Official figures indicate that the UK’s economic growth slowed in the first quarter of the year, hit by a drop in manufacturing and construction output. Gross domestic product (GDP) grew by 0.4%, down from 0.6% in the fourth quarter of last year. On an annual basis, growth was 2.1%. The 0.4% rate was in line with economist expectations and marks the 13th consecutive quarter of positive growth for the UK. Part of the slowdown was due to a sharp fall in construction output, which dropped 0.9% in the first quarter. Industrial output which includes manufacturing declined by 0.4%. The service sector which is the biggest part of the economy grew by 0.6%.
Analysts caution that the slowing economic growth figures are not all down to uncertainty about the EU referendum, although this has led to businesses delaying investment decisions. Poor productivity and weak exports as well as falling industrial production and construction figures are also longer term contributing factors. Significant challenges remain to rebalance the UK economy away from the services sector and household consumption towards manufacturing, as well as dealing with global economic headwinds such as slower growth in China.
The U.S. economy also slowed to its weakest pace in two years, as plunging oil prices and global anxiety brought growth to a near standstill. The economy grew by just 0.1% in the first quarter of the year, according to official figures, which was well below the 0.4% gain of the previous quarter and the 0.2% rise anticipated by analysts. However analysts believe that the weak growth figures may not prevent the U.S. Federal Reserve (Fed) from raising interest rates in the summer months should job market conditions continue to improve.
The growth performance of the Eurozone for the first quarter of the year has surprised analysts as official figures indicate that GDP rose by 0.6% in the three months to March. This has resulted in the Eurozone’s overall economic size finally reaching the level it last hit in 2008 prior to the financial crisis. The pace of growth was twice as strong as that witnessed in the final quarter of last year. While no breakdown of the GDP data has yet been provided, analysts believe a rebound in household consumption and business investment has probably helped the currency bloc to power ahead. The single currency area’s growth was better than that of the UK for the first time since 2011. However, the UK economy regained its pre-crisis size much earlier, in 2013.
The Fed’s rate-setting committee left interest rates unchanged at its April meeting but has kept the door open for a possible increase in June while showing little sign that it is in a hurry to tighten monetary policy amid the apparent slowdown in the U.S. economy. In a statement that largely mirrored the one that was issued after its last policy meeting in March, the committee acknowledged an improving labour market but noted that economic growth seemed to have slowed. It also said it was closely watching inflation and stated that global economic headwinds remained on its radar.
Analysts warn that the UK’s major banks are set for one of their worst first-quarter earnings seasons since the financial crisis, adding to their struggle to win over investors against a backdrop of misconduct charges, a weak economic outlook and uncertainty over Brexit. The five biggest banks, namely: Barclays; HSBC; Lloyds; RBS; and Standard Chartered have collectively seen their shares fall about 11% this year against a 1.5% rise in the FTSE 100 index. Most analysts expect earnings to fall at the big five banks, with Barclays, HSBC and Standard Chartered thought most likely to suffer the biggest hits because of their large investment banking operations.
In addition the Rating agency, Standard & Poor’s (S&P) has warned that the UK’s four biggest banks face paying out a further £19.5bn in fines, compensation and legal expenses this year and next which would take the total paid out since 2011 to more than £75bn. Over the five years to 2015, Barclays, HSBC and the bailed-out Lloyds and RBS have together incurred costs of £55.8bn to cover so-called conduct and litigation issues and having to compensate customers for mis-selling payment protection insurance. According to S&P, this amount represents around 9% of these banks’ total net revenues during this period and about 90% of all conduct and litigation charges for the whole UK banking system.
The Royal Bank of Scotland group has announced a first quarter loss of £968m which that has almost doubled from the £459m loss it recorded a year ago and is slightly higher than analysts had expected. However this included a one-off repayment of £1.19bn to the UK Government for the support it received during the financial crisis. The group, which has not posted a profit since 2007, said the losses were exacerbated by a £238m restructuring bill, which includes the increasing costs of spinning off its Williams & Glyn business. The group acknowledged it might not be able to complete the sale by the end of next year and would therefore fail to meet a regulatory deadline. This casts further doubts over whether it will be able to resume its dividend payment policy in the short term.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||3 May 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.88||1.80||+4.4%|
|Allied Irish Banks||65||65||0.0%||8.11||9.00||-9.9%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.90||15.00||-0.7%|
|Aust and NZ Banking Group Ltd||103||106||-2.8%||24.27||24.35||-0.3%|
|Banco Bilbao Vizcaya Argentaria S.A.||115||108||+6.5%||5.98||6.55||-8.7%|
|Parent: Barclays plc|
|Barclays Bank plc||109||107||+1.9%||1.72||1.72||0.0%|
|BNP Paribas S.A.||74||70||+5.7%||46.24||47.79||-3.2%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.12||12.64||-4.1%|
|Credit Agricole S.A.||74||70||+5.7%||9.66||10.09||-4.3%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||127||127||0.0%||19.68||19.30||+2.0%|
|Deutsche Bank AG||151||157||-3.8%||16.47||16.80||-2.0%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||89||87||+2.3%||4.53||4.67||-3.0%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||64||60||+6.7%||10.70||11.47||-6.7%|
|Intesa Sanpaolo S.p.A.||115||110||+4.5%||2.42||2.46||-1.6%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.23||5.40||-3.1%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||90||88||+2.3%||0.67||0.68||-1.5%|
|Metro Bank plc||n/a||n/a||n/a||20.50||20.32||+0.9%|
|Nationwide Building Society||79||81||-2.5%||n/a||n/a||n/a|
|Nordea Bank AB||69||69||0.0%||78||80||-2.5%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||111||107||+3.7%||2.30||2.52||-8.7%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||76||79||-3.8%||4.42||4.47||-1.1%|
|Shawbrook Group plc||n/a||n/a||n/a||2.87||2.71||+5.9%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||128||126||+1.6%||5.52||5.56||-0.7%|
|Svenska Handelsbanken AB||58||56||+3.6%||107||108||-0.9%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3287||3345||-1.7%|
|SNR FIN ITRAX CDS 5-YEARS||87||82||+6.1%||n/a||n/a||n/a|