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UK firms suffer biggest drop in activity since January 2021; Gordon Brown warns of more crises – business live

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UK business activity slides by most since early 2021

UK companies suffered the sharpest decline in activity since the lockdowns of January 2021 last month, as the economy weakened.

The closely-watched UK Composite PMI index fell to 49.1 in September, down from 49.6 in August, and further below the 50-point mark showing that activity stagnated.

It’s the lowest reading since January 2021, when the country had entered a lockdown after a surge in Covid-19 infections, but slightly better than the flash reading released on the day of the mini-budget.

Tiny sliver of light: final September #PMI for the UK unexpectedly revised up, from 48.4 to 49.1 (Energy Price Guarantee?), but still signalling #recession.#Euro area (48.1) continues to underperform on this measure, with #Germany (just 45.7) remaining the ‘sick man of Europe’. pic.twitter.com/xGeqcz8p69

— Julian Jessop (@julianHjessop) October 5, 2022

The downturn was driven by a considerable fall in manufacturing production, while the services sector stagnated.

Both factories and services companies reported a drop in new business, while confidence dropped for the seventh time in the past eight months. Growth projections for the year ahead are now the weakest since May 2020, largely reflecting a slump of sentiment in the service economy.

Costs kept rising too, with firms juggling escalating energy prices, higher staff wages and supplier price hikes.

Despite the weak pound, exports fell in September for the first time in eight months, with companies blaming Brexit-related trade difficulties and weaker global economic conditions.

Dr John Glen, Chief Economist at the Chartered Institute of Procurement and Supply (CIPS), says:

More evidence of weaknesses in the UK economy appeared last month as the services sector flatlined in September, falling to the no-change mark with fewer orders and higher costs affecting output.

“The new business index was the lowest since February 2021 as domestic consumers had cost-of-living pressures and not hospitality uppermost in their minds. After enjoying rising levels of export orders for eight months in a row, the ongoing effects of Brexit and trade difficulties also reduced overseas enquiries for service companies.

The picture is no better in the eurozone either – where private sector output also fell at sharpest rate since January 2021.

The Eurozone Composite #PMI dropped further below the 50.0 mark in September, hitting a 20-month low of 48.1 (Aug: 48.9). Output across manufacturing and services fell amid high inflation, soaring energy costs and economic uncertainty. Read more: https://t.co/F2WIOKOH1m pic.twitter.com/maPHIdgYr2

— S&P Global PMI™ (@SPGlobalPMI) October 5, 2022

UK car sales rose last month

New car sales in the UK have picked up compared with last year, but are still a third lower than before the pandemic.

There were 225,269 new cars registered in September, 4.6% more than in 2021, according to the Society of Motor Manufacturers and Traders (SMMT), but still 34.4% less than in September 2019.

Britain’s millionth plug-in electric car was registered last month, with 249,575 joining roads in 2022 alone.

Here’s the details:

Gordon Brown also warned of a “national uprising” if the Government opts not to increase benefits in line with inflation.

The former Labour prime minister told BBC Radio 4’s Today programme it would be “immoral” not to increase benefits alongside inflation, which has soared in recent months to levels unseen in generations.

Mr Brown said a real-terms cut in benefits (which the government hasn’t ruled out) would be “unfair” and “unequal”.

“It’s divisive because we’re not in this together any more. It’s anti-work because 40% of those who would suffer are people on low pay in work. It’s anti-family because five million children would be in poverty.

“And I think most of all, it’s immoral. It’s asking the poor to bear the burden for the crisis that we face in this country and for mistakes that other people have made, and it’s a scar on the soul of our country, it’s a stain on our conscience.”

And here’s Katie Schmuecker of the Joseph Rowntree Foundation:

Talk of benefits bloodbath from @GordonBrown on @BBCr4today

✂️failing to increase benefits with prices (as is usual) would be the single biggest deliberate real terms cut IN HISTORY

❌increasing with earnings rather than prices leaves the bottom 10% another £214 worse off 1/3

— Katie Schmuecker (@KatieSchmuecker) October 5, 2022

Against a backdrop where the the worst off already typically face a £450 gap between rising costs & their income this year – even with the government’s announced support package.

And that’s on the back of a decade of cuts and freezes to social security 2/3

— Katie Schmuecker (@KatieSchmuecker) October 5, 2022

Little wonder people are already 🍽skipping meals
🚿& showers
🔥terrified to put the heating on
💍selling possessions
💳taking on credit to cover bills
🧾missing bill payments

People need certainty not cuts. Benefits must rise with prices in the usual way. End.

— Katie Schmuecker (@KatieSchmuecker) October 5, 2022

Gas prices have dropped back to more normal levels this morning.

The wholesale gas price for next-day delivery has almost halved this morning, to 70p per therm from 130p/therm last night. That’s the lowest level since June.

The pick-up in wind speeds may be reducing demand for gas to fuel power stations.

Month-ahead gas prices are pricier, though, with the wholesale contract for delivery in November down 3% at 270p per therm.

The BBC’s Faisal Islam has also spotted that UK bond yields are climbing again…

Meanwhile material change in long term bond markets – 30 year bond yield is up 30 basis points to well over 4% in past 24 hours, 4.15% a few moments ago. this is despite fact the Bank of England has offered to buy up these bonds…. That intervention took it down from 5% to 3.6% pic.twitter.com/OfZktUKXJG

— Faisal Islam (@faisalislam) October 5, 2022

Tesco results: What the analysts say

Tesco’s results are caught between “the jaws of post-pandemic normalisation and the rising cost of living”, says Zoe Gillespie, investment manager at RBC Brewin Dolphin:

Profits have taken a dip and are likely to be at the lower end of guidance this year, as the supermarket looks to align with customers and mitigate the impact of rising prices through a combination of initiatives – such as its Clubcard prices.

On the more positive front though, revenues have seen a marginal increase and cash flow has largely held up to the point where management feel confident enough to hike the dividend.

The drop in profits at Tesco shows that shoppers are feeling the pinch as the cost-of-living crisis takes hold, explains Matt Britzman, equity analyst at Hargreaves Lansdown:

“Supermarkets are no strangers to dealing with cost-of-living pressures, there’s been an all-out price war in the industry for some years now. Amongst the larger players, Tesco’s arguably been one of the standout businesses in the battle against low-cost outfits but pressures on consumer spending can only build for so long before something must give.

That pain’s slowly starting to feed into performance, as shopping behaviours continue to normalise from bumper levels seen over the pandemic and inflation keeps costs high – that’s meant full year profit guidance got a slight downgrade toward the bottom end of the previous range.

Neil Shah, executive director of content and strategy at Edison Group says Tesco’s interim results may put investors on edge.

Despite statutory revenue being up 6.7% since last year, the group’s operating profit declined by 43.6% and its profit before tax slumped 63.9%. Furthermore, adjusted operating profit for the group’s bank division dropped by 6.9% and, in a sign of increasing pressure on consumers, Non-Food sales declined 6%.

As the cost-of-living crisis continues to squeeze household budgets, Tesco has been faced with increased competition with cheaper supermarkets such as Lidl and Aldi. Tesco is therefore determined to compete with Aldi and Lidl’s prices, with the company extending its Aldi price match scheme to over 650 products in April.

Tesco’s CEO Ken Murphy has told reporters that the supermarket chain expects to have enough turkeys and chickens to satisfy the nation’s demands this Christmas.

Murphy also says Tesco isn’t having problems hiring staff for Christmas, and expects to take on 12,500 staff for the festive season.

And he explained that shoppers were trading down to own label products and frozen food, and buying less non-food products as a result of the cost-of-living crisis.

Tesco CEO says do expect to be able to satisfy demand for turkeys and chickens this Christmas

— Peter Hoskins (@PeterHoskinsTV) October 5, 2022

UK government bond prices are weakening this morning.

The yield (or interest rate) on two-year gilts has risen back over 4%, having fallen steadily over the last week following the Bank of England’s intervention.

Long-dated debt prices are also lower, pushing up the yield on 30-year UK bonds up to 4.13%, from just under 4% last night. That’s still below last week’s surge – when yields rocketed over 5%.

The pound has dipped back from Tuesday’s two-week high, to around $1.142 (still 10% above its record low nine days ago).

Pound was flirting with $1.15 this morning but not a very positive start for gilts – yields up strongly across the board (with the exception of the 30-year gilt), and by more so than other countries

— Andy Bruce (@BruceReuters) October 5, 2022

Alex Lawson

Tesco’s fuel sales surged by over 38% in the last six months, due to rising prices and higher demand.

That lifted its revenues from petrol and diesel to £4.28bn, up from just over £3bn a year earlier.

This comes as supermarkets are accused of taking 10p extra in margins on fuel – despite the cost of filling up a car with petrol dropping below £90 for the first time since May.

The RAC said the average price of petrol fell by nearly 7p a litre to 162.89p in September – the sixth-biggest monthly drop since 2000. The fall means the cost of filling a typical 55-litre petrol tank has fallen below £90 for the first time since the start of May.

The motoring group claimed drivers would have enjoyed a further 10p reduction in petrol prices but major retailers instead opted to increase their margins.

Gordon Brown warns of risk of further crises from shadow banking

Former prime minister Gordon Brown
Photograph: Andrew Milligan/PA

Former UK prime minister Gordon Brown has urged the Bank of England to tighten up its scrutiny of the shadow banking sector.

Speaking on Radio 4’s Today Programme, Brown warned that the crisis in the financial markets is not over, and there could be ‘grave difficulties’ for some companies when interest rates rise.

Specifically, he’s concerned about shadow banking – in which unregulated institutions carry out loans and other financial activities.

Brown warns that the UK faces problems with inflation, potentially problems with liquidity and solvency amongst companies, and the potential for markets to be disfunctional.

He explained:

I would be worried about the shadow banking – that’s the non-bank financial sector in this country. And i would be very careful if I was the Bank of England and make sure that the supervision of that part of the economy is tightened up.

I do fear that as inflation hits, and interest rates rise, there will be a number of companies and organisations that willl be in grave difficulty.

The money markets expect UK interest rates to have more than doubled by next summer, to around 5.5%.

Brown adds that he doesn’t believe the crisis is over, just because the pension funds were rescued last week by the Bank of England’s pledge to spend up to £65bn buying up long-dated UK debt.

Instead, he called for ‘eternal vigilence’ to try to avoid problems escalating again:

I do think there’s got to be eternal vigilance about what has happened to the shadow banking sector.

And I do fear there could be further crises to come.

Tesco is also lifting its pay rates for staff.

From 13 November the basic hourly rate of pay in stores will increase by 20p to £10.30 (or £10.98 in London), making a total 8% increase in pay this year.

The company said it was also freezing prices on more than 1,000 products.

Tesco’s CEO Ken Murphy says the supermarke’s price position got ‘more competitive’ this year:

Customers are seeking out the quality and value of our own brand ranges as they work to make their money go further, whether they are switching from branded products, between categories or cutting back on eating out.

Retail analyst Steve Dresserman has picked out some key points from Tesco’s results:

Notable step up in own brand sales, including Finest which rose 13%.

Proving that people don’t just buy value tier lines in tough times.

It’s far too narrow visioned to assume people want to eat low value (both calorific and monetary) meals because things are tight.

— Steve Dresser (@dresserman) October 5, 2022

Online sales remain +50% ahead of pre COVID levels, as volumes normalise, Tesco online share remains at 35.9%.

Whoosh in 400 stores, plan for 800 by year end.

— Steve Dresser (@dresserman) October 5, 2022

Tesco’s non-food sales dropped by 6% year-on-year in the six months to the end of August.

The supermarket chain says it was competing against strong sales a year ago, when the Covid-19 lockdown led to “exceptionally strong demand”.

But it may also signal that consumers are cutting back where they can.

Non-Food sales in Tesco declined -6%; with cost of living pressure biting.

— Steve Dresser (@dresserman) October 5, 2022

Tesco issues minor profit warning “at bottom end of forecasts” and warns of “significant cost inflation” still to come.

— Louise Cooper CFA (@Louiseaileen70) October 5, 2022

Tesco sees full-year profits at lower end of guidance

Tesco has forecast that its underlying profits will come in at the ‘lower end’ of its previous forecast, due to the cost of living crisis and rising costs.

It says:

Despite ongoing challenges in the market, we are able to maintain our profit guidance within our previous range, albeit towards the lower end.

We therefore expect full year retail adjusted operating profit of between £2.4bn and £2.5bn. Significant uncertainties in the external environment still exist, most notably how consumer behaviour continues to evolve.

Tesco maintain profit guidance at the lower end of their original guidance (£2.4bn-£2.5bn).

— Steve Dresser (@dresserman) October 5, 2022

Tesco: customers watching every penny

Tesco has warned that its consumers are facing tough times as the cost of living crisis rages, and its own profits have taken a hit too.

The UK’s largest supermarket chain has reported that pre-tax profits have fallen almost 64% in the first half of its financial year, despite a 6.7% increase in revenues (partly due to the jump in petrol prices).

Achnowledging the squeeze on households, Tesco CEO Ken Murphy says:

“We know our customers are facing a tough time and watching every penny to make ends meet.”

In its latest financial results, just released, Tesco says it saw “significant” cost inflation, with some customers shifting from branded ranges to its own brand goods as they tried to manage household budgets.

Tesco did still grow its like-for-like UK sales by 0.7% year-on-year – lifting them almost 10% above pre-pandemic levels. Various offers, such as its Aldi Price Match and lower prices for Clubcard members, helped ease cost-of-living pressures.

Operating profits dropped 43% year-on-year, in the 26 weeks to 27th August.

Tesco has also been pushing a strategy of lifting prices “a little bit less and a little bit later”, it says, which helped it hold market share.

But Murphy warns that it’s too early to know how households will behave in the months ahead, with inflation now at its highest in around 40 years.

As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market.

Tesco – unsurprisingly not positive H1 progress in everything at the company, but at least lower debt. “Despite these uncertainties, our priorities are clear. We have the right long-term strategy and we will continue to balance the needs of all of our stakeholders”. 9am call pic.twitter.com/yFtdHKFiHn

— Chris Bailey (@Financial_Orbit) October 5, 2022

Introduction: Opec+ could defy White House with production cut today

OPEC's headquarters in Vienna, Austria.
OPEC’s headquarters in Vienna, Austria. Photograph: Lisa Leutner/AP

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

Opec and its allies meet today to discuss whether to make the biggest cut to oil output since the pandemic, despite strong pressure from the White House not to.

The cartel of oil producers led by Saudi Arabia and Russia hold their first in-person meeting since 2020 in Vienna today, to discuss output strategy. And Opec sources have suggested that the group could slash production by as much as 2 million barrels per day.

That would take around 2% of global oil production off the market, in an attempt to prop up crude prices which have been hammered by recession worries.

Opec slashed output back in 2020 when the world went into lockdown, but began reversing those cuts in 2021. Last month it trimmed output by 100,000 barrels per day, but a larger cut is now on the table due to fears of an economic slowdown and demand contraction.

The US government, keen to keen gasoline prices down before November’s mid-term elections, is aghast at this prospect, though.

According to CNN, the Biden administration has launched a full-scale pressure campaign in a last-ditch effort to dissuade Middle Eastern allies from dramatically cutting oil production.

CNN reports:

Some of the draft talking points circulated by the White House to the Treasury Department on Monday that were obtained by CNN framed the prospect of a production cut as a “total disaster” and warned that it could be taken as a “hostile act.”

“It’s important everyone is aware of just how high the stakes are,” said a US official of what was framed as a broad administration effort that is expected to continue in the lead up to the Wednesday OPEC+ meeting.

Saudis and Russians planning big oil production cuts at tomorrow’s OPEC meeting. As I wrote two weeks ago, Mohammed bin Salman is friendlier to Putin than Biden: https://t.co/diPQu1R4o7

— Edward Luce (@EdwardGLuce) October 4, 2022

The prospect of Opec cuts lifted Brent cude to a near two-week high of $92 per barrel last night, up from $84/barrel in late September.

That will make it harder to get inflation down towards more normal levels, and could hurt motorists this winter.

Hovering over the OPEC+ meeting in Vienna is an unspoken fact: beyond Russia, many, many member-countries despise the G7 oil price cap. For them, it’s a terrible precedent of consumers trying to dictate oil prices. It may or may not influence the talks, but it’s there | #OOTT

— Javier Blas (@JavierBlas) October 4, 2022

Also coming up today

Rail services in the UK are being disrupted today by another large-scale strike n the long-running dispute over jobs, pay and conditions.

Members of the drivers’ union Aslef and the Transport Salaried Staffs Association (TSSA), encompassing 12 train operators, will walk out, meaning more chaos for travelers.

Many Conservative party conference attendees are expected to leave Birmingham early to avoid disruptions – rather than catch Liz Truss’s speech.

Investors will be watching, though, with the PM expected to claim that the “disruption” caused by her economic policies will be worth it.

That may no calm nerves in the City over the scale of spending cuts or increased borrowing needed to fund Truss’s unfunded pledges.

10 days ago Kwasi Kwarteng said there was “more to come” on fiscal changes and pound tanked.

Liz Truss will go one step further on Wednesday, telling Tory conference: “Whenever there is change, there is disruption.”

Some Tory MPs questioning the wisdom of her framing.

— Pippa Crerar (@PippaCrerar) October 5, 2022

So are the bond and foreign exchange Mkts

— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) October 5, 2022

There’s no shortage of disruption at the conference either, with the home secretary accusing fellow Tory MPs of a coup against the prime minister, and cabinet ministers in open conflict over the 45p tax U-turn and whether benefits should rise with inflation.

Last night the pound hit a two week high near to $1.15, as it recovers from the turmoil following the mini-budget.

European stock markets are set for a calm open after a strong rally yesterday on both sides of the Atlantic, and in Asia-Pacific markets.

*WHAT HAPPENED OVERNIGHT*

– Equities continued to rally from oversold levels

– SPX +3.06%, Nasdaq +3.34%

– UST 10y -1 bps to 3.63%

– USD continued to retrace on the back of risk-on

– Oil +3.2% to $91.69

– Downside surprise in Sept job openings fueled peak Fed narrative

— Prashant Nair (@_prashantnair) October 5, 2022

America’s S&P 500 posted its best two-day gain in roughly two years.

The agenda

  • 7am BST: German trade balance for August

  • 9am BST: Eurozone service sector PMI for September

  • 9am BST: UK car sales for September

  • 9.30am BST: UK service sector PMI for September

  • 1.15pm BST: ADP index of US private sector employment in September

  • 1.30pm BST: OPEC and non-OPEC Ministerial Meeting begins

  • 3pm BST: US service sector PMI for September




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