Echoes of 1970s for UK economy

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Good evening

News this morning that the economy had shrunk for the second month in a row is the latest piece of evidence that the UK is suffering from the worst combination of surging prices and lack of growth since the 1970s.

GDP fell in April by 0.3 per cent, far more than forecasts had suggested, sending the pound down to a two-year low against the dollar.

The decline was across all sectors but was led by a 5.6 per cent drop in health services as the NHS test and trace programme wound down. The services sector overall fell by 0.3 per cent, while production was down 0.6 per cent as businesses were hit by price rises and supply chain problems. Construction slipped 0.4 per cent.

Today’s data follow forecasts last week from the OECD which said the UK would have the weakest growth in the G20 outside Russia. Zero growth was predicted for next year as the economy stagnated. Separate FT analysis said the UK would experience the highest inflation in the G7 from now until 2024.

One of the factors contributing to the country’s cost of living crisis is soaring petrol prices, something acknowledged today by the UK’s competition watchdog as it launched an investigation into the retail fuel market. Business secretary Kwasi Kwarteng had queried whether the government’s cut in fuel duty was being passed on to drivers.

The surge in inflation means the Bank of England is still likely to raise interest rates after its policy meeting on Thursday, despite the poor growth figures. Most economists expect a rise of 0.25 per cent.

Separate data from this morning show the UK is also suffering its second-largest trade deficit since records began in 1997 after importing £24.3mn more than it exported in the three months to April.

Trade is at the heart of today’s other big UK story: the move by the government to rip up its own Brexit deal by expunging key elements of the Northern Ireland protocol, which governs relationships between the province, mainland Britain and the EU.

Under the proposals, goods from Great Britain destined to stay in Northern Ireland would go through a “green lane” with no checks, while those heading across the open border into the Republic of Ireland and the EU single market would face “red lane” checks.

The measure would end the role of the European Court of Justice in policing the protocol as well as giving Westminster sweeping new powers, but faces strong opposition from many MPs, the House of Lords, the Irish government and the business community in Northern Ireland, which currently benefits from being part of the European Single Market as well as the UK internal market. Today the EU said it would launch legal action as Brussels and London moved closer to a possible trade war. Here’s our explainer on the bill and why it’s so contentious.

Prime minister Boris Johnson argues that the protocol has created political tensions as well as business disruptions between Northern Ireland and the rest of the UK.

Latest news

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For up-to-the-minute news updates, visit our live blog

Need to know: the economy

It’s an important week for central banks and interest rates. The Bank of England’s decision is preceded on Wednesday by the US Federal Reserve, which is expected to announce the first back-to-back half-point interest rate rises since 1994. Announcements also come from Brazil (Wednesday), Switzerland (Thursday) and Japan (Friday).

China’s major cities returned to lockdowns and mass testing over the weekend as Covid cases continued to spread. Global China editor James Kynge says the human and economic cost of Beijing’s “techno-authoritarian” zero-Covid strategy is mounting.

Latest for the UK and Europe

The UK looks set to extend the life of a coal-fired power station slated for closure as it seeks to beef up energy security. Continuing the West Burton plant would cost tens of millions of pounds and likely spark a fierce backlash from environmental groups. Electricity generator SSE told the FT that the UK’s windfall tax would harm investor confidence just as companies planned to plough billions into new projects

EU commissioners meet today to discuss Ukraine’s bid to join the bloc ahead of a summit next week. Our Europe Express newsletter assesses its chances.

Global latest

Some 70 per cent of top economists polled by the FT think the US will enter recession next year. Many are also sceptical about the Fed’s plans to moderate inflation. “This is not landing a plane on a regular landing strip. This is landing a plane on a tightrope, and the winds are blowing,” said one.

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The Summit of the Americas, a gathering that takes place every three or four years, was marred by the US exclusion of Cuba, Venezuela and Nicaragua. The highlight was a (non-binding) migration pact that would allow farmers in the US and Canada to employ more seasonal labourers. It also urges countries to set up “legal pathways” for people from Latin American and the Caribbean to reach the wealthier north.

New forecasts from Citgroup suggest global consumers of commodities could pay $5.2tn more this year then they did before the pandemic as prices surge and supplies are squeezed. “The ongoing commodity shock is on track to be a similar order of magnitude as the first oil shock almost 50 years ago, when taken as a share of global GDP,” it said.

Our Big Read looks at the role of the World Trade Organization in an era of fracturing alliances and trends towards deglobalisation. As this week’s ministerial meeting in Geneva got under way, WTO director-general Ngozi Okonjo-Iweala urged governments to end export restrictions on food which she said were exacerbating problems caused by Russia’s invasion of Ukraine.

Food versus fuel: Our new explainer looks at how the war has sharpened the debate on the use of crops for energy. The total amount used each year for biofuels is equal to the calorie consumption of 1.9bn people, highlighting the volume of agricultural commodities that could be diverted if the food crisis worsened. UN forecasts say the combination of conflict and climate could put a record 49mn people in 46 countries at risk of famine.

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China’s drive to decarbonise has been set back by the increasing use of coal power as it seeks to boost flagging economic growth, but industry in Japan sees opportunities in its government’s net zero push. Read more in our special report: Asia-Pacific Climate Leaders.

Need to know: business

Binance halted withdrawals of bitcoin hours after crypto lender Celsius blocked customers from pulling funds from its platform, fuelling a sell-off across the digital asset market. Bitcoin and other tokens dropped sharply following a turbulent weekend as the market infrastructure that underpins digital assets came under stress.

China has told banks to rein in executive pay as part of President Xi Jinping’s “common prosperity” drive, a move that will benefit local banks, says the Lex column. A regulatory crackdown has cut some $2bn off the market value of tech groups over the past 12 months: our Big Read examines Xi’s plans for capital markets after his criticism of “disorderly expansion”.

US companies have lost $40bn in earnings because of the dollar’s rise to its highest level since 2002. As earnings growth slows, the currency effect could mean the difference between expanding and shrinking, our capital markets team explains.

A small red burger and a couple of fries have replaced McDonald’s Golden Arches logo in Russia. The chain of 850 restaurants has been rebranded as Vkusno & Tochka (‘Tasty — Full Stop’) by its new owners, who bought the operation last month.

A Vkusno & Tochka employee delivers a food order
A Vkusno & Tochka employee delivers a food order © Kirill Kudryavtsev/AFP/Getty Images

Passenger demand is surging but airports are still crippled by staff shortages. Our Big Read looks at whether the aviation industry can get its act together in time for summer. Wealthier travellers meanwhile have been driving a boom in private charters after getting used to being unshackled from commercial flight schedules (and avoiding fellow humans) during the pandemic.

FT Future of Finance will be live streamed on June 16 and 17 from the heart of Europe’s leading tech festival, The Next Web (TNW). We’ll be exploring how new technologies continue to uproot existing banking operations and how fintechs are further exacerbating this rate of transformation. Register for free today.

The World of Work

Company finance chiefs have been faced with extraordinary challenges during the pandemic but what can they learn from past crises? Read more in our special report Business education: Financial Training, including our ranking of the best Masters in Finance courses.

Covid cases and vaccinations

Total global cases: 529.0mn

Total doses given: 11.9bn

Get the latest worldwide picture with our vaccine tracker

And finally…

“I was like the Kofi Annan of Blur vs Oasis.” Britpop, a guitar-playing Tony Blair and the business of being human are on the menu during musician, broadcaster and author Jarvis Cocker’s Lunch with the FT.

© James Ferguson

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