Introduction: IMF forecasts UK recession this year
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
Growth, or the lack of it, is the main issue today after the International Monetary Fund released its latest economic forecasts overnight … and as we await eurozone GDP figures this morning.
The IMF’s message for Britain was grim – the UK is the only advanced economy expected to fall into recession this year.
UK GDP is forecast to shrink by 0.6% this year, the worst forecast for any G7 country this year, which is a 0.9 percentage point downward revision from October’s forecasts.
The IMF blamed the downgrade on tighter government spending policies and higher interest rates (which may be raised again on Thursday), and the burden from still-high energy retail prices on household budgets.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, said 2023 would be “quite challenging” for the UK as it slipped from top to bottom of the G7 league table.
He added:
“There is a sharp correction.”
The move piles more pressure on UK chancellor Jeremy Hunt, who’s facing calls from business groups for a more ambitious growth strategy, and demands from some Conservative MPs for tax cuts.
This contraction would follow 4.1% growth in 2022, the IMF says, one of the fastest growth rates among advanced economies last year.
The broader economic picture has brightened a little, though, the IMF says, citing “signs of resilience and China reopening”.
The IMF has lifted its forecast for the world economy this year: global growth will slow from 3.4% in 2022 to 2.9% in 2023 – an upgrade on its previous forecast of 2.7%.
The IMF’s Gourinchas says China’s sudden reopening paves the way for a rapid rebound in activity.
Gourinchas writes:
The global economy is poised to slow this year, before rebounding next year. Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity.
Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining.
Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe. Inflation, too, showed improvement, with overall measures now decreasing in most countries – even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.
Also coming up….
We find out today how the French, Portuguese, Italian and the wider eurozone economy fared in the final quarter of last year.
Yesterday we learned that Germany’s GDP shrank unexpectedly in Q4, by 0.2%, putting Europe’s largest economy at risk of a winter recession.
The agenda
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6.30am GMT: French Q4 2022 GDP report
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8.55am GMT: German unemployment report for January
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9.30am GMT: Portugal’s Q4 2022 GDP report
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9.30am GMT: UK mortgage approvals and consumer credit data for December
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10am GMT: Italy’s Q4 2022 GDP report
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10am GMT: Eurozone Q4 2022 GDP report
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1.30pm GMT: Canadian December and Q4 2022 GDP report
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2pm GMT: US house price index
Key events
Closing post
Time for a recap.
The clouds covering the UK economy have darkened today, after mortgage approvals tumbled last month, company insolvencies jumped, and the IMF predicted Britain would be the only major industrialised country to see its economy shrink this year.
The Bank of England reported that mortgage approvals decreased to around 35,600 in December from 46,200 in November. Housing experts said higher interest rates and the cost of living squeeze had hit the housing market.
The number of companies falling into insolvency in England and Wales last year surged to its highest since 2009, according to figures from the Insolvency Service. Total company insolvencies registered in 2022 leapt by 57% to 22,109 from the previous year.
Uk households were hit by soaring price in supermarkets this month, with grocery inflation jumping to 16.7%.
2023 will be a rough year for the UK economy, according to the latest IMF forecasts which predict GDP will shrink by 0.6% this year, a downgrade of almost 1%.
The IMF revised up its forecast for global growth this year, though, to 2.9% from 2.7% before.
Labour shadow chancellor, Rachel Reeves, has told parliament that Britain has huge potential, but 13 years of Tory failure has been a “drag anchor on prosperity”.
She told MPs:
The UK is the only major economy forecast to shrink this year.
Weaker growth compared to our competitors for both of the next two years.
The World upgraded. The UK downgraded.
Growth even worse than sanctions-hit Russia.
Staff shortages, Brexit and mortgage costs are all holding the country back, experts say.
But there was better news from the eurozone – it avoided recession in the last quarter of 2022, with growth of 0.1%. France also managed modest growth in October-December.
Here’s the rest of today’s main stories:
Anna Isaac
Infosys, the company founded by Rishi Sunak’s father-in-law NR Narayana Murthy, is in a multimillion-pound dispute with the UK tax authorities.
HMRC and the Indian IT services firm, in which the prime minister’s wife, Akshata Murty, holds a stake of close to 1%, disagree over a corporation tax bill of about £20m, according to the company’s annual report.
The dispute, first revealed by the Times, is one of a clutch of tax issues the company has in a range of jurisdictions, including Australia.
Large tax disagreements that could affect a company’s operations or profits often have to be disclosed to shareholders and regulators. Infosys is publicly listed in India and New York.
US consumer confidence dips
Over in the US, consumer confidence has fallen as people grow more concerned about the economic outlook.
The Conference Board Consumer Confidence Index decreased in January, to 107.1, down from December’s upwardly revised 109 (where 100 was the average in 1985).
The Present Situation Index, which is based on consumers’ assessment of current business and labor market conditions. increased to 150.9 from 147.4 last month.
But the Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, fell to 77.8 from 83.4, which partially reverses December gain.
The Conference Board explains:
The Expectations Index is below 80 which often signals a recession within the next year. Both present situation and expectations indexes were revised up slightly in December.
Joanna Partridge
Tesco has bought the brand and intellectual property of Paperchase, after the struggling stationery retailer collapsed into administration.
However, the deal does not include Tesco taking on the brand’s 106 stores across the UK and Ireland, leaving the future uncertain for Paperchase’s 820 employees.
The deal follows a difficult few months for Paperchase after rising costs and disappointing sales.
“Paperchase is a well-loved brand by so many, and we’re proud to bring it to Tesco stores across the UK,” said Jan Marchant, the managing director of home and clothing at Tesco.
Freddy Khalastchi, business recovery partner at accountancy firm, Menzies, said:
“After bleak data released this morning showed that corporate insolvencies rose by 7 per cent last quarter, it’s not surprising to see another well-known retail chains collapse under economic pressures.
“Spiking energy costs, rising interest rates, inflation, staff shortages and reduced customer spending will have all contributed to Paperchase’s collapse, as the business failed to secure a buyout.
Mark Sweney
The value of Darktrace has plummeted to a record low after the emergence of two new short sellers betting against its business, as the British cybersecurity firm was hit by a new wave of criticism of its sales, marketing and accounting practices.
The company, which earlier this month warned of slowing numbers of new customers signing up for its artificial intelligence-led security products, has attracted the attention of Quintessential Capital Management (QCM) and the London-based Marshall Wace, one of the world’s biggest hedge funds with $60bn (£49bn) in client assets.
Darktrace has been dogged by criticism and struggled to emerge from the spectre of its controversial co-founder Mike Lynch, the British billionaire fighting extradition to the US over fraud charges relating to the $11bn sale of his software company Autonomy to Hewlett-Packard in 2011. Lynch denies all charges against him.
The US hedge fund QCM has backed up its short position, publishing on Tuesday a 69-page document criticising the management and operations of Darktrace.
The firm alleges that questionable and aggressive marketing, sales and accounting practices were employed by Darktrace to drive up the value of the company before its multibillion-pound flotation in London almost two years ago.
Here’s the full story:
Twitter makes first interest payment on Musk buyout debt
Twitter has made its first interest payment on the $12.5bn of debt that Elon Musk used to take the social media giant private last year, Bloomberg reported overnight.
The social media group paid a group of seven banks, led by Morgan Stanley, who are still holding the debt after not managing to sell it on to investors.
The first coupon was expected to cost Twitter roughly $300m, according to Bloomberg calculations and market participants not involved in the Twitter deal.
Appetite for this debt may have weakened after Musk fired half of Twitter’s staff, spooking advertisers and leading to a slump in revenue.
Musk has been busy pushing through changes at Twitter, including the Twitter Blue subscription service, which lets users pay for the “verified” badge.
Twitter co-founder Biz Stone told the Guardian earlier this month that Elon Musk “doesn’t seem like” the right person to own Twitter, and that positive changes at the company had been unwound.
The UK economy has been hit by a triple-whammy in recent days, Liberal Democrat Sarah Olney tells MPs.
She cites the IMF’s prediction that the UK economy will shrink this year, figures from the ONS showing the horrors of the winter of discontent (almost a quarter of adults can’t keep warm, and 15% fear running out of food) and this morning’s figures showing the surge in insolvencies last year to the highest level since 2009.
Q: When and where will the Brexit benefits begin?
Treasury minister James Cartlidge says UK unemployment is the lowest in almost 50 years, helped by measures such as the pandemic furlough scheme. He repeats his earlier point about energy support for households.
Back in the global economy, Canada probably expanded by 0.4% in the final quarter of last year.
That’s according to Statistics Canada, which reports that real GDP edged up by 0.1% in November, following a +0.1% uptick in October.
Labour MP Dame Angela Eagle tells the Commons the IMF’s forecasts are “devastating”, and “lay bare the economic incompetence of the government”.
Even santioned Russia is expected to do better than the UK this year, Eagle points out, adding that the government is unfit to run the country.
James Cartlidge reiterates that the IMF said the UK economy had done relatively well in the last year.
SNP Treasury spokesperson Stewart Hosie MP suggests the government should reform its windfall tax on energy companies, removing the 91p tax saving for every £1 spent on North Sea investment.
This, Hosie tells the House of Commons, would create a “meaningful windfall tax” which could support the economy and help small firms and households with their energy bills.
Treasury minister James Cartlidge says inflation is a global challenge, and the government wants to get it down. But, he points out, the average household will receive £1,300 of support this winter (from cost of living payments and the price cap on bills).
And on Hosie’s specific suggestion to change the windfall tax – Cartlidge say this would hurt the North Sea industry, and undermine energy security.
Q: Why the UK is still the only G7 economy that is smaller than before the pandemic, and the only G7 economy with its growth forecast downgraded this year, Rachel Reeves asks?
Treasury minister James Cartlidge says that since 2010, the UK has grown faster than France, Japan and Italy. He repeats that UK growth over the three years from 2022 to 2024 is expected to be higher than in Germany or Japan, and similar to the US.
And he cites the IMF’s overnight press conference, where IMF economic councellor Pierre-Olivier Gourinchas said the good news was that the UK economy had done relatively well in the last year, with estimated growth of 4.1% in 2022 – one of the highest in Europe.
Cartlidge then points out that the Covid-19 pandemic, and the Ukraine war, have both hit the UK economy this year, and claims Labour would have kept the UK locked down for longer.
Reeves: Tory failure has been a “drag anchor” on UK prosperity
Labour shadow chancellor, Rachel Reeves, has told parliament that Britain has huge potential, but 13 years of Tory failure has been a “drag anchor on prosperity”.
Responding to treasury minister James Cartlidge’s comments, Reeves says the IMF’s latest World Economic Outlook holds a mirror up to the UK’s wasted opportunities, adding “it is not a pretty sight”.
Reeves tells MPs:
The UK is the only major economy forecast to shrink this year.
Weaker growth compared to our competitors for both of the next two years.
The World upgraded. The UK downgraded.
Growth even worse than sanctions-hit Russia.
Reeves points out that the IMF chief economist, Pierre-Olivier Gourinchas, singles out higher mortgage rates as a reason for Britain’s poor performance.
She says:
The Tory mortgage penalty is devastating for family finances and is holding back our economy.
British business are paying the price for the “gaping holes in the Tories’ Brexit deal”, Reeves warns, adding:
It will fall to Labour to clean up this mess.
And she criticises Jeremy Hunt for not answering today’s urgent question:
If the Chancellor had ideas, answers or courage – he would be here today. But he is not.
The question people are now asking is this:
Are me and my family better off after 13 years of Tory government?
The answer is no.
And as the IMF show today – it doesn’t have to be this way.
Over in parliament, the Labour party have posed an urgent question on the IMF growth forecast for the UK, showing it is the only G7 economy forecast to shrink in 2023.
Junior Treasury minister James Cartlidge is responding, and defends the UK’s record.
He says the government has three economic priorities – to halve inflation this year, grow the economy and get debt falling.
Cartlidge points out that the IMF said today that it thinks the UK is on the right track, and that the UK had one of the best estimated growth rates for 2022 (revised up to 4.1%).
The UK’s cumulative growth over 2022-2024 is predicted to be higher than Germany and Japan, and similar to the US, Cartlidge adds.
Cartlidge insists that the government’s actions, “from unleashing innovation across AI, financial services and a host of other sectors to improving technical education and protecting infrastructure investment” will spur growth in coming years.
But, he adds, the IMF’s figures do confirm the UK is not immune to pressures hitting all advanced economies (a point chancellor Jeremy Hunt made earlier).
The best tax cut possible now is to lower inflation, the minister says.
2022 was a rough year for Norway’s sovereign wealth fund, which this morning reported a record loss of 1.64 trillion Norwegian kroner, or £132bn, for last year.
The so-called Government Pension Fund Global cited “very unusual” market conditions for its return of -14.1% last year.
Norges Bank Investment Management CEO Nicolai Tangen said in a statement.
“The market was impacted by war in Europe, high inflation, and rising interest rates. This negatively impacted both the equity market and bond market at the same time, which is very unusual,”
“All the sectors in the equity market had negative returns, with the exception of energy.
Global stock markets fell by around 20% last year, while the UK’s FTSE 100 index managed a small rise (lifted by oil companies).
