UK borrowing costs fall ahead of the budget; Germany avoids falling into recession – business live

Newsflash: Germany has avoided falling into recession, in a welcome sign for Europe’s largest economy.

Germany’s GDP expanded by 0.2% in July-September, new data shows, beating expectations of a contraction of 0.1%.

That will be a relief for Berlin, at a time when Germany’s economy is being buffered by high energy costs and problems in its car sector.

BUT it’s not all good news. Germany’s second-quarter GDP report has been revised down, to show a contraction of 0.3% – worse than the 0.1% fall first reported.

So the rise in activity in Q3 is against this new, lower, benchmark.

Rachel Reeves may risk a sigh of relief if she checks the bond markets this morning, because UK government borrowing costs are dipping.

The yield, or interest rate, on 10-year government bonds has dropped to 4.26% this morning, a fall of over basis points from last night’s close of 4.3%.

Yesterday, the 10-year yield hit its highest level since the general election.

The yield on UK government debt (known as gilts) has been rising in recent weeks, up from 3.75% in mid-September.

That could be a sign of investors anticipating the UK will issue more government debt – with increased supply weighing on prices (which fall when yields rise).

But there are other factors too – including concerns over the US election, which have pushed up US borrowing costs.

Japanese bank MUFG told clients this morning:

UK Gilt yields have been rising this month with the 10-year yield up just over 30bps from the September close. But it is debatable how much of that move reflects fears over increased Gilt supply on the potential for increased borrowing.

The US Treasury 10-year yield is up over 50bps this month on expectations of a Trump election victory next week and that is helping lift yields everywhere.

UK firms expect no growth over the next three months, according to a new survey that shows the challenge facing Rachel Reeves to stimulate the economy.

The CBI’s latest Growth Indicator has shows that private sector firms expect no change in activity over the next three months.

Alpesh Paleja, CBI interim deputy chief economist, says Reeves needs to boost business confidence today:

“Our latest surveys paint a picture of an economy shifting down a gear as we head into the final quarter of 2024. Weaker growth expectations are weighing on firms’ hiring intentions, which have treaded water since the beginning of the summer.

“In the budget, the Chancellor has an opportunity to boost confidence despite the difficult fiscal picture. Business will want to see messages of hard choices balanced with interventions that deliver a vision of optimism.

‘Many businesses are very concerned about potential increases to Employers’ NICs and the impact it will have on pay, hiring and investment. If the government does follow through, then they will want to see the government act on other key areas of investment, such as reforming the Apprenticeship Levy

“Giving firms certainty over future tax plans in the form of a business tax roadmap, measures to enhance productivity, and the country’s net zero trajectory can all help cement the path to long-term growth.”

Shares in weapons producer BAE Systems have dropped by 1% in early trading, after a fire broke out at its shipyard in Cumbria, where British nuclear submarines are built.

Two people were taken to hospital with suspected smoke inhalation after the fire at the shipyard in Barrow-in-Furness began at around 12.45am today.

The police said there is “no nuclear risk” but residents should stay inside with doors and windows closed.

BAE Systems said:

“We are working with emergency services to deal with a fire at site in Barrow in Furness. Two colleagues have been taken to hospital having suffered suspected smoke inhalation.”

BBC Radio Cumbria’s Jennie Dennett has reported that there is “no sign of fire now” but a “metallic smell of smoke in the air”.

BAE’s shares have dropped by 1.25% to £12.64, making it one of the top fallers on the FTSE 100 share index this morning.

The cold snap this autumn has helped drive sales at retailer Next, putting it on track to make more than £1bn profits this year.

Next has raised its guidance for profits this year to £1.005bn, up from £995m previously, after selling more stock than expected in the last three months.

Next’s full price sales in August-October were up 7.6% compared with last year, beating forecast of 5.0% growth.

It told shareholders this morning:

We believe the strong performance was driven by the early arrival of colder weather this year, versus an unusually warm September and early October last year.

If Next were to hit £1bn of profits for the first time, it would join only a handful of UK retailers that have done so, including Tesco – and Marks & Spencer in a previous era.

Next’s shares have jumped by 1.3% in early trading.

Hosting the Olympics this summer has helped the French economy to accelerate.

France’s GDP grew by 0.4% in the third quarter of this year, new data from statistics body INSEE this morning shows, up from 0.2% in April-June.

The data suggests the summer sporting festivities boosted consumer spending – it rose by 0.5% in the third quarter after a flat performance in the second quarter.

INSEE says GDP “accelerated moderately in the third quarter….boosted by the Paris Olympic and Paralympic Games”, adding:

Final domestic demand (excluding inventories) regained some momentum, driven by a rebound in household consumption (+0.5% after +0.0%).

Conversely, gross fixed capital formation continued to decline (-0.8% after -0.1%). Overall, domestic demand (excluding inventories) made a positive contribution to GDP growth this quarter: +0.2 points after +0.1 points in Q2 2024.

Official data this morning could show that German output contracted again in the third quarter as its industrial slump drags on, tipping Europe’s largest economy into recession.

The AFP newswire reports:

Federal statistics agency Destatis will unveil its quarterly GDP estimate at 09:00 GMT.

The economy ministry has said it expects “a renewed slight decline” after gross domestic product already shrank by 0.1 percent in the second quarter.

A technical recession is defined as two consecutive quarters of contraction.

“The German economy is unlikely to have emerged from its weak phase in the third quarter,” the ministry said in its autumn forecasts this month.

Analysts surveyed by FactSet were narrowly more upbeat, predicting a quarter-on-quarter stagnation.

Currency traders have been racing to protect themselves against possible big swings in the value of the pound, as the UK budget is released today.

One-week implied options volatility – which measure the demand for protection against large moves in the pound over the coming week – have risen to 10.375%, Reuters reports, which is the highest since March 2023.

The overnight rise from around 6.325% was the largest one-day increase in one-week implied volatility since September 2022, the month of Liz Truss’s mini-budget (which triggered the sort of market chaos that Rachel Reeves is desperate to avoid).

Pepperstone strategist Chris Weston says today’s budget is being taken more seriously by traders than usual:

It’s budget day in the UK, and while these events rarely pose the sort of risks to price action that warrants real focus on positioning, this one is different.

It is seen by some as a generational budget, that will define Chancellor Reeves’s career and could significantly impact Keir Starmer’s public approval rating, which has been shot to pieces of late.

Currently the pound is trading flat against the US dollar, at just over $1.30.

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

It’s a significant day in the UK and in Europe, with Rachel Reeves delivering Labour’s first budget in almost 15 years, and growth data from across the eurozone likely to show Germany is in recession.

Reeves could present one of the largest tax-raising budgets in decades today, as she tries to raise funds to repair UK public services.

The chancellor is expected to announce a swathe of “difficult but necessary decisions” to restore economic stability.

She’ll promise to “invest, invest, invest” to drive economic growth and provide funding for the NHS, to build homes and rebuild schools.

After a lot of gloominess since the July election, Reeves could strike a more optimistic note today, saying:

“My belief in Britain burns brighter than ever. And the prize on offer today is immense.

“More pounds in people’s pockets. An NHS that is there when you need it. An economy that is growing, creating wealth and opportunity for all. Because that is the only way to improve living standards.”

Reeves is also expected to stick to Labour’s pledge not to introduce higher taxes on working people.

Instead, companies will carry a lot of the burden, with a rise in employers’ national insurance contributions expected. Capital gains tax rates, or inheritance tax, may also be in the chancellor’s sight.

Income tax thresholds may be frozen for even longer than already planned, which will drag more people into higher tax rates as their salaries rise.

Another measure – an inflation-busting rise in the minimum wage, was announced last night.

Reeves will also set out the details of her changes to the UK’s debt rules. She’s expected to target public sector net financial liabilities (a measure known as PSNFL, or “persnuffle”) which takes into account all the government’s financial assets and liabilities, increasing her latitude to borrow for investment in long-term infrastructure.

The Office for Budget Responsibility will give its verdict after the speech. The OBR is also expected to release its report into the spending forecast drawn up by the previous, Conservative, government for the spring budget in March, despite former chancellor Jeremy Hunt’s efforts to delay it.

The report may show whether or not Labour was left with a £22bn “black hole” of unfunded commitments. Hunt says it’s unfair to publish it on the day of the budget.

The success of Reeves’s first budget will be judged, eventually, by whether it does stimulate faster growth in the UK, leading to higher tax receipts to fund better public services.

We’ll get a taste of how other European countries fared last summer, with the first estimate of eurozone GDP for the third quarter of the year. Economists predict that Germany may have shrunk slightly in July-September, which would put Europe’s largest economy into recession.

The agenda

• 9am GMT: Germany’s GDP report for Q3 2024

• 9.30am GMT: UK construction PMI report

• 10am GMT: Eurozone GDP report for Q3 2024

• 12.15pm BST: The ADP survey of US private sector job creation

• 12.30pm GMT: Rachel Reeves delivers the budget

• 12.30pm GMT: US GDP report for Q3 2024

• 1.30pm GMT: Office for Budget Responsibility publishes its latest Economic and Fiscal Outlook report

• 1.30pm GMT: Office for Budget Responsibility publishes its review of the previous government’s March spending plans