Omicron knocks UK and eurozone growth to 11-month lows; banknote maker De La Rue warns on profits – business live

The fall in the UK composite PMI this month shows that omicron continued to hit growth, economists say.

But the impact could be modest, as Covid-19 cases fall and restrictions are relaxed.

That means interest rates are likely to rise next week, from 0.25% to 0.5%.

Adam Hoyes, assistant economist at Capital Economics, says the “Omicron hangover won’t last long”, with signs that supply shortages are easing.

All told, this PMI survey suggests that the economy is suffering a hangover from the surge in Omicron cases. Even so, we still think GDP will recovery fairly swiftly over the rest of Q1.

And the further rise in the price balances supports our forecast for CPI inflation to climb higher in the coming months. That means that the Bank of England is likely to raise Bank Rate from 0.25% to 0.50% on 3rd February.

© Provided by The Guardian
January’s UK PMI shows that service sector growth slowed this month, but factory delivery delays are easing Photograph: IHS Markit

James Smith, developed markets economist at ING, says the UK PMIs show a modest Omicron economic hit.

A more modest fall in the PMIs relative to past Covid waves hints that the cumulative hit to UK monthly GDP from Omicron will be less than 1%.

This latest survey also hints at renewed service-sector cost pressure, and that reinforces our view that the Bank of England will hike rates again in February.

Thomas Pugh, economist at RSM UK, agrees that the economic damage from Omicron has been limited, and growth probably stabilised this month.

We expect most of the output lost in December to be made up in February as the number of people self-isolating drops, workers return to offices and consumers get back to socialising in person.

Indeed, the rise in the future output balance of the composite PMI from 72.5 in December, a year long low, to 75.8, a six month high, suggests firms are gearing up for a bounce back in demand.

The Omicron variant has dragged UK company growth to its slowest since the lockdowns nearly a year ago.

British business activity cooled to an 11-month low in January, led by a slowdown in the services sector, a closely-watched survey of UK purchasing managers from IHS Markit shows.

Customer-facing parts of the economy were, understandably, worst hit by Omicron, as the UK experienced a “two-speed recovery in January”.

The service sector slowed for the third month running, with hospitality, leisure and travel all struggling due to the restrictions which were introduced last month, and which are now being eased.

Companies across the economy reported rising backlogs of work due to staff absences, as record numbers of Covid-19 infections led to more people off ill or isolating.

But there’s good news too — manufacturing output hit a five-month high, thanks to a “sustained turnaround in materials availability” which may show the supply chain crisis is finally easing.

Business confidence in the outlook also picked up, driving sustained solid jobs growth.

The IHS Markit/CIPS Composite PMI, which tracks activity in the economy, dipped in January to 53.4 from 53.6.

That’s the lowest in 11 months, and weaker than expected (economists forecast a rise to 55, which would have shown a pick-up). But it is higher than the eurozone’s composite PMI of 52.4 (see earlier post), suggesting the UK has started 2022 a little stronger.

Chris Williamson, chief business economist at IHS Markit, says there were wide variations across different sectors this month.

Consumer-facing businesses have been hit hard by Omicron and manufactures have reported a further worrying weakening of order book growth, but other business sectors have remained encouragingly robust.

Looking ahead, while the Omicron wave meant the hospitality sector has sunk into a third steep downturn, these restrictions are now easing, meaning this downturn should be brief. Many business and financial services companies have meanwhile been far less affected by Omicron, and saw business growth accelerate at the start of the year

With inflationary pressures remaining elevated at near-record levels, this all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting, he adds:

UK services companies were hit by expensive raw material costs, pay rises and soaring energy bills this month – leading many to lift their own prices in return.

January’s survey of purchasing managers found that inflationary pressures continued to build in the service sector. Input costs and output charges increasing at the second-fastest rate since the survey began in July 1996 (exceeded only by November 2021).

Survey respondents “overwhelmingly” said higher raw material costs, staff wages and energy bills had led to a repricing of their services, Markit says.

Duncan Brock, Group Director at CIPS, says:

“In the gloomiest month of the year what is also disappointing for the UK economy is price inflation returning with a vengeance with the second highest jump in business expenses since 1998.

Staff wages and energy price hikes made up the bulk of the extra burden and businesses will inevitably pass on these costs to consumers.

Germany’s economy is showing resilience, with the private sector returning to growth in January after a difficult December.

Service sector companies in Germany are expanding again, while manufacturing is growing at the fastest pace in five months, the latest ‘flash’ survey of purchasing managers shows.

IHS Markit says:

The goods-producing sector drove a renewed increase in new orders at the start of the year. Overall inflows of new business showed the strongest rise since last September as manufacturing order books expanded markedly and to the greatest extent for five months. There was a slightly better month of new business across the services sector as well, with demand improving somewhat after falling in each of the previous two months.

New export business received by services firms continued to fall, however, hinting that the upturn here was driven by the domestic market.

And here’s some reaction to the eurozone flash PMI surveys, from Frederik Ducrozet of Pictet Wealth Management:

Here’s AJ Bell investment director Russ Mould on De La Rue’s profits warning:

Banknote printer De La Rue left its shareholders feeling poorer as it warned on profit thanks to supply chain issues and staff shortages associated with the Omicron variant of Covid-10.

“While it insists a turnaround plan has been delayed rather than derailed, many investors are not sticking around to find out.”

Just in: Growth across the eurozone has slowed to its lowest in nearly a year, despite signs of recovery in Germany.

The eurozone’s recovery weakened again this month, as restrictions imposed to combat the Omicron variant caused a sharp slowdown at companies in the services sector.

Tourism, travel and recreation firms were especially hard hit by a drop in spending.

Firms were also hit by rising costs, leading them to hike their own prices. But encouragingly, manufacturers reported that supply chain delays were improving.

This pulled data firm IHS Markit’s Flash Eurozone PMI Composite Output Index down to 52.4, from 53.3 in December. That’s an 11-month low, closer to the 50-point mark showing stagnation.

© Provided by The Guardian
Eurozone PMI, January 2022

Chris Williamson, chief business economist at IHS Markit, says the overall impact of Omicron on the wider economy appears relatively muted:

Not only has the alleviating supply crunch helped factories boost production, but cost pressures in manufacturing have also moderated.

“Importantly, while the Omicron wave has dented prospects in the service sector, the impact so far looks less severe than prior waves. Meanwhile, perceived prospects have improved among manufacturers, linked to fewer supply shortages adding to the brightening outlook.

“In the meantime, however, prices for goods and services are rising at a joint-record rate as increasing wages and energy costs offset the easing in producers’ raw material prices, dashing hopes of any imminent cooling of inflationary pressures.”

Here’s the details:

• Flash Eurozone Services PMI Activity Index fell to 51.2 (53.1 in December). 9-month low.
• Flash Eurozone Manufacturing PMI Output Index rose to 55.8 (53.8 in December). 5-month high.
• Flash Eurozone Manufacturing PMI rose to 59.0 (58.0 in December). 5-month high.

De La Rue isn’t alone in being buffeted by supply chain problems.

There was a 19% jump in profit warnings issued by UK listed companies in the last quarter of 2021. A record proportion cited supply chain disruption and rising costs, according to EY-Parthenon’s latest Profit Warnings report.

It found that:

• UK listed companies issued 203 profit warnings in 2021 – down from the record-breaking 583 warnings in 2020
• One-in-five companies in consumer-facing sectors issued a warning over the year
• A record 44% of profit warnings issued in Q4 2021 were blamed on supply chain disruption
• Retail, Software & Computer services and Aerospace & Defense were amongst the hardest hit FTSE sectors in 2021

Alan Hudson, EY-Parthenon partner and UK&I turnaround and restructuring strategy Leader, says :

“Sporadic growth made it a difficult year for many companies to navigate, despite healthy headline growth. By the second half of the year, an increasing number of companies were issuing profit warnings as forecasting and earnings challenges evolved and multiplied.”

The biggest driver of warnings in 2022 is likely to be the rise in inflationary pressures and its impact on disposable incomes and margins, Hudson adds:

We have already recorded profit warnings relating to rising energy prices. Labour shortages and wage increases are also beginning to feature more in company concerns, especially in logistics, hospitality and healthcare – including care homes.”

Growth across France’s private sector has hit a nine-month low.

Data firm IHS Markit reports that French economic activity is rising at a slower rate this month, due to rising Covid-19 infections and the supply chain crisis.

Although manufacturing sped up, there was a “notable easing in services growth”, which hurt the wider performance of the French economy

Inflationary pressures also intensified across France, with output prices increasing at the fastest rate on record amid a stronger rise in cost burdens, Markit adds.

Factory activity in Japan is growing at its fastest in four years this month, as output growth picked up.

However, manufacturers are still facing persistent chip shortages and rising prices, the latest survey of purchasing managers shows.

And Japan’s wider private sector slipped into contraction for the first time in four months, after a surge in Omicron variant coronavirus cases hurt customer-facing businesses in the services industry.

European markets have opened in the red, with Germany’s DAX and France’s CAC both down around 0.3%.

The UK’s FTSE 100 is holding up slightly better, down 0.2% or 13 points.

The pan-European Stoxx 600 is now down 3% so far this year, as worries about US interest rate rises weigh on markets, while the FTSE 100 is still up 1.35% during 2022.

© Provided by The Guardian
European stock markets in early reading. Photograph: Refinitiv

Richard Hunter, Head of Markets at interactive investor, says January has been difficult for investors:

The earnings season so far has been a patchy affair, marked by missed earnings reports so far set against high expectations. The likes of Apple and Microsoft have the opportunity later in the week to lift spirits, while a first reading of US GDP for the December quarter could show that prior to the Omicron variant the economy was showing real signs of recovery.

In the meantime, January has been a difficult month for investors and in the year to date the Dow Jones has lost 5.7%, the S&P500 7.7% and the Nasdaq 12% with few signs of immediate respite on the table.

More broadly, the apparently worsening of relations between Russia and Ukraine has put investors on alert, as any possible attacks by Russia will have wider implications which other major powers will be unable to ignore. Whether this results in military action or strict sanctions remains to be seen, but in any event the developments are adding to general investor unease.

Shares in Unilever have jumped almost 5% this morning, after Nelson Peltz’s activist hedge fund built a stake in the consumer goods maker.

Peltz’s interest piles more pressure on Unilever to shake up its business model, as my colleague Zoe Wood explains:

The consumer goods company, best known for Dove soap, Hellmann’s mayonnaise and Marmite, has been thrown into turmoil after a £50bn tilt at GlaxoSmithKline’s consumer healthcare division caused fury among its shareholders.

On Sunday the Financial Times reported that Trian Partners, Peltz’s New York-based hedge fund, had taken a position in the UK group, adding to the problems of its embattled chief executive, Alan Jope.

Martin Deboo, an analyst at investment bank Jefferies, said the “fox would now appear to be inside the henhouse”.

“Trian has a long and successful track record of unlocking value,” said Deboo. “This has frequently centred on splits and spin-outs.

Related: Pressure for shake-up expected at Unilever as activist investor buys stake in firm

Unilever are the top FTSE 100 riser, after plunging a week ago as investors baulked at its plan to buy GSK’s consumer healthcare arm.

© Provided by The Guardian
Unilever’s share price Photograph: Refinitiv

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

Global stock markets are starting the new week on the back foot, as investors fret about looming interest rate rises and the Ukraine crisis.

Shares have dropped in many Asia-Pacific markets, after Wall Street ended last week with more losses. The S&P 500 fell 1.9% on Friday, as January continues to be one of the worst months for stocks since the pandemic began.

Hong Kong’s Hang Seng index, and South Korea’s KOSPI, are both down 1.25% today, while India’s Sensex has lost 2%.

European stocks are expected to open lower too, as traders brace for a Federal Reserve meeting on Wednesday. The US central bank is likely to confirm it is on track to soon start raising borrowing costs and running down its balance sheet.

As Oliver Allen, a market economist at Capital Economics, puts it:

“With inflation eye-wateringly high, the Fed is on course to steadily remove the ultra-accommodative monetary policy that has been a key prop to stock prices for over a decade now.”

There is also anxiety about the situation in Ukraine, after the US government ordered the families of all American personnel at its embassy in Ukraine to leave the country amid heightened fears of a Russian invasion.

Jim Reid of Deutsche Bank says:

Geopolitics doesn’t always impact markets even if they feel very tense and fraught. However the current Russia/Ukraine situation does seem to be adding to the risk off at the moment and merits close attention.

But Wall Street could claw back some of last week’s losses, at the start of a very busy week for company earnings – including Microsoft, Apple and Tesla.

Also coming up today

Some UK workers will be returning to the office today for the first time in weeks, as the Plan B Covid-19 restrictions are rolled back.

The latest ‘flash’ PMI surveys of firms in the UK, France, Germany and the wider eurozone will be released this morning.

They could show that the UK economy picked up in January, after Omicron hit in December, as Alvin Tan of Royal Bank of Canada explains:

The economic impact of the omicron variant is likely to have been relatively mild. Data for early January already point to some degree of recovery in restaurant bookings while card spending data has also shown signs of recovery.

The recovery along with expectation of restrictions being lifted should buoy the PMI survey, and we expect the January services PMI to strengthen to 54.8.

The agenda

• 9am GMT: Eurozone flash Purchasing Managers survey for January
• 9.30am GMT: UK flash Purchasing Managers survey for January
• 1.30pm GMT: Chicago Fed National Activity Index for December
• 2.45pm GMT: US flash Purchasing Managers survey for January

Shares in De la Rue have tumbled by 30% at the start of trading, after it warned profits will miss expectations.

They’ve dropped 45p to 105p each, the lowest since June 2020.

© Provided by The Guardian
De La Rue’s share price over the last two years Photograph: Refinitiv

British banknote printer De La Rue has issued a profit warning, after suffering supply chain shortages and staff absences due to the pandemic.

De La Rue told the City that annual profit will miss market expectations, after “significant headwinds”, primarily due to the Covid-19 pandemic, become more pronounced.

Those headwinds include increased employee absences at its manufacturing facilities globally due to coronavirus infections.

De La Rue says:

The Omicron and Delta variants have caused substantially increased employee absences in our manufacturing facilities globally, which will result in lower total operational output for the full year.

It has also suffered supply chain shortages, including semiconductors, and other process raw materials, plus rising costs due to supply chain cost inflation.

De La Rue now expects to make adjusted operating profits of £36m to £40m this financial year (to March 26th), missing market expectations of £45m-47m.

This disruption will delay the results of its Turnaround Plan by 12 months, De La Rue says, rather than derailing it.

Clive Vacher, CEO, says:

“Despite the macro challenges that are delaying aspects of the Turnaround Plan, De La Rue continues to increase adjusted operating profit in both divisions year on year, and the Plan anticipates this to continue going forward. While this trading update is disappointing, it should be seen as a delay to reaching our Turnaround Plan objectives, rather than indicating that a change of direction is required.

The Company’s leadership has worked hard to mitigate many of these external effects, with the cost reduction activities we have implemented since early 2020 having a significant impact in supporting our underlying performance while we navigate these external factors. The markets in which we operate, and our position in them, remain strong, and we continue to execute substantial investment for the future.”