A worker inspects under the bonnet of a Volkswagen Golf 8 automobile on the assembly line at the Volkswagen factory in Wolfsburg, Germany, in 2021. Carmakers are a key part of the European economy. Photograph: Bloomberg/Getty Images
A worker inspects under the bonnet of a Volkswagen Golf 8 automobile on the assembly line at the Volkswagen factory in Wolfsburg, Germany, in 2021. Carmakers are a key part of the European economy. Photograph: Bloomberg/Getty Images
Closing summary: warm winter helps EU avoid recession
It was the winter that never came: Europe rode out the energy crisis thanks to good weather, and the EU has so far avoided a recession that was thought a nailed-on certainty a year ago.
You can read the full report by Larry Elliott, the Guardian’s economics editor, here:
Holger Schmieding, chief economist at Berenberg, an investment bank, said:
The eurozone economy rode out a difficult winter without falling into stagnation or even recession. Despite sky-high energy prices for households and businesses caused by the Putin shock, real GDP expanded by a modest 0.1% quarter-on-quarter in the first quarter. The fading of gas shortage fears, the easing of supply chain pressures and more outdoor construction due to mostly mild weather contributed to a small overall rise in activity.
But there is a real divergence between the performances of different countries in Europe – making the job of the European Central Bank (ECB) harder. Does the central bank keep raising interest rates – adding further to the difficulties of the stuttering German economy – to clamp down on inflation?
Schmieding makes a telling comparison that will be familiar (albeit back-to-front) to watchers of the eurozone crisis of a decade ago. Then the Pigs – Portugal, Italy, Greece and Spain – were a byword for slow growth and consequent social unrest. Now they are steaming ahead.
Judging by today’s data, the periphery has turned into the growth engine of the eurozone, with quarter-on-quarter gains in activity of a whopping 1.6% in Portugal and 0.5% in Italy and Spain.
Recent European inflation data still show consumer prices rising much faster than the 2% a year that is generally considered as monetary stability. That will be enough to persuade the ECB to keep tightening, said Charles Hepworth, investment director, GAM Investments.
The accompanying individual country inflation data keeps pressure on the European Central Bank to remain aggressive on the hiking front at next week’s central bank meeting despite euro-wide growth not that far from flatlining.”
More companies became insolvent during the first quarter of the year than during any first quarter for a decade as they grappled with inflation and rising borrowing costs.
Profits at US oil supermajors Chevron and ExxonMobil have fallen back from their all-time records, but they still did better than expected even as prices fell back.
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German inflation data has not quite delivered the same surprise as the GDP data.
Annual consumer inflation came in at 7.2% in April, down from 7.4% last month and a touch lower than the 7.3% expected by economists – they got the direction correct.
“Big Foot”, Chevron's deep ocean oil rig, departing Kiewit Industries at dawn, in 2018. Photograph: Inga Spence/Alamy
Profits at US oil supermajors Chevron and ExxonMobil have fallen back from their all-time records, but they still did better than expected even as prices fell back.
Russia’s invasion of Ukraine delivered an historic windfall for oil companies, whose costs barely shifted as prices soared amid global energy market chaos.
US President Joe Biden in the autumn described big oil companies as “war profiteering” as he raised the possibility of imposing a windfall tax. However, the US windfall tax was not introduced, leaving the companies free to keep making bumper profits.
Exxon said it delivered record first quarter earnings of $11.4bn (£9.1bn), while Chevron reported earnings of $6.6bn.
The UK did introduce a windfall tax following sustained pressure on Rishi Sunak when he served as chancellor, as did the EU. Chevron said its results for the quarter included a $130m tax charge related to changes in the energy profits levy in the United Kingdom.
More companies became insolvent during the first quarter of the year than during any equivalent period for a decade as they grappled with inflation and rising borrowing costs.
There were 5,747 registered company insolvencies, 4% compared to the end of 2022, but 18% higher than the same period last year, according to the government’s Insolvency Service.
The final quarter of 2022 was the only period in more than a decade in which more companies became insolvent.
The number of insolvencies remained near the highest level since 2009, according to Insolvency Service data. Photograph: Insolvency Service
Energy costs in particular – which surged after Russia’s invasion of Ukraine in 2022 – stymied many businesses such as bars and restaurants just as they were hoping to finally leave behind the effects of the coronavirus pandemic. Insolvencies hit a 13-year high for the full year during 2022.
The numbers suggest that company owners have been running out of patience when hoping for their businesses to recover after the chaos of the pandemic lockdowns, experts said.
Nicky Fisher, president of R3, the insolvency and restructuring trade body, said:
A small dip in overall corporate insolvency levels doesn’t hide the fact that more directors are choosing to shut up shop and more creditors are choosing to chase unpaid debts than 12 months ago. Firms are still struggling as the trading climate remains challenging, and unless the economic picture improves, it’s unlikely numbers will drop in the near future.
Samantha Keen, a UK turnaround and restructuring strategy partner at EY-Parthenon, a consultancy, said:
The significant year-on-year rise in corporate insolvencies has again been driven by creditors’ voluntary liquidations, with business owners calling time on their companies rather than looking at rescue options.
However, there are some reasons to be positive. The latest analysis from the EY ITEM Club spring forecast has found that the UK economy is slowly turning a corner and should avoid recession this year.
NatWest chief executive Alison Rose also commented on the bank’s decision to terminate its membership in the scandal-hit Confederation of British Industry (CBI) lobby group last week.
And while the CBI is preparing a “root and branch” overhaul to try win back members, it is unclear what tangible changes might convince the bank to rejoin:
We didn’t have any suspicions or any reported incidents. I mean, clearly, the news that has come out has been extremely disappointing, and of great concern, and we have, as you know, withdrawn our membership from the CBI.
I think it’s really important that business has a strong voice... but that it represents the values of business and what business stands for… I think that that’s what we will be looking for. But at this stage, we’ve withdrawn our membership. We’re very disappointed, you know, with the reports that have come out. Clearly, that’s unacceptable behaviour.
NatWest chief executive Alison Rose at a conference in London in 2019. Photograph: Simon Dawson/Reuters
NatWest’s chief executive Alison Rose struck a cautiously optimistic tone during this morning’s media call, but shareholders – still jittery from last month’s mini-banking crisis – seem to be on high alert for any potential red flags.
And they’ve sent shares down 5.6% this morning. Shareholders seem to be focusing on two issues: firstly, the fact that NatWest did not improve its guidance, and secondly, the fact that there has been a drop in deposits.
On guidance, shareholders are potentially premature on their hunt for green shoots. Rose told journalists this morning that while NatWest was seeing very low levels of defaults, and “signs of improving confidence” from businesses, the macro economic environment “remains challenging”. That ongoing uncertainty is likely causing some investors to wring their hands.
Secondly, NatWest reported a near-£20bn drop in deposits. But it’s not the same story as in the US, where the collapse of Silicon Valley Bank caused savers to jump ship to more stable lenders. Around half of the deposit drop at NatWest was linked to its disposal of Ulster Bank in Ireland, and a portion had to do with customers paying year-end taxes in the first quarter, as well as competition.
But investors may be more focused on the fact that some customers have been dipping into their savings as they grapple with price inflation. As Rose explained:
What we are seeing is people are using their cash balances that they built up – and remember, there was a big buffer built up – during Covid… People are starting to use those deposits – in particularly some of the more affluent households – to make decisions about their budgets. So we have seen paying down of debt, [and] we are seeing businesses start to use the cash to…[cover] the impacts of inflation.
But the European economy has undoubtedly done better than the nailed-on recession predicted a few months ago, said Melanie Debono, senior Europe economist at Pantheon Macroeconomics, a consultancy.
She said:
The eurozone economy grew less than implied by the business surveys in the first quarter, though better than would have been expected just a few months ago and in line with the European Central Bank’s latest forecast from March.
Looking ahead, we doubt the first quarter’s rebound in GDP marks the start of a sustained acceleration in growth, and indeed look for growth to remain subdued in the second quarter and the third quarter, as softer bank lending pulls down investment, offsetting the recovery in consumers’ spending and some of the continued boost from net trade.
Deutsche Bank believes there will be zero growth in Germany, Europe’s largest economy, over the course of the year. Germany has been particularly held back by its reliance on energy-intensive industry.
Deutsche’s Stefan Schneider and Marc Schattenberg said:
We continue to expect a shallow recovery during the course of the year, held back by high inflation, the expected US recession in the second half and the increasing impact of recent and further rate hikes.
Back on the European economy, the early verdict is that everything is not quite rosy, despite the return to growth.
Carsten Brzeski, global head of macro at ING, an investment bank, said:
The eurozone economy carries on along the rim of stagnation. A meagre 0.1% quarter-on-quarter GDP growth in the first quarter with high divergence across member states is better than feared – but clearly no reason to cheer.
More resilient than expected is clearly one label to put on the eurozone’s economic performance. In fact, the eurozone economy has now been able to avoid what a few months ago was probably the best predicted recession ever. The warmer winter weather, lower wholesale energy prices, the reopening of China and fiscal stimulus are the key drivers behind this better-than-expected performance.
The compromise for the eurozone economy will be subdued growth going into 2024.
Neil Birrell, chief investment officer at Premier Miton Investors, said:
The Eurozone economy has been resilient in the face of energy price increases and rate hikes over the past few months, and while growth is slowing, this remained the case in the first quarter.
However, we are still likely to see the ECB press ahead with tighter policy measures when they meet on 4 May. There is nothing in this data set to suggest that the economy is stalling or that inflation is beaten. In fact, the inflation data at country level suggests the opposite.
