Official figures from the Office for National Statistics (ONS) for gross domestic product (GDP) growth indicates that the UK economy grew by just 0.3% in the first quarter of 2017 which is the slowest rate of growth since the first three months of 2016. In the last quarter of 2016 GDP growth increased by 0.7%. Economists had been expecting GDP growth to slow as UK consumers reined back spending in the face of rising inflation but had pencilled in a higher figure of 0.4%. The ONS stated that the slower pace of GDP growth in the quarter was mainly due to a fall of 0.3% in service sector growth against a figure of 0.8% at the end of 2016. The main drag on the services sector (which accounts for about 78% of the UK economy) came from the hotels, restaurants and the distributions sector which fell by 0.5% as increasing prices from rising inflation has applied the brakes to retail trade. Output in the construction sector was also lower after expanding by 0.2% in the first three months of the year following 1.0% growth in the fourth quarter of 2016 while industrial production expanded by 0.3% over the period.
Economists believe that the slowdown in UK GDP growth in the first quarter has effectively killed off the likelihood that the Bank of England (BoE) will raise interest rates in the foreseeable future. The BoE currently maintains a neutral stance on interest rate movements having done so since around three months after cutting interest rates from 0.50% to 0.25% last year as a means of protecting the UK from any economic shock of Brexit. However in recent statements the BoE had hinted that a rate hike back to 0.50% could be on the horizon as the economy had been outperformed expectations since the Brexit referendum while inflation has recently surged and is widely expected to pass 3.0% by the end of 2017.
However UK consumer sentiment continues to be relatively buoyant as the country enters the two-year window of Brexit negotiations with the European Union (EU). Market research firm GfK’s measure of UK consumer confidence slipped to -7 in April from -6 in March which was in line with the median forecast of economists. Although this means that UK consumer confidence is at its lowest level in four months, as consumers weigh up the outlook for the economy and their finances ahead of Brexit and June’s general election, the survey did show that consumer confidence remains robust by historical standards. This is likely to help reassure policymakers who are watching to see how a recent rise in inflation is affecting household spending which is the main driver of the economy.
Inflation in the eurozone has returned to the European Central Bank (ECB)’s target level. Official figures indicate that inflation in the bloc reached 1.9% in April which was up from 1.5% in March but just below February’s four-year high of 2.0%. ECB head, Mario Draghi, commented that while the Eurozone’s economic recovery was increasingly solid, inflation was not yet high enough to justify lifting interest rates. Following its latest meeting last week the ECB has kept its main interest rate on hold at zero and left its bond-buying stimulus scheme unchanged. The bond-buying programme has already been trimmed to €60.0bn (£51.0bn) a month from €80.0bn. The main factor behind April’s pick-up in inflation was rising energy prices. Core inflation – a measure that is watched closely by the ECB and which strips out energy and unprocessed food prices – rose to 1.2% in April from 0.8% in March. The core figure was higher than expected and is at its highest level since September 2013. However analysts believe that the ECB is very unlikely to read too much into April’s data as it was positively impacted by Easter timing distortions.
Meanwhile the U.S growth rate for the first quarter of 2017 indicates that the US economy slowed dramatically in the first three months of the year to its lowest level reported for three years. According to official data GDP expanded at an annual rate of 0.7% in the first quarter. This was disappointing news for the Trump administration who have pledged to raise growth to 4.0%. In a bid to fulfil that promise, the White House has announced plans to slash the rate of corporation tax from 35% to 15%. The plans also propose to offer an incentive for companies to bring back money held overseas and a cut in the tax rate for individuals. The Trump administration may be reassured by the trend in recent years for growth figures to be depressed in the first quarter but then experience a strong pick-up later in the year.
The Royal Bank of Scotland (RBS) reported a £300 million profit in the first three months of the year as its core lending business continued to recover and as cost-cutting boosted performance. The profit compared with a loss of almost £1.0bn in the same period last year and has raised analyst expectations that the bank is set for a profit in 2018. As a consequence the share price closed the week up 10.4%. However there remains substantial clouds on the horizon including the need to settle the bank’s multibillion-pound litigation in the U.S. over its sale of sub-prime mortgage bonds. In January RBS set aside £3.1bn towards the cost of the penalty but has reiterated a warning that the final sum could be substantially more. RBS also needs to resolve the fate of Williams & Glyn and is awaiting a judgment by the European Commission about whether a UK Treasury proposal for the bank to spend at least £750 million helping challenger lenders and small businesses will be deemed a sufficient final penalty for its £45.5bn of state aid. The bank will also go to court in four weeks’ time to defend itself against claims by shareholders that it misled them about its dire financial state at the time of its £12.0bn rights issue in 2008.
Barclays Bank plc has reported that pre-tax profits reached £1.7bn in the first three months of the year which was a rise of 112%. This was partly due to a £600 million fall in losses from the division responsible for cleaning up its legacy debts. Pre-tax profits of £1.36bn from its international and investment banking business were up by 32%. However analysts caution that the investment bank’s performance lagged its peers on Wall Street and its return on shareholder equity was slightly lower than forecast. The Bank also announced that it will go against the tide of job-cutting by big banks to recruit 1,000 extra staff. The jobs will be created in areas including Cheshire, Northampton and Glasgow this year and Barclays said that it would be hiring the same number again by 2020 as profits rise further. The expansion includes 750 technology posts and 250 customer service jobs to support Barclays’ Premier and Business Banking customers.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Movements over the Last Week|
|Date:||2nd May 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||24.10||22.58||+6.7%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.53||2.35||+7.7%|
|Allied Irish Banks||49||55||-10.9%||5.24||5.00||+4.8%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||15.15||14.78||+2.5%|
|Aust and NZ Banking Group Ltd||55||58||-5.2%||32.76||31.81||+3.0%|
|Banco Bilbao Vizcaya Argentaria S.A.||91||114||-20.2%||7.35||7.10||+3.5%|
|Parent: Barclays plc|
|Barclays Bank plc||67||78||-14.1%||2.12||2.08||+1.9%|
|BNP Paribas S.A.||64||89||-28.1%||64.78||62.00||+4.5%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||16.92||16.49||+2.6%|
|Credit Agricole S.A.||62||86||-27.9%||13.65||12.43||+9.8%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||91||105||-13.3%||15.13||14.43||+4.9%|
|Deutsche Bank AG||110||127||-13.4%||16.53||15.57||+6.2%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||53||63||-15.9%||6.37||6.24||+2.1%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||52||63||-17.5%||14.94||13.81||+8.2%|
|Intesa Sanpaolo S.p.A.||134||155||-13.5%||2.67||2.51||+6.4%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.72||5.64||+1.4%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||56||68||-17.6%||0.69||0.64||+8.1%|
|Metro Bank plc||n/a||n/a||n/a||35.29||34.55||+2.1%|
|Nordea Bank AB||36||43||-16.3%||109||103||+5.8%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||79||96||-17.7%||2.65||2.40||+10.4%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||75||76||-1.3%||5.99||5.67||+5.6%|
|Shawbrook Group plc||n/a||n/a||n/a||3.42||3.39||+0.9%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||68||79||-13.9%||7.21||6.86||+5.1%|
|Svenska Handelsbanken AB||36||43||-16.3%||126||121||+4.1%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4180||4036||+3.6%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||75||91||-17.5%||n/a||n/a||n/a|