when the pandemic hit.

It suggests America’s economy is at greater risk of a downturn, as inflation soars and the Ukraine war hits the global economy.

The drop was partly due to a fall in business inventories, as companies ran down their stocks.

Net trade also weakened sharply, with annualised exports down 5.9% and imports jumping 17.7% (which will subtract from GDP).

Consumer spending and business investment continued to rise.

Richard Flynn, Managing Director at Charles Schwab UK, says the figures are likely to cause concern.

The US economy accelerated incredibly sharply as we exited the acute phase of the pandemic and this pace of growth continued until late last year. Whilst the healthy labour and housing market are positive indicators, today’s figures confirm there is now no shortage of headwinds facing the US economy, including the consequences of the Russian invasion of Ukraine, persistently high inflation, and tightening monetary policy.

“Consumer confidence is low. We’re in a period of counter-cyclical inflation – when high prices put downward pressure on demand and growth. The Fed’s eye is on inflation as it tightens monetary policy in a bid to slow aggregate demand and cool price rises.

With high inflation and low growth expectations, it may be difficult for the Fed to raise rates without slowing growth. Economic data has been generally weakening recently, which is likely to persist, increasing the probability of a downturn.”

 

Paul Ashworth of Capital Economics predicts America’s central bank, the Federal Reserve, will not be deterred from lifting US interest rates sharply next week:

The unexpectedly severe 1.4% annualised decline in first-quarter GDP growth probably won’t stop the Fed from hiking interest rates by 50bp next week, since officials will chalk it up to the temporary impact of Omicron and point to the strength of underlying demand – with the growth rate of sales to private domestic purchasers accelerating to a very healthy 3.7%.

Net export subtracted a massive 3.2% points from overall GDP growth, with inventories subtracting an additional 0.8% points. Exports fell by 5.9% annualised while, as shipping congestion eased, imports increased by 17.7%. The negative contribution from inventories was inevitable after stock building added 5.3% points to fourth-quarter GDP growth, which was as strong as 6.9%.

The other source of weakness in the first quarter was the public sector, as fiscal support was withdrawn, with government expenditure falling by 2.7%.

Economists: US recovery holding up despite Q1 slide

The US economy is now technically on the brink of recession (two negative quarters in a row), after shrinking in the January-March quarter, but economists are suggesting this isn’t likely.

Robert Frick, corporate economist at Navy Federal Credit Union, argues that the recovery is still on track, once you recognised that weak trade and softer business inventories pushed GDP down in Q1.

“GDP contracted in the first quarter by 1.4%, which is a scary drop from 6.9% growth in the fourth quarter of last year, but not scary when you look at the underlying numbers in two categories—trade and inventories. In the other two categories that count most, business and consumer spending, first quarter GDP did well, and clearly those categories are accelerating now into the second quarter.

Also, while GDP is an imperfect short-term measure of economic health, better measures such as employment and consumer spending indicate the expansion is steady and on track.”

Other economists also insists the US isn’t about to drop into recession, as CNBC explains:

“This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“Net trade has been hammered by a surge in imports, especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory.

This cannot persist much longer, and imports in due course will drop outright, and net trade will boost GDP growth in Q2 and/or Q3.”

Here’s more reaction:

 

Economists are pointing out that US consumer spending and business investment remained strong in the last quarter, despite the economy shrinking.

Instead, it was the drop in inventories, along with falling exports and lower government spending, that pulled GDP down, the Bureau of Economic Analysis data shows:

 

Veterinary groups have criticised the decision to delay checks at the UK border on imports of EU animal and agrifood products.

They fear this latest suspension could threaten health, because sanitary and phytosanitary checks would continue to take place away from the border at ‘places of destination’, potentially giving pests and diseases more opportunity to enter the UK.

Port operators are also concerned that the money they’ve spent on infrastructure for Bexit checks could have been wasted.

The FT has the details:

James Russell, senior vice-president, of the British Veterinary Association, said the government’s move “flies in the face” of ministers’ commitment to preserving high levels of animal and human health in the UK at a time when diseases such as African swine fever had already had a catastrophic impact in parts of Europe.

“We urge the government to abandon these plans and close off the threat of causing significant damage to our food and farming industries,” he said.

Tim Morris, chief executive of the UK Major Ports Group, said port operators feared the facilities they had built “will be highly bespoke white elephants”. “Government needs to engage urgently with ports to agree how the substantial investments made in good faith can be recovered,” he said. “We will of course be working closely with the government on its new vision of a slimmer and smaller regime of border checks.”

 

There would have been ‘devastating’ disruption to food shipments to the UK if EU import controls hadn’t been delayed again, says Shane Brennan, chief executive of the Cold Chain Federation (which represents firms in the UK’s temperature-controlled supply chain).

That highlights how the UK still wasn’t ready to handle the impact of Brexit at the border, leading to today’s delay.

UK delays post-Brexit food checks on EU imports until end of 2023

As predicted earlier, the UK has — again — dropped plans to impose further checks on goods entering the UK from the European Union.

The change means restrictions on the imports of chilled meats from the EU and border checks on plant and animal products will not be introduced in July.

Instead, Brexit opportunities minister Jacob ReesMogg said a “new regime of border import controls” will be established by the end of 2023.

Taking the opportunity to kick import controls further into the future, Rees-Mogg has said it would be “wrong to impose new administrative burdens and risk disruption at ports” when costs are already rising due to the energy price shock and the Ukraine war.

Instead, the Government is accelerating its transformative programme to digitise Britain’s border, he explains. But in the meantime, goods from the EU will continue to arrive in the UK with minimal checks.

Rees-Mogg told MPs in a statement:

No further import controls on EU goods will be introduced this year. Businesses can stop their preparations for July now. We will publish a Target Operating Model in the Autumn that will set out our new regime of border import controls and will target the end of 2023.

The move, he says, would save British businesses up to £1bn in annual costs when importing goods.

Federation of Small Businesses national chair Martin McTague has welcomed the latest delay:

“Imposition of full import controls this summer would have meant yet another burden for small firms which are already wrestling with new trade rules and spiralling operating costs.

However, the EU introduced full customs controls back in 1 January 2021, meaning UK exporters have faced extra red tape and trade frictions for 16 months now. EU firms will continue to sell goods into Britain without those rules.

Here are the changes that now won’t start in July:

  • A requirement for further Sanitary and Phytosanitary (SPS) checks on EU imports currently at destination to be moved to Border Control Post (BCP).
  • A requirement for safety and security declarations on EU imports.
  • A requirement for further health certification and SPS checks for EU imports.
  • Prohibitions and restrictions on the import of chilled meats from the EU.

And here’s the BBC’s Faisal Islam:

 

12:50 Jasper Jolly
© Provided by The Guardian The logo of the Russian energy company Gazprom is seen on а station in Sofia. Photograph: Spasiyana Sergieva/Reuters

Energy companies in Europe are considering opening Russian accounts to pay for gas from Gazprom after Vladimir Putin’s regime cut off supplies to Poland and Bulgaria and insisted other countries must pay in roubles.

Big gas distributors in Germany and Austria confirmed they were seeking ways to continue to make payments after Putin signed a decree at the end of March calling for a “special procedure for foreign buyers’ fulfilment of obligations to Russian suppliers of natural gas”.

The decree stipulates that non-Russian buyers of gas must open special “K” type rouble and foreign currency accounts at Gazprombank, the third-largest bank in Russia.

Gazprombank was set up to be a service provider to Gazprom, the state-owned gas producer that has a monopoly on exports via gas pipelines to Europe.

The German distributor Uniper and Austria’s OMV confirmed they were considering how to comply with the decree.

A spokesperson for Uniper, one of Germany’s main buyers of gas from Russia, on Thursday confirmed it was in talks with Gazprom “in close coordination with the German government” over “concrete payment modalities”, but that it would continue to pay in euros for now.

“Uniper can say for its contracts: we consider a payment conversion compliant with sanctions law and the Russian decree to be possible.

For our company and for Germany as a whole, it is not possible to do without Russian gas in the short term; this would have dramatic consequences for our economy.”

The Financial Times reported that companies in Hungary and Slovakia, as well as Italy’s Eni, were also considering signing up for the accounts in the hope of securing continued supplies, despite the European Commission saying that doing so could breach sanctions.

Here’s the full story:

Related: European energy firms seek ways to comply with Putin gas payment decree

Reuters has heard that some European traders have started to pay Russia for gas sales in roubles, while large clients have yet to do so.

“Several traders, maybe more than five, have startedpayments,” one source said on condition of anonymity because they were not authorised to speak to the media.

 

The cost of living crisis, on top of the pandemic, drove company insolvencies in England and Wales to a 10-year high in the last quarter.

Christina Fitzgerald, President of insolvency and restructuring trade body R3, explains that many firms are choosing to fold:

“This has been the busiest quarter for corporate insolvencies since 2012 as firms who have struggled with the economic consequences of the pandemic are now having to deal with the sharp rise in inflation. These statistics provide further proof that while the Government’s Covid support measures prevented an initial sharp rise in corporate insolvencies, the economic damage caused by the pandemic couldn’t be mitigated away forever.

“The main cause of the increase in corporate insolvencies this quarter is an increase in Creditors Voluntary Liquidations (CVLs), which are now at a level not seen for more than 60 years. It seems more and more directors feel they can’t carry on trading and are choosing to close their business’s doors before they are forced to.

Fitzgerald adds that companies face a critical time:

“The figures published today reflect the tough climate businesses have been operating in over the last quarter. At a point where many businesses needed a return to normality, rising fuel and energy costs have put them under additional strain, and the effects of the increased cost of living has prevented the spending boom many were hoping for from happening.

“Although the economy has largely returned to pre-Covid levels in many respects, and consumer spending has increased, rising inflation and stagnant wage growth have left many people unwilling and unable to spend money on anything other than the basics.

“Businesses have also faced the end of the final set of Covid measures and creditors can once again issue winding-up petitions against companies for debts of £750 or more (with the exception of landlords with Covid rent arrears).

 

Personal insolvencies have also jumped this year, to a three-year high, as the cost of living crisis leaves people unable to repay their loans.

There were 32,305 individual insolvencies in England and Wales in January-March, which is a 17% jump on the previous quarter.

© Provided by The Guardian Individual insolvencies in England and Wales Photograph: HMRC

It shows that household finances have been under rising pressure this year, as inflation rose to 30-year highs.

Joe Cox, Senior Policy Officer at Jubilee Debt Campaign, says the UK faces a debt crisis.

“The clear and alarming upward trend in personal insolvencies shows that a debt crisis is overwhelming UK’s households.

The government needs to stop burying its head in the sand and take urgent action by writing-down large amounts of problem debt to give millions weighed down by arrears a chance to reset their finances and rebuild their lives.”

Insolvencies at 10-year high as firms feel squeeze

Company insolvencies in England and Wales have more than doubled so far this year to the highest level in a decade.

Surging costs and the withdrawal of some Covid-19 support packages have left firms struggling to keep afloat.

There were 4,896 company insolvencies across England and Wales in January-March, the Insolvency Service reports, which is 112% higher than in Q1 2021, and the highest recorded since 2012.

It was driven by a record number of creditors’ voluntary liquidations, in which directors voluntarily put their business into liquidation in order to pay its debts.

There were 4,274 CVLs in Q1, the highest quarterly level since the start of the series in 1960.

© Provided by The Guardian Insolvencies in England and Wales Photograph: HMRC

This is the first full quarter since the UK’s furlough scheme ended on 30 September 2021, while other schemes are being phased out.

Hospitality firms also missed out on Christmas trading due to the Omicron variant, which would normally tide them through the January lull.

Plus, companies across the economy are hit by increased commodity and energy prices, supply chain disruption, and a tightening cost of living squeeze.

Samantha Keen, UK Turnaround and Restructuring Strategy Partner at EY-Parthenon, warns that many firms are seeing their margins being squeezed.

“Looking ahead, it’s likely we’ll see further waves of insolvencies among larger businesses as the impact of rising costs affects their bottom line.

Businesses in sectors most affected by fluctuations in cost and supply chain pressures and changes in business confidence, such as retail, food producers, and high energy users – such as chemical and paper manufacturers – are likely to be most vulnerable.

Nigel Fox, director in the restructuring and recovery services team at Tilney Smith & Williamson, warns that companies could also face an economic downturn.

Now that the government’s measures to support businesses have ended, it is more important than ever for directors to regularly review their company’s finances and prepare projections to ensure that they know where their business is likely to be heading so that they can take any corrective action that is needed before it is too late. For any directors who are worried about the financial position of their business, we recommend seeking professional advice as early as possible. The earlier that advice is sought then the greater number of options there will be for the business.

The importance of directors paying close attention to the health of their business has become critical as a result of a number of factors. Inflation in the UK has now risen to 7%, the highest rate it has been for 30 years. In addition the rising price of energy for businesses, for which there is no cap, leaves them very exposed. Climate change, whether directly or indirectly, also threatens almost all industries. Whether these and other factors will result in the UK falling into recession later this year is unclear, but the slender growth of UK GDP by just 0.1% in February – below expectations – means that this cannot be ruled out.

 

The cost of repaying government support is also pushing some businesses to insolvency.

Svend Pearce, founder of the Watford-based small business accountant and bookkeeper, Bficient, says:

“While it’s pleasing the pandemic appears to be under control, the debt accumulated by many companies to stay afloat is substantial.

Much of the assistance came in the form of cheap loans with a grace period to commence repayment after 12 months. It’s sadly now payback time and the pain many businesses are now experiencing is real. Bounce Back and CBILS loan repayments are proving a significant drain on companies’ working capital.

Restructuring any business is equally not without cash drains and so many directors will conclude that the battle is simply too great, future prospects too bleak and that further loans would simply be pouring fuel onto the fire.

Related: ‘Challenge’ for banks that used taxpayer cash to cover fraudulent Covid loan losses

Brexit will keep UK inflation elevated, says Posen

Brexit is also a key factor keeping inflation high, according to Adam Posen, a former Bank of England policy maker.

Posen warned yesterday that the impact of leaving the EU was a key factor why inflation is expected to remain high for longer in the UK.

The ex-MPC member also said he’d vote for a half-point interest rate increase to curb an upward surge in prices.

Bloomberg has the details:

The economist who heads the Peterson Institute for International Economics in Washington, a prominent research group, said that 80% of the reason why the International Monetary Fund expects Britain’s inflation to remain elevated for longer than its Group of Seven peers is the impact of its departure from the European Union on immigration.

“We see a very large gap between the inflation rate in the U.S. and the inflation rate in Europe — the U.K. ends up in between,” Posen said at a conference hosted by the U.K. in a Changing Europe research group.

“You’ve seen a huge drop in migrant labor. When you look at the macro factors, it’s very difficult to see anything other than the labor market issues.

It really seems like Brexit has to bear a disproportionate role in explaining the inflation.”

UK firms have been warning of labour shortages for many months, with vacancies soaring over the one-million mark to record highs.

Inflation is, though, a global problem, with energy bills and supply chain problems driving it to 40-year highs in the US.

The UK government is set to announce a fourth delay to physical checks on fresh food imported from the European Union later today, having continually struggled to get the necessary technology or infrastructure ready since leaving the EU.

My colleague Lisa O’Carroll explains:

The Brexit opportunities minister, Jacob Rees-Mogg, is expected to frame the move as use of the UK’s newfound independent powers to control the trade border since the departure from the EU and the single market.

He is also expected to say it is a response to supply chain fears in a trading environment already hit by the Ukraine war and cost of living crisis.

Related: Rees-Mogg set to delay post-Brexit fresh food checks for fourth time

 

More work is needed to protect the financial system from shocks such as the Ukraine war and the Covid-19 pandemic, a senior Bank of England official warns.

Sarah Breeden, the BoE’s executive director for financial stability strategy, says these recent shocks have shown that the system remains vulnerable to panics.

She cites the ‘dash for cash’ in March 2020 which hit government bond markets and drove up the cost of borrowing, and the links between energy and commodity markets and the real economy, shown clearly by the Ukraine war.

In a speech at Lancaster University this morning, Breeden says:

Let me briefly mention a few of the lessons from our experience in Covid-19.

First the capital framework does not in practice support use of bank capital buffers in a stress as we intended. And that would have mattered a lot in the absence of the substantial government support for the corporate sector. Second, we need to change our approach to stress testing in a stress if we are to avoid those stress tests further amplifying any downturn. And third, in a shock of roughly half the size of the global financial crisis, it was only large-scale use of central bank balance sheets that calmed dysfunction in the system of market-based finance.

We are continuing to learn through the Russia-Ukraine crisis too. We are exploring concentrations in, and interconnections across, energy and other commodity markets, the financial system, and the real economy, as well as the potential for feedback loops between them. And we have observed too that commodity markets are relatively opaque.

We must now develop the macro-prudential framework to reflect the lessons from these recent stresses.

Here’s the full speech.

Introduction: Unilever, Sainsbury and Whitbread warn price pressures rising

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

A flurry of UK companies are warning today that inflation pressures are rising, intensifying the cost of living squeeze on consumers.

Consumer goods giant Unilever, whose brands include makes Marmite, Dove soap and Ben & Jerry’s ice cream, has reported that input costs have “further accelerated” through the first three months of the year.

It plans to pass these costs onto consumers – having already raised prices by over 8% year-on-year in the last quarter.

With the Ukraine war driving up raw material inflation, Unilever now expects its costs in the second half of this year to rise by €2.7bn. That’s up from a forecast of €1.5bn three months ago, and on top of input cost inflation of around €2.1bn in the first half.

Unilever says:

This period of unprecedented inflation requires us to take further pricing action with some impact on volume as a result.

CEO Alan Jope explains the company is navigating ‘unprecedented cost inflation’, adding:

Underlying sales growth of 7.3% was driven by strong pricing, with a limited impact on volume in the quarter.

This performance was delivered against the backdrop of significant rises in input costs that have further accelerated through the first three months of the year, and the human tragedy of the war in Ukraine.

While prices soared 8.3%, sales volumes were down 1% — suggesting consumers may have sought out cheaper options as inflation hit household budgets.

Unilever now expects full-year underlying sales growth to be towards the top end of its 4.5-6.5% guidance range, but the full-year underlying operating profit margin could be the bottom end of its 16-17% range.

Supermarket chain Sainsbury’s is also seeing the impact of rising costs, with the Ukraine war having driven up energy costs, and a wide-range of agricultural products including cooking oil and wheat.

It told shareholders this morning:

The year ahead will be impacted by significant external pressures and uncertainties.

Sainsbury’s warned shareholders that profits this year will be hit by soaring inflation and a fall in customers’ disposable incomes.

It now expects underlying profit before tax to fall to between £630m and £690m, from the £730m underlying profit in the last 12 months.

Sainsbury’s CEO Simon Roberts says it’s been a year of unprecedented change:

“The dreadful situation in Ukraine continues to have a profound impact. We’re doing everything we can to help with the humanitarian effort, and are working to manage the supply chain impacts.

“We have a clear long term focus on keeping prices low and we remain committed to helping everyone eat better, whatever the external environment may bring.”

Cost pressures in the hospitality sector are rising too. Whitbread, which runs the Premier Inns hotel chain, has warned that cost inflation this financial year is now expected to hit around 8%-9%, which is 1% higher than previously guided.

Whitbread says it will use its ‘pricing power’ to offset these higher costs, along with cost efficiencies, and growing its estate.

The firm has also returned to profit last year, with a pre-tax profit of £58.2m – compared with a loss of around £1bn – due to the easing of Covid-19 restrictions.

The agenda

  • 10am BST: Eurozone consumer and economic confidence report
  • 10.30am BST: Sarah Breedon, Bank of England’s executive director of Financial Stability Strategy, gives a speech at Lancaster University
  • 1pm BST: German inflation data for April.
  • 1.30pm BST: US first-quarter GDP report
  • 1.30pm BST: US weekly jobless claims

Unilever warns of more price rises

Unilever has confirmed that more price rises are coming, as it is hit by ‘extreme’ increases in raw material costs.

That would be on top of the 8% rise in prices in the first quarter of the year, as cost pressures began to mount.

Reuters has the details:

“As far as pricing and volumes, I think we are in unchartered territory,” Chief Executive Alan Jope said on an earnings call.

“While we’re acutely aware of the pressure on consumers, we believe that increasing prices in response to this extreme commodity cost pressure is the right thing to do.”

Analysts said prices were only going to go higher.

Unilever’s full-year costs “are going to quadruple versus a year ago. That’s why the pricing needs to be so high, and that’s why the price is going to go much higher,” Barclays’ Warren Ackerman said. “This is not the peak.”

“The worry is what will happen to volumes when pricing goes up more?”

In the first quarter, Unilever hiked prices the most in Latin America – by 16.4% – and in other emerging markets.

Related: Unprecedented inflation ahead as Russia-Ukraine war adds to costs, says Unilever

As flagged in the introduction, Unilever now expects its input cost inflation would reach €2.7bn in July-December, a jump of €1.2bn on its previous forecast.

The increase in oil, grain, other agricultural costs, and fertiliser following the invasion of Ukraine is hitting many consumer goods makers. Unilever, whose brands also include Knoor stock cubes, Hellmann’s mayonnaise and Magnum icecreams, is clearly exposed.

And while it raised prices by over 8% in the first quarter of the year, sales grew 7.3% after volumes fell 1% as some customers shifted to cheaper, own-brand options.

 

10:05 Helen Davidson

In China, authorities have said they are cracking down on price gouging as food shortages due to Shanghai’s lockdown continue and fears in Beijing prompt a run on supermarkets.

It comes as social media platforms shut down the account of a high-profile critic of the government’s insistence on a traditional Chinese medicine product being rolled out to millions of residents.

On Wednesday, the Ministry of Public Security pledged any individuals taking advantage of outbreaks to make a profit would be dealt with strictly, with fines of up to 3m yuan (£363,400).

In Shanghai, one man faced administrative punishment for “fabricating and disseminating price increase information and disrupting market price orders”. The man was accused of buying produce and reselling it online at prices increased by up to 360%. Another was accused of renting someone else’s business licence and selling produce and food online at inflated prices, making $230,000 (£180,000) in profit. Last month, Shanghai’s market supervision authorities said they had already issued about 20,000 warning letters over price gouging.

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Related: China cracks down on price gouging amid food shortages

 

Sweden’s surprise rate hike could be a sign that the European Central Bank will lift its own interest rates from current record lows soon, experts say:

Ima Sammani, senior FX analyst at Monex Europe, says the inflation outlook has worsened in Sweden (as in the UK!):

Today marks a crucial day in Riksbank history as the central bank, which only moved out of negative interest rate territory in December 2019, embarked on its first interest rate hike since the pandemic.

While timing the first rate hike in this environment has been a challenge for all central banks in the DM space, it has been all the more difficult for the Riksbank given their recent failed experiment of negative rates; the last thing the central bank wants to do is hike rates too early and risk having to enter negative territory again.

However, with inflation having soared over the last months and several Riksbank policy makers including Governor Ingves having voiced concerns around the inflation outlook and accommodative policy, expectations for today’s meeting were elevated.

 

Sweden’s central bank has unexpectedly raised interest rates, in another sign that policymakers are concerned about global inflation pressures.

The Riksbank has hiked its benchmark borrowing rate from zero to 0.25%, and signalled that it could raise rates two or three more times this year.

It says it acted to prevent high inflation from becoming entrenched in price and wage-setting, after it hit 6.1% the highest level since the 1990s.

The rise in inflation last year was largely due to rapid increases in energy prices. But since the turn of the year, inflation excluding energy has also risen rapidly and has been significantly higher than the Riksbank’s forecast in February.

The outcomes indicate that the upturn is now broad and prices of goods and food as well as services are rising unusually quickly.

 

Price hikes on everything from detergent to food is hitting consumers hard and Unilever is expecting things to get worse as the year progresses, explains Laura Hoy, Equity Analyst at Hargreaves Lansdown:

Here’s her take on this morning’s results:

The group’s already raised prices more than 8% to the detriment of volumes, but more hikes are on the agenda as inflation continues to bite. It seems we’re willing to pay more for the things we missed in lockdown, like going out for ice cream, but beyond that Unilever’s seen consumers pull back as their wallets are squeezed.

This is expected to put a damper on margins moving forward as the group tries to find a balance between covering rising input costs and keeping customers from abandoning branded products altogether. Consumers are becoming increasingly comfortable with private label brands, and generic replacements are going to start looking a lot more acceptable as the pressure on household budgets continues to build. That’s bad news for companies like Unilever, that rely on familiarity and consumer trust in order to charge a premium for their products.

For now it seems the trade-off between volume and price is working, but that won’t last forever. Plus, this opens the door for private labels and own-brands to pinch long-term consumers. If they’re happy with their swap, they may never return even if they can afford to.”

 

European stock markets have rallied in early trading, as better-than-expected results from Facebook owner Meta reassure investors.

In London, the FTSE 100 has jumped by 60 points, or 0.8%, to 7485 as it continues to recover from Monday’s slump when fears over the global economy hit stocks.

Banking group Standard Chartered are the top Footsie riser, up 12% after beating forecasts with a 6% increase in pre-tax profits.

Across Europe, Germany’s DAX and France’s CAC are both 1.8% higher.

Meta’s shares are up 18% in pre-market trading, even though it missed revenue forecast last night, after it reversed its fall in daily active users.

Related: Meta shares soar despite a decidedly mixed quarter report

Victoria Scholar, head of investment at interactive investor says,

“European markets have opened in the green, with positive momentum carrying forward from the overnight session in Asia. Corporate reports are driving price action with a slew of earnings in the US and Europe.

The FTSE 100 is pushing higher, inching closer towards resistance at 7,500 lifted by shares in Standard Chartered which are trading up double digits. However some of this positivity is being offset by disappointing results from Sainsburys which is languishing at the bottom of the UK index.

And on Meta:

Once the darling of the tech sector, Meta has fallen out of favour among investors, spooked by rising inflation and interest rates as well as its disappointing quarterly scorecard in February. Even after February’s sharp gap lower, price action continued to see the stock push lower.

Barclays: customers facing ‘far harder conditions’

Banking group Barclays has warned that the cost of living crisis is hitting its customers.

Reporting its latest financial results, chief executive C. S. Venkatakrishnan told shareholders that inflation, supply chain issues and higher energy costs are hitting people and companies:

We remain focused on the impact higher prices are having on our customers and our small business and corporate clients, all of whom are facing far harder conditions this year as a result of inflation, supply chain issues and higher energy costs. We will support them through this difficult period wherever we can, and support the wider economy just as we did through the COVID-19 pandemic.

But revenue rose 10% to £6.5bn, beating forecasts, as Barclays’ investment banking arm benefited from volatile markets amid the war in Ukraine.

Our income growth was driven partly by Global Markets, which has been helping clients navigate ongoing market volatility caused by geopolitical and economic challenges including the devastating war in Ukraine, and by the impact of higher interest rates in the US and UK.

Barclays reported that pretax profits dropped to £2.2bn in the first three months of the year, down from £2.4bn a year ago.

That included £500m of ‘litigation and conduct costs’, including £320m set aside over a blunder in which it issued about $15bn more structured notes and exchange traded notes than it had registered for sale.

The FT’s banking editor Stephen Morris it was a ‘messy quarter’:

Barclays has now put its share buyback plans on hold as US regulators probe the blunder.

“Barclays remains committed to the share buyback programme and the intention would be to launch it as soon as practicable following resolution of filing requirements being reached with the SEC.”

Sainsbury’s shares slide as inflation hits profit forecast

Shares in Sainsbury’s have dropped over 5% at the start of trading in London, after it warned that profits will fall this year due to soaring inflation.

Supermarket chains are locked in a fight to hold onto customers as prices jump. Earlier this week, Asda committed £73m to cut or freeze prices on 100 products, while Morrisons says it will cut prices on 500 products.

Related: Asda and Morrisons cut prices as supermarkets fight for customers

Sainsbury’s says it is raising prices less sharply than rivals on some popular products, such as milk, eggs, bread, fish and meat.

CEO Simon Roberts says:

We have been able to drive more investment into lowering food prices funded by our comprehensive cost savings plans.

As a result, we continue to inflate behind competitors on the products customers buy most often. Last week we announced the next bold phase of investment, lowering prices across 150 of our highest volume fresh products.