Graeme Wearden 

EC slashes UK growth forecasts but hikes eurozone; markets fall – as it happened

European Commission says Brexit uncertainty will hurt UK investment, but the rest of Europe is doing ‘significantly better than expected’
  
  

A container ship at the shipping terminal Eurokai in the Port of Hamburg, Germany.
A container ship at the shipping terminal Eurokai in the Port of Hamburg, Germany. Photograph: Fabian Bimmer/Reuters

A bad day in the markets

European stock markets have closed, with losses across the board.

Here’s the damage:

Traders took their cue from Asia, says David Madden of CMC Markets:

Stocks in Europe sold-off as the sudden and severe decline in the Nikkei 225 overnight trigged fears around the world. Lately stock markets in Europe have been lacklustre as there has no major change to the economic or political outlook. The low volatility was interrupted today by the rapid drop in the Japanese market, which got traders out of their comfort zone in Europe.

The sell-off is broad based, and when you look back at how much ground was made in 2017, dealers don’t need much of an excuse to exit the market.

That’s all for tonight. Thanks for reading and commenting. GW

As ever nothing is easy in Greece. Just when prime minister Alexis Tsipras was sounding an optimistic note on the investment front earlier, the Canadian company, Eldorado Gold, has announced that it will freeze one of the biggest investment projects in the country.

Sounding a defiant note, George Burns, Eldorado’s President and CEO said the Vancouver-based firm was not only freezing further investment in its gold copper deposit at Skouries but taking legal action Greece’s ministry of energy and environment,

“Although we have made good progress on the Olympias mine, we require the necessary permits and government support prior to investing further in Skouries,” he said in a statement.

“As a consequence we are now taking the necessary legal action to enforce the Company’s rights while continuing efforts to resolve outstanding matters through ongoing dialogue.”

Upon approval and receipt of the required permits, the Company will re-assess its investment in the Skouries project if the government was “supportive and open to discussions regarding the use and implementation of best available technologies.”

The tough stance is likely to put off other foreign investors who have often cited Greece’s labyrinthine bureaucracy and unwieldy justice systems as major obstacles to investment.

In September Eldorado had threatened to halt new investment in its Olympias and Stratonii mines in the northern region of Halkidiki because of a spat over permits but subsequently backed down.

With more than 2,000 employees, the firm is one of the largest foreign employers in Greece.

The mood in the stock markets has “really soured this afternoon”, says Connor Campbell of SpreadEx.

With Wall Street follows Europe into the red, there’s not much optimism on the trading floors today.

He writes:

Despite the European Commission promising the best Eurozone growth for a decade in 2017, the region’s indices were in a bad mood this Thursday. That’s because the euro attracted most of the buzz; while the currency rose 0.3% against both the dollar and the pound the DAX and CAC plunged, dropping 1.3% and 1% respectively.

An acute retail headache, and a red-soaked set of mining stocks, meant the FTSE failed to take advantage of the pound’s losses against the euro (and flat performance against the dollar).

Instead the UK index slid half a percent , taking it under 7500 as it was dragged lower by Burberry’s eye-watering 10% decline, a 2% drop from Sainsbury’s and a 2% to 3% falls from Rio Tinto, BHP Billiton and Anglo American.

The worst-performing stock in Europe is Vestas, the wind turbine maker. It disappointed investors today by reporting a drop in pre-tax profits and smaller profit margins as competition gets tougher.

Lords: City urgently needs Brexit transition deal

An influential House of Lords Committee have urged the government to agree a Brexit transitional deal before the end of this year, or risk losing City jobs overseas.

Having taken evidence from City experts, the EU Financial Affairs Sub-Committee has concluded that ministers need to act now, before banks trigger their own contingency plans.

Committee chair Baroness Falkner has written to chancellor Philip Hammond, saying:

“The clock is relentlessly ticking. Witness, after witness, told us that financial services industry won’t be able to continue servicing cross-border clients after 2019 if a transition period is not agreed by the end of this year. The UK’s financial services industry will be severely hit – as will EU counterparties.

“The more the Government waits, the more the value of such a period irreversibly declines. A trickle of banks and insurers have started to implement their contingency plans ahead of access to the Single Market being suspended in March 2019. The Government must urgently negotiate a transition period to stop this trickle turning into a flood.”

Wall Street has joined the global stock market selloff.

The Dow Jones industrial average has dropped by 103 points, or 0.4%, at the start of trading in New York.

The long-running saga of Saudi Arabia’s attempt to float oil giant Aramco has taken another curious twist today.

The UK government has confirmed it is close to handing Aramco a $2bn credit line. It means British taxpayers will effectively be lending the company money to encourage it to buy goods and services in the UK.

The government has denied that the credit guarantee has any link to the question of whether Aramco - which is the world’s largest oil producer - should list 5% of its shares in London.

If the IPO goes through, it will be the biggest flotation ever and would deliver a bonanza of fees for the City. But the idea has been criticised by several major investors, as existing listing rules will need to be bent for Aramco.

Nick Macpherson, formally the top civil servant in the Treasury, isn’t impressed at all.

More here:

Just in: The number of Americans signing on for unemployment benefit has risen, and by more than expected.

Some 239,000 US citizens filed ‘initial claims’ last week, as the jobs market got back to normal after the hurricane season.

That’s up from 229,000 in the previous seven days, and more than expected. But still, it’s a very low figures in historical terms.

The EC’s upbeat eurozone growth forecasts haven’t brought much cheer to the region’s stock markets.

Every major index is down today, although not massively. The FTSE 100 has shed around 40 points, or 0.55%, while Germany’s DAX has lost nearly 1%.

The FTSE 100 is being dragged down by Burberry, which is still off by 10%. Investors aren’t happy that today’s strategy of moving more upmarket will hurt profits for the next couple of years.

Eurozone bonds are also under pressure, with prices falling and yields (the rate of return) up.

There doesn’t seem to be a single trigger for the selloff. But after such a long rally, investors can’t be blamed for cashing in some profits.

Rabobank rates strategist Lyn Graham-Taylor says (via Reuters):

“Maybe there’s a bit of a view out there that it’s as good as it’s going to get in bond markets so it’s worth taking a bit of profit.”

The European Commission’s forecasts are more pessimistic than other forecasts.

For example, the IMF predicts that the UK will grow by 1.7% this year, and by 1.5% in 2018.

But the big picture is unimpressive, with the EC predicting that Britain will suffer “subdued” private consumption growth and weak business investment.

Peter Dixon, Senior Economist at Commerzbank, says the forecasts don’t make “particularly pleasant reading for UK policymakers”

This comes just a week after the BoE projections pointed to growth of 1.6% next year and 1.7% in 2019. Although the BoE’s growth path is a little higher, the key point is that very few forecasters currently expect the UK to grow at sustained rates in excess of 2%.

Just as fans of the English national football team used to regard “only” reaching the quarter finals of the World Cup as a failure, they would happily accept such an outcome today. In a similar vein, for the foreseeable future UK policymakers who used to regard 2% GDP growth as being too slow, might look back on the halcyon days of such growth as a golden era.

Looking back at the UK housing market.... rating agency Moody’s has warned that mortgage borrowers in Northern Ireland, East Midlands, East Anglia and the South West are most vulnerable if UK interest rates keep rising.

In a new report, Moody’s analyst Steven Becker says:

“In the event of a rate increase to 1.25%, borrowers in East Midlands, East Anglia and Northern Ireland are up to 2x more likely to face financial stress and go into arrears than a borrower in Scotland.”

When it raised interest rates last week, to 0.5%, the Bank of England indicated that borrowing costs would rise a few more times over the next few years.

Greek PM bangs drum for business investment

The EC predicts that Greece will grow by 1,6% this year, a little faster than the UK.

This is expected to jump to 2.5% in both 2018 and 2019 (a lot faster than the UK!).

And over in Athens prime minister Alexis Tsipras has appealed to Arab entrepreneurs to invest in Greece, as he pushes the message that the transformation of the crisis-plagued country is underway.

My colleague Helena Smith reports:

Greece has crossed the rubicon and is now one of the best countries in the world to invest in, Alexis Tsipras told the EU-Arab world summit in Athens.

Opening the second such meeting in the Greek capital the leftist leader urged businessmen from across the Arab world to grab the golden opportunity of investment in a nation that after eight gruelling years of austerity-fueled recession was finally showing signs of economic recovery.

“Greece for certain has emerged from crisis, Greece has crossed the rubicon of crisis,” he told the conference describing the country as an especially attractive place for investment because of low acquisition and labour costs.

Tsipras gave the speech as unionists attached to the powerful KKE communist party prepared mass to stage mass protest rallies nationwide.

Did the EC consider a hard Brexit scenario when drawing up today’s forecasts?

No, we had a purely technical approach based on the ‘ongoing status quo’, replies commissioner Pierre Moscovici.

He adds that this doesn’t mean that a particular option is better or worse. Also, any change in the UK’s trading relationship with the EU would affect every European country’s economic outlook (so it would be unfeasibly tricky to model).

Importantly, these new forecasts are based on the assumption that the EU and the UK maintain the current ‘status quo’ in 2019.

So if Britain doesn’t hammer out a transition deal, today’s forecasts could prove to be too optimistic.

In another blow, the EC has warned that Britain’s budget deficit is going to rise in the current financial year.

After “several years of improvement”, the UK’s general government deficit is expected to rise to 2.5% of GDP in the 2017-2018 fiscal year, up from 2.3%.

The EC also warns that Britain’s deficit could be even higher, if negotiations with the EU go badly.

It says:

Risks to the forecast point to upward pressure on the general government deficit, particularly in case of a Brexit-related trade shock during the forecast period.

On the UK, the European Commission says that growth has been slowing as rising inflation hits consumers and Brexit uncertainty spooks businesses.

Today’s report states:

Economic growth in the UK has been slowing since the start of the year, as higher consumer prices constrained private consumption growth. Based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK, growth is still expected to remain subdued over the forecast horizon.

Consumption growth is projected to be modest, in line with weak real wage growth, while uncertainty continues to weigh on business investment. However, net exports are expected to provide some support to growth, and the labour market is projected to show continued resilience.

And here’s a chart, showing how the EC expects Britain’s growth to slow:

The report is online here:

But....the EC also concedes that too many people across the eurozone are out of work.

Unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, dropping to 8.5% in 2018 and 7.9% in 2019.

In contrast, the UK’s unemployment rate is just 4.3%, the lowest in over four decades.

European Commissioner Pierre Moscovici is presenting today’s forecasts now.

Sounding upbeat, Moscovici says the eurozone is expected to post its fastest growth since the financial crisis, adding:

We have entered a new phase of the economic recovery, with stronger growth driven by resilient consumption, the global upswing, loose financing conditions and falling unemployment.

Here’s a chart from the new EC economic forecasts, showing which countries are expected to post the strongest and weakest growth (lighter = faster)

Eurozone to post fastest growth in a decade

Having slashed the UK’s growth forecasts, the EC has also raised its forecasts for the eurozone.

The Commission now believes that eurozone countries will expand by 2.2% this year, up from the 1.7% forecast earlier this year.

The Commission says the eurozone has enjoyed a bumper year, having shaken off the debt crisis that gripped the region a couple of years ago.

“The European economy has performed significantly better than expected this year, propelled by resilient private consumption, stronger growth around the world, and falling unemployment.

Investment is also picking up amid favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded,”

However, growth is expected to dip slightly in 2018 to 2.1%, and then to 1.9% to 2019.

If the EC is right, it means the UK will lag behind the eurozone for the next couple of years....

Updated

EC cuts UK growth forecasts

Newflash: The European Commission has slashed its forecast for UK growth, warning that Brexit uncertainty will hurt business investment.

It now expects Britain’s economy to grow by just 1.5% this year, down from 1.8% previously. The EC also predicts that growth will slow to 1.3% next year, and just 1.1% in 2019.

The forecasts also appear to be based on a transition deal being agreed that will prevent a cliff edge in 2019 and a hard Brexit.

The EC says:

“Investment growth is forecast to weaken in 2018, as many firms are likely to continue deferring investments in the face of uncertainty.

“Given the ongoing negotiation on the terms of the UK withdrawal from the EU, our projections for 2019 are based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK.”

So far this year, the UK grew by 0.3% in January to March and also in April to June, rising to 0.4% in the third quarter of 2017. So the EC’s new forecasts don’t sound unduly pessimistic.

How estate agents around the UK see the market

RICS has surveyed chartered surveyors and estate agents from across the UK to gauge the state of the market.

A number of them are particularly gloomy (although others less so). Here’s a selection from today’s report:

Newcastle Upon Tyne: Neil Foster of Foster Maddison Property Consultants.

Prolonged political uncertainty and weak direction from government is hampering sentiment amongst buyers and sellers. We are in for a long winter.

Ilkley, Yorkshire: Bill Dale of Dale Eddison

The market has slowed in the last month, albeit after a frenetic period in July and August when stock levels of available houses fell as a result of strong sales. There is a noticeable seasonal slowdown and the lack of supply is also holding back activity

Liverpool: Derek Coates of Venmore:

A surprisingly busy month for sales and buyer enquiries. However, there is a lack of properties coming on to the market which has been a worrying trend for some time. Vendors appear unwilling to commit in the present climate of uncertainty.

Worksop, Nottinghamshire: David Hawke of David Hawke & Co

Although as we approach Christmas you would expect a downturn but this reduction in market activity is well beyond this, generally so quiet!!

Norfolk: Nigel Steele of Jackson-Stops:

A slowing market with Brexit and economic uncertainty having an effect so that it could be a long winter.

Beaconsfield: John Frost of The Frost Partnership:

There is life in the market at the right price! Buyers are offering lower than guide prices and sales are doing the same up the chain. Stamp duty levels have had a considerable impact on the number of potential instructions coming to the market.

West Devon and Cornwall: David Lewis of Stags:

Continued political and economic uncertainty is negatively influencing the market place. Actively levels have fallen – has winter come early?

Lampeter, Wales: Andrew Morgan of Morgan & Davies:

A very busy period in the market across all sectors. This appears to be benefitting the rural lifestyle type properties most of all. No signs of depreciation at present.

Putney, London: Allan Fuller of Allan Fuller Estate Agents:

We usually have buyers registering keen to move before Christmas. So far we are registering 80% less than normal during October. Vendors more receptive to price drops and some are agreeing to 10% reductions, which are then attracting interest.

East London: Josh Homans of Valunation:

The sales market has dramatically changed and technically crashed across the board. In E2 the difference between asking and sale price is a staggering 20%.

Glasgow: Grant Robertson of Allied Surveyors

Autumn/winter slowdown in evidence. Strong interest for market leading homes but generally things are slower.

Belfast: Gareth Gibson of Douglas Huston

Supply remains very restricted however new enquiries are lower, the normal September lift was not seen.

PSA restructuring: What it means for Vauxhall

PSA, the firm which owns Vauxhall and Opel, has announced a wide-ranging cost-reduction plan including voluntary layoffs.

It’s an important development for UK workers at Vauxhall’s plants near Liverpool, and at Luton, as well as Opel factories across Europe.

PSA, which also owns Peugeot, says it hopes to avoid compulsory redundancies, as part of a plan to improve Vauxhall and Opel’s performance.

Crucially, PSA is promising not to shut any factories, but there is going to be a shake-up.

Opel/Vauxhall chief executive Michael Lohscheller told journalists at a press conference in Rüsselsheim, Germany, that the company would not shut any factories in Europe and try to avoid compulsory redundancies.

Any cost reductions would be achieved through shorter working hours, voluntary redundancies and early retirement. Lohscheller said personnel costs in relation to revenues were too high. Some workers who are on 40 hour-weeks will be moved to 35 hours.

He added the group would consult employee representatives, “especially the works council and the union IG Metall in Germany” and had already held meetings this morning.

PSA boss Carlos Tavares, speaking at the same press conference, reiterated that the company needed to act fast to become more competitive.

“Opel is facing a dramatic situation. There is no time to waste… This dramatic situation is getting worse day by day. We have a significant opportunity to rescue this company.”

The FT’s Peter Campbell is also tweeting from the press conference call:

Housing worries: What the experts say

RICS’s gloomy survey of the UK housing market gets plenty of coverage this morning.

In the Financial Times, Chris Giles says:

Estate agents have become more pessimistic over the housing market, saying prices have not risen at all in the past three months, newly agreed sales are down, and prices are likely to fall in most parts of the country.

Andy Bruce of Reuters shows how optimism has hit its lowest level since 2012, if you exclude the wobble after the Brexit vote.

Ben Chu of the Independent points out that the top end of the housing market is under the most pressure:

More expensive homes are under significant downward price pressure, with 70 per cent of surveyors reporting that offers for homes in the £1m plus bracket are coming in below asking price.

Some 60 per cent also reported lower offers for homes on the market priced between £500,000 and £1m.

Pantheon Economics’ Sam Tombs is also concerned:

Shares in UK housebuilders are also falling this morning, following this morning’s downbeat survey of chartered surveyors and estate agents.

Barratt Development are down 2.8% and Persimmon have lost 2.7%.

Investors are concerned to learn that UK house prices have stalled, with fewer potential buyers making inquiries about buying a home.

Lee Wild, Head of Equity Strategy at interactive investor, explains why Burberry’s shares have slumped to the bottom of the FTSE 100 this morning:

It was crucial Burberry’s new chief executive Marco Gobbetti got off to a good start after chief creative officer Christopher Bailey announced he’ll be off next year. Unfortunately, the market appears unimpressed with Gobbetti’s vision of Burberry’s strategy, and his first address to the market since taking over has failed to prevent the loss of big share price gains made since September.

Gobbetti’s aim to generate high-single digit revenue growth plus ‘meaningful’ operating margin expansion is ambitious, yes, but the big benefits don’t come through until 2021.

Updated

Burberry shares dive as new upmarket strategy revealed

Ouch! Shares in fashion chain Burberry have slumped by around 9% in early trading.

The slide came as Burberry’s new CEO Marco Gobbetti, who replaced Christopher Bailey in July, revealed that he wants to take the British luxury brand more upmarket.

My colleague Julia Kollewe explains:

Gobbetti reveals in a strategy update today that the company will close some outlets in department stores that don’t fit in with this move, starting in the US, before reviewing Europe in coming years.

The company said it was too early to give numbers for affected outlets and jobs.

Burberry has also posted better-than-expected numbers this morning. Like-for-like retail sales were up 4% in the six months to September, ahead of the analysts’ forecast of 3% growth, with the UK growing in double digits. Rainwear did particularly well, for example the car coat and the tropical gabardine. Pretax profits also came in ahead of expectations at £128m. Overall revenues rose 9% to £1.3bn.

A spokesman said the “strong growth in the UK and mainland China with the Chinese luxury consumer travelling, has continued”

Gobbetti told investors this morning that:

We will reshape our offer, increasing and invigorating the fashion content. We will create compelling luxury leather goods and accessories to attract new customers.

We will build on the strength of our apparel and re-energise it.

We will build our offer to provide a complete look for our customers, while continuing to simplify our ranges.

However, growth slowed in the UK in the latest quarter due to a tough comparison with last year. Following the Brexit vote in June 2016, sterling fell sharply and there was an influx of tourists who bought Burberry coats and bags.

Updated

Germany's trade surplus widens

Germany’s already sizeable trade surplus has widened further, as Europe’s largest economy continues to export much more than it imports.

The Federal Statistical Office has just reported that German exports rose by 4.6% over the last 12 months in September, to €110.4. Imports also rose, by 5.5%, to €86.3bn.

This pushed the overall German trade surplus for the month up to €24.1bn, from €23.7bn in September 2016.

The figures also show that Germany ran a chunky trade surplus with the rest of the European Union - exporting €65bn to fellow EU member states while importing €57.6bn.

That includes Germany’s large trade surplus with the UK, of course....

Another sign that German-manufactured products are valued around the world? That the European Central Bank’s stimulus measures are paying off? Or that Europe’s largest member is benefitting from the relative weakness of the euro compared to the Deutsche Mark? Probably all three....

The agenda: UK property market cools

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

Britain’s army of estate agents are getting more pessimistic about the UK housing market, as the London property market continues to cool.

A new survey from the Royal Institution of Chartered Surveyors has found that prices nationally have stalled over the last few months, with the number of new sales dropping.

More RICS members reported a fall in new buyers last month than a rise, suggesting “subdued momentum” in the market as demand for properties cools.

Sellers of the most expensive houses are also having to accept lower offers, in another sign that demand is weakening in the face of slow economic growth and political uncertainty.

Here are the key points from RICS’ survey:

  • National price indicator turns flat with sentiment still downbeat in London and the South East
  • Subdued sales trends now being reported across most regions
  • 70% of respondents report sales prices are coming in below asking prices for homes valued at £1m+

These charts show clearly how the market has weakened in the last few months, with sales expectations hitting the lows seen after the Brexit vote and during the eurozone crisis:

The report is more pessimistic than recent surveys from Halifax and Nationwide.

Simon Rubinsohn, RICS chief economist, paints a pretty gloomy picture of the market today:

“The combination of the increased cost of moving, a lack of fresh stock coming to the market, uncertainly over the political climate and now an interest rate hike appears to be taking its toll on activity in the housing market.

With both buyer enquiries slipping and sales expectations also subdued, the sense is that home owners are staying put and first time purchasers are increasingly focusing on that part of the market supported by the Help to Buy incentive.

A stagnant second-hand market is bad news for the wider economy, not just in terms of spending but also because it restricts mobility.

More details to follow....

Also coming up today...

New German trade data is being released this morning, showing how Europe’s largest economy posted another surplus in September (more on this shortly).

Auto maker PSA Group is outlining its new strategy for Opel/Vauxhall this morning, in an attempt to return to profitability by 2020. The plan includes offering an electrified version of all its models by 2024.

Car workers at its plants across Europe will be listening to see what it means for their jobs...

Pharma group AstraZeneca, fashion chain Burberry, supermarket group Sainsbury, and energy provider National Grid and car dealership Bookers are all reporting results.

Sainsbury have reported a rise in sales, but a 9% drop in profits over the last six months.

The agenda:

  • 7am GMT: German trade data for September
  • 9am GMT: The European Central Bank publishes its latest economic bulletin
  • 10am GMT: The European Commission releases new economic forecasts
  • 1.30pm GMT: The weekly US jobless report
 

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