Germany’s economy shrinks unexpectedly
Newsflash: Germany’s economy is back on the brink of recession.
Germany’s GDP shrank by 0.1% in the second quarter of this year, new data from statistics body Destatis shows.
That’s a blow to Berlin’s government, which has been hit by an ailing train network, the surge in energy prices after Russia’s invasion of Ukraine, protests by farmers, weaker demand from China, and a rise in support for far-right politicians.
Economists had expected growth of 0.1% in the quarter.
The decline in activity was due to a fall in manufacturing and construction investments.
Destatis reports that “investments in equipment and buildings, adjusted for price, seasonal and calendar effects, in particular decreased” in the last quarter.
The drop in GDP in the last quarter follows 0.2% growth in the first quarter of 2024.
A technical recession is defined as two quartery contractions in a row.
This takes the shine off a decent start to today’s eurozone growth data, with both Spain (+0.8%) and France (+0.3%) beating expectations…..
Key events
We also have growth figures from Mexico, which are a little weaker than expected.
Mexico’s economy grew by 0.2% quarter-on-quarter in April-June, missing forecasts for 0.3% growth.
Takeover Panel cold-shoulders 10
The UK’s Takeover Panel has doled out its harshest penalty for a code breach, after a long investigation into the company which once owned boutique hotel chains Malmaison and Hotel du Vin.
The Panel has concluded that ten parties should be “cold-shouldered”, a move which effectively bars them from any takeover-related activity, including buying or selling shares during a live takeover period.
The Panel found that several executives of MWB Group Holdings had acquired shares in the company which, when added to the shares held by a pre-existing concert party, meant they controlled more than half its share capital – which would, if disclosed, force them to make a formal takeover bid.
Omar Faruqui, Director General of the Panel, explains:
“Today’s ruling concludes the most complex investigation in the Panel’s 56-year history. Ten individuals have been cold-shouldered. They misled MWB Group shareholders and the market through a web of sham transactions and false trails stretching across many jurisdictions.
Exposing their deceit and wrong-doing is testament to the skill and determination of the Panel’s enforcement team.”
The ruling, which runs to over 100 pages, is online here.
The Panel also decided that three members of management, including former MWB CEO Richard Balfour–Lynn, should pay compensation to shareholders, and has rejected an appeal from Balfour–Lynn.
It has also publicly censured Andrew Blurton, a joint finance director of MWB at the time of some of the events in question.
MWB entered administration in November 2012 and was liquidated on 15 April 2018.
The slight increase in German inflation this month (see last post) not only highlights the stickiness of inflation but also suggests that a September rate cut by the European Central Bank is not a done deal, yet, says ING’s Carsten Brzeski
German harmonised inflation rate rises
Another blow for Germany – its inflation rate has risen.
Inflation, on an EU-harmonised basis, rose to 2.6% per year in July, up from 2.5% in June, statistics body Destatis reports.
After stronger than expected inflation from Lander, German CPI came out slightly above expectations:
m/m +0.5% (est +0.4%, last +0.2%)
y/y +2.6% (est +2.5%, last +2.5%)National CPI:
m/m +0.3% (est +0.3%,last +0.1%)
y/y +2.3% (est +2.2%, last +2.2%) https://t.co/huGQqVBpaO pic.twitter.com/BlNqA5RIpb— Mario Cavaggioni (@CavaggioniMario) July 30, 2024
UK’s CMA looking into Alphabet’s Anthropic partnership
Britain’s competition watchdog has kicked off another probe into the artificial intelligence sector.
The Competition and Markets Authority (CMA) is examining whether Alphabet’s partnership with AI start-up Anthropic has created a “merger situation”, and if so wheter it weakens competition.
This is the latest in a series of moves by the CMA. Earlier this month it began a full investigation into Microsoft’s deal with AI startup Inflection, and in April it began seeking views on Amazon’s investment in Anthropic, which is a leading rival to OpenAI.
Other regulators also have concerns; in January, Alphabet, Amazon and Microsoft received inquiries from the US Federal Trade Commission on their investments and partnerships with Anthropic and OpenAI.
Getting back to today’s eurozone growth figures, Moody’s Analytics economist Ross Cioffi has warned that the outlook for the region for the rest of this year is “precarious”.
Cioffi explains:
Preliminary estimates reported a 0.3% quarter-on-quarter expansion of Eurozone GDP in the second quarter of 2024. Most major economies grew more strongly than we had been expecting, with the notable exception of Germany, which was worse off.
Spain’s second quarter was well-rounded, with solid increases in domestic and foreign demand. France gained from both home and abroad, as well, though only to a minor extent with private consumption on the decline, while Italy was bolstered mostly on domestic demand. In Germany, the weak spot was fixed investments.
The outlook for the Eurozone economy remains precarious for the rest of the year, with modest growth at best, as prices and interest rates remain high, and weak sentiment keep things cool, before picking up steam next year.
UK finance watchdog extends probe into car finance mis-selling
A major probe into whether people overpaid on their car loans has been extended by the UK’s financial watchdog.
The Financial Conduct Authority now expects to set out the next steps in its review into the past use of discretionary commission arrangements (DCAs) in May 2025, having previously aimed to do this by the end of September.
The FCA says:
We’re working hard to understand how DCAs affected the cost of credit for people borrowing money to buy a vehicle. We’re assessing thousands of records spanning 14 years.
The FCA’s investigation centres on the car loans market, and whether commission payments to brokers were too high. Those brokers were able to adjust the interest rates they charged customers, and some received “discretionary commission arrangements”, which meant they were paid more if the interest rate was higher.
The FCA says today that firms involved in our review have engaged constructively with the regulator, but many have struggled to supply data within the requested time.
Another wrinkle is that Barclays Partner Finance has begun judicial review proceedings of the Financial Ombudsman Service’s decision to uphold a complaint relating to its use of a DCA.
Thousands of car loan customers who took out loans before 2021 have been complaining to lenders and brokers.
The FCA says today it could bring in a redress scheme, so it is asking firms to pause complaint handling until 4 December 2025.
Shares in Close Brothers, which has provided motor finance deals, are down around a third since January, when the FCA announced it was investigating the market.
JP Morgan remains bullish on UK stocks
JP Morgan is still bullish on the outlook for the UK stock market.
In a new research note, its analysts say the backdrop for UK equities is “looking favourable”. They cite attractive valuations, improved political clarity and potentially lower bond yields, which all make dividend yields more attractive again.
JP Morgan is maintain its recommendation to remain ‘overweight’ on UK stocks.
They explain:
The elections event risk is behind us, and the new government is likely to provide more fiscal credibility and stability, with focus on domestic agenda, homebuilding and the consumer. Broadly, the beneficiaries stand to be Banks, Homebuilders, Real Estate and Utilities, while on the negative side we have Diversified Financials, E&P and Transportation.
Within the UK, we have a preference for Domestic over Exporters plays, as GBP is firmer, for UK consumer plays, and for Real Estate and Homebuilders – these typically start performing once the rate cuts begin.
In the car world, Tesla is updating the software on more than 1.8 million vehicles in the US to fix a problem that stops unlatched bonnets being detected.
Tesla has started rolling out an over-the-air software update to detect the open bonnet and send a notification to customers, the National Highway Traffic Safety Administration (NHTSA) said today.
If a bonnet, or hood, was not locked properly, it could fully open while a car is being operated, blocking the driver’s view.
The pound is holding firm on the foreign exchanges this morning, unchanged at $1.286 against the US dollar.
But, sterling could weaken on Thursday if the Bank of England decides to cut interest rates from their current 16-year high.
Matthew Ryan, head of market strategy at global financial services firm Ebury, says:
“The Bank of England’s August policy announcement appears on a knife-edge, and one of the tougher rate decisions to predict for some time. We expect the MPC to deliver a 25 basis point cut on Thursday, albeit the vote on rates appears almost too close to call, and could be evenly split between the hawks and doves.
On balance, we think that we’ve seen enough progress on inflation for those members that were close to voting for a cut in June to shift their allegiance in favour of the doves. There is, however, a high degree of uncertainty surrounding this view, particularly given the lack of communications from MPC members since the June meeting, in part due to the blackout period surrounding the general election.
Currently, the money markets indicate there’s a 59% chance of a rate cut on Thursday.
Ryan adds:
As this is not yet fully priced in, an immediate rate reduction would likely trigger some downside in the pound, albeit an upbeat set of communications, particularly a sizable upward revision to the GDP forecasts, could limit the extent of any sell-off.”
In the UK, the Bank of England has created a new cost benefit analysis panel to provide advice when new rules are proposed for firms and financial market infrastructures.
It is chaired by Laurel Powers–Freeling, who is also the chair of Uber UK.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said:
“Cost benefit analysis is an essential part of policy development, and I’m delighted that we’ve been able to attract such a strong panel to help ensure that we do the best job we can in this vital area.”
S&P cuts Bangladesh’s credit rating as curfew and protests hit economy
Away from Europe, credit rating agency S&P has downgraded Bangladesh’s credit ratings to B+ from BB-, nearly two weeks after the government imposed a curfew to quell deadly student protests.
S&P cited a sustained decline in Bangladesh’s foreign exchange reserves, which it says shows there is persistent pressure on the country’s external metrics.
Earlier this month, the Bangladeshi government declared a national curfew and announced plans to deploy the army to tackle the country’s worst unrest in a decade, with AFP reporting that at least 105 people have died in the unrest.
The protests began this month on university campuses as students demanded an end to a quota system that reserves 30% of government jobs for family members of veterans who fought in Bangladesh’s war of independence in 1971.
Those protesting have argued that the policy is unfair and discriminatory as young people struggle for jobs during an economic downturn and instead benefits members of the ruling Awami League party, which is led by the Hasina.
The drop in German GDP in the last quarter is a worry, says Joshua Mahony, chief market analyst at Scope Markets:
The trajectory of the German economy remains a concern for Europe, with the manufacturing powerhouse seeing second quarter growth fall back into negative territory (-0.1%).
Fortunately, things are more stable for the eurozone as a whole, with the latest GDP figure beating expectations to post a second consecutive 0.3% reading in Q2.
CEBR: Eurozone has turned a corner
Pushpin Singh, senior economist at the CEBR think tank, predicts the eurozone’s growth prospects will improve this year:
“Flash estimates from Eurostat indicate that the Eurozone economy grew by 0.3% on the quarter in Q2. This rate was above consensus expectations and matched the corresponding growth rate seen in Q1. The stronger-than-expected growth rate suggests the bloc has turned a corner since the start of the year.
Prospects are likely to improve further throughout the year, driven by recent policy loosening by the European Central Bank and expectations for further interest rate cuts down the line. Cebr expects the Eurozone economy to expand by 0.8% in 2024, up from 2023’s growth figure of 0.4%.”
The eurozone only grew half as quickly as the US in the last quarter.
GDP data last week showed that the US economy grew at a 2.8% annualised rate in the second quarter of 2024, or the equivalent of 0.7% quarterly growth.
Today’s eurozone growth report is “moderate but decent”, says Frederik Engholm, head of Macro & Strategy at Nykredit.
Another moderate but decent GDP print from the eurozone. +0,3% in Q2 (as in Q1). Most notable>> German weakness intact (-0,1%). Germany has stagnated since the covid-crisis, while other major EZ-countries have seen solid growth.
Weak enough for ECB to cut! #dkøko #dkfinans #ECB pic.twitter.com/SULYCvG4gE— Frederik Engholm (@FrederikEngholm) July 30, 2024
Eurozone grew by 0.3% last quarter
Just in: The eurozone grew by 0.3% in the second quarter of this year, a little faster than expected, despite the economic problems in Germany.
Statistics body Eurostat has just reported that GDP increased by 0.3% in both the euro area and the EU in the April-June quarter, which matches the growth recorded in the first quarter of this year.
Economists had expected growth to slow to 0.2% in Q2, so this is a little better than expected.
Ireland (+1.2%) recorded the highest increase compared to the previous quarter, followed by Lithuania (+0.9%) and Spain (+0.8%), while France grew by 0.3% and Italy and Belgium both expanded by 0.2%.
The highest declines were recorded in Latvia (-1.1%), Sweden (-0.8%) and Hungary (-0.2%), while Germany’s 0.1% fall in GDP also dragged on growth.
Another small positive surprise:
Eurozone GDP q/q +0.3% (est +0.2%, last +0.3%)
Eurozone GDP y/y +0.6% (est +0.5%, last +0.5% from +0.4%) https://t.co/IO4H1aRC34— Mario Cavaggioni (@CavaggioniMario) July 30, 2024
