Signs of ‘green shoots’ in UK economy, but high core inflation threatens recovery

Key events

Blackstone’s Schwarzman: banks not in crisis

The head of asset manager giant Blackstone has played down concerns over the banking sector, blaming new technology for the speed of the bank runs we’ve seen this month.

Speaking to Bloomberg, Schwarzman said he expects most US banks to withstand the current industry turmoil, which he blames on the after-effects of the pandemic and technology rather than a wave of bad loans.

Schwarzman explained:

“The banking system is not in any type of conventional crisis,”

“We have just an interim issue with interest rates being up and we have a deposit issue caused by technology. And these are both solvable problems for the vast number of banks.”

He also pointed to the use of mobile phone apps, which let people communicate their concerns and also to withdraw money electronically, rather than having to queue at a branch.

This was a factor in the rapid collapse of Silicon Valley Bank, which the Bank of England governor compared to the high-speed failure of Barings Bank 30 years ago.

Silicon Valley was fastest bank collapse in nearly 30 years, says Bank of England governor – video

Schwarzman says:

“This crisis was caused by people on iPhones and other devices, hearing on social media that some bank might be in trouble.

They responded with huge withdrawals in a very short period of time, collapsing the bank.”

UK car production rises, helped by exports to EU

UK car production rose by over 13% last month, in a signal that the auto industry is recovering from supply chain shortages.

The number of cars built in UK factories rose to 69,707 last month, around 8,050 more than the same month a year ago, the Society of Motor Manufacturers and Traders (SMMT) reports this morning.

Problems sourcing semiconductors had been hurting car production since early in 2021, but those problem seem to now be easing.

Production for both home markets rose by over 20%, while output for overseas markets rose 11.5%.

Shipments to the EU rose 6.5%, offsetting a 19.9% drop in car production for the US and 21.6% for China, which the SMMT says provides “further evidence of the need for continued free trade across the Channel.”

February’s growth in UK car production signposts an industry on the road to recovery, says Mike Hawes, SMMT chief executive, adding:

The fundamentals of the sector are strong; a highly skilled workforce, engineering excellence, a sector that is embracing new electrified vehicle manufacturing and wide ranging capabilities in the EV supply chain.

To take advantage of global opportunities, however, we must scale up at pace and make the UK the most attractive destination for automotive investment by addressing trading and fiscal costs and delivering low carbon, affordable energy.”

Introduction: UK firms see signs of ‘green shoots’

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

There are signs of ‘green shoots’ in the UK economy, with firms more confident about the country’s economic prospects after a tough winter.

British businesses expect a return to growth in the next three months for the first time since shortly after Russia’s invasion of Ukraine, according to the latest poll from the CBI released today.

The monthly business survey found a net majority of +5% of firms expect growth in private sector activity in April-to-June. This is the first time there have been positive expectations for growth since April 2022.

The CBI also reports that activity fell slightly in the three months to March, the eighth ‘rolling quarter’ in a row in which the private sector has shrunk.

Manufacturers are most optimistic, with a balance of +12% predicting a recovery in output, while service sector firms see a small uptick.

Alpesh Paleja, CBI Lead Economist, warns that the UK is ‘skirting stagnation’ rather than growing strongly:

“It’s encouraging that the private sector is expected to return to growth in the months ahead, chiming with a range of other data indicating some resilience in economic activity. But let’s be clear – at best, this illustrates an economy skirting stagnation-like conditions rather than delivering the strong, sustainable growth we need.

“While the Chancellor has set out an ambitious plan to deliver growth in his Spring Budget, there’s broad recognition that the UK still faces considerable economic headwinds.

Paleja cautions, though, that ”Inflation remains stubbornly high”, and will continue to pressure household budgets.

Last week, Bank of England governor Andrew Bailey warned firms to that continuing to lift prices would drive up inflation and lead to higher interest rates.

The annual rate of UK inflation rose to 10.4% last month, but is expected to drop sharply through this year (as we catch up with price hikes in 2022).

But, BoE policymaker Catherine Mann is concerned that core inflation will remain too high, making it harder to bring CPI inflation down to the 2% target.

Last night, Mann told the National Association for Business Economics that persistent underlying inflation will make it hard to set monetary policy this year.

Mann said:

“Gas prices in particular are on the down slope, and that type of dynamic is going to be very important in driving headline inflation down.

But, she added:

“Core goods and services are trending up … It is going to make it very difficult to do our job.”

The financial markets currently indicate there is an 58% chance that the Bank raises interest rates at its next meeting, in early May. It has already raised them to 4.25% this month, a 14-year high.

Also coming up today

The government is announcing an updated net zero and energy security strategy today, on what was originally going to be billed Green Day. Instead, we’re getting a new net zero strategy, with a focus on oil and gas development, alongside renewable energy.

The UK government will defy scientific doubts to place a massive bet on technology to capture and store carbon dioxide in undersea caverns, to enable an expansion of oil and gas in the North Sea.

Grant Shapps, the energy and net zero secretary, will on Thursday unveil the “powering up Britain” strategy, with carbon capture and storage (CCS) at its heart, during a visit to a nuclear fusion development facility in Oxford.

Hundreds of the UK’s leading scientists are urging Rishi Sunak to halt the licensing of new oil and gas developments in the UK, ahead of the announcement.

On the economic front, we get Germany’s inflation report for March, an economic bulletin from the European Central Bank, and updated US GDP data for the last quarter of 2022.

European stock markets are set to open a little higher: