UK growth lower than expected

• FTSE trading 90 points higher • UK services show surprise rebound while contraction in eurozone deepens • Britain’s 2008/09 recession was shorter but deeper than previously thought • General strike in Greece • Dexia rescue should happen by Thursday, says French finance minister 10.07am: Here is ING economist James Knightley’s take on the improvement in Britain’s services sector. Today’s report shows the biggest rise in the headline index since March. It is possible that the PMIs were negatively affected by concerns over the August riots and now the fears of wider civil unrest have faded the surveys are recovering. Indeed, the global macro backdrop continues to deteriorate and the expectations component of the index fell to its lowest level sine March 2009 – the depths of the recession. Consequently we believe it is only a matter of time before we see more QE. We favour November as the announcement point for more QE from the BoE given close proximity to the Fed and ECB policy meetings and the Cannes G20 summit. Being seen to act in some kind of coordinated fashion may also give the stimulus “more bang for its buck” rather than going it alone currently in what are very volatile markets and a mixed environment for data. With the Fed consistently highlighting that QE2 was less effective than QE1 in the US we suspect QE2 in the UK will amount to around an extra £300bn of asset purchases. This would bring the total spend to half a trillion pounds. 10.00am: Jonathan Loynes, chief European economist at Capital Economics, can’t get very excited about the bounceback in Britain’s service industries, and reckons the Bank of England should pump more money into the economy. He says: Coupled with the equivalent indices of the construction and manufacturing reports, this points to GDP growth of about 0.1% per quarter – positive at least. However, the average reading in Q3 as a whole suggests that GDP may well have fallen during the quarter. Meanwhile, the national accounts give a very downbeat picture of the economy’s past performance. Not only was growth nudged down in Q2 (from +0.2% q/q to +0.1%), but revisions to the back data left a bigger drop in output during the recession (7.1%) than previously estimated (6.4%). This would seem to contradict recent suggestions that there might be less spare capacity in the economy than previously thought. Overall, further justification for the MPC to launch QE2 either tomorrow or next month. 9.53am: And we’ve had another surprise, this time a positive one. The UK service industries bucked the worsening European trend and improved this month, with the PMI rebounding from August’s eight-month low to 52.9 in September. The FTSE is now up 90 points at 5035, an 1.84% increase. 9.38am: It turns out Britain’s 2008-09 recession was shorter but deeper than previously thought. After changing its methodology, the ONS carried out a major recalculation of its historical data and now reckons the slump was 7.1% from peak to trough, rather than 6.4%. 9.36am: Alas, we had some technical problems just as the Office for National Statistics published revised GDP figures. In a surprise revision, it said the UK economy grew by just 0.1% in the second quarter, less than the 0.2% previously estimated. This is the slowest quarterly growth rate since the end of last year, when the economy contracted by 0.5%. “We’ve had some new data in, but the majority of the change is due to new methods and some new industrial weights,” a statistician said. 9.17am: The euro slipped on Wednesday, hovering near a nine-month low against the dollar, as investors grew more sceptical over EU finance ministers’ willingness to act quickly to beef up the banks. It was trading at $1.3290 after hitting $1.3260 earlier. Kasper Kirkegaar, currency strategist at Danske Bank in Copenhagen, told Reuters: At this point, there’s just been news of discussions about possible bank recapitalisations, there’s no details yet. There’s a high risk of a further sell-off if we don’t get details on this soon. 9.12am: Here is some reaction to the eurozone services PMIs from Howard Archer, chief UK and European economist at IHS Global Insight. Eurozone service sector activity contracted for the first time in 25 months in September according to the purchasing managers, and at a deeper rate than first reported. Furthermore, the deterioration was widespread in September, with Germany seeing the first contraction in services activity since July 2009 and French expansion slowing sharply to a 25-month low. Worryingly, there was deeper services contraction in both Spain and Italy, adding to the concerns over their economy. Ireland bucked the trend, seeing marginally faster expansion. Contraction in the Eurozone’s key services sector during September, coupled with a marked decline in new business, heightens concern that the Eurozone could be heading back into recession and puts pressure on the ECB to cut interest rates as soon as Thursday. Indeed, with manufacturing activity contracting in September for a second month running, Markit’s composite output indicator for the two sectors sank to 49.1 from 50.7 in August, thereby indicating overall contraction in services and manufacturing output for the first time since July 2009. Eurozone economic activity is clearly being held back by tighter fiscal policy increasingly kicking in across the region, squeezed consumer spending power and the major hit to confidence coming from the heightened Eurozone sovereign debt tensions and global financial market turmoil. Also critically, slower global growth is now hitting foreign demand for Eurozone goods and services hard. Furthermore, falling prices charged in the services and manufacturing sectors combined in September supports the view that Eurozone consumer price inflation will soon head downwards on a sustainable basis despite spiking up to 3.0% in September. While an ECB interest rate cut is a possibility on Thursday, latest comments by policymakers suggest that it is more likely than not that the central bank will keep interest rate at 1.50% for now. Indeed, there was no hint of a rate cut on Thursday from ECB President Jean-Claude Trichet when he addressed the European Parliament earlier this week. 8.52am: The PMI services surveys for the eurozone paint a troubling picture. Italy’s services sector has shrunk at its sharpest pace for more than two years, and rather worryingly, Germany’s service industries have slipped into contraction territory for the first time since July 2009, with the index falling to 49.7 in September from 51.1 in August. Italy’s PMI dropped to 45.8 from 48.4, the lowest since July 2009, and Spain also posted its weakest reading since then, with the PMI at 44.8, indicating a sharper contraction. In the eurozone as a whole, the services sector has worsened with the index falling to 48.8, which indicates a faster contraction than previously. The UK PMI will be released at 9.30am and is expected to show services still expanded this month, albeit at a weaker pace. 8.51am: The FTSE is now only up 60 points at 5005, a 1.2% gain. 8.37am: In Greece, airlines have been grounded, trains halted and tax offices shut as public workers walked out to protest against the government’s harsh austerity measures – defying the prime minister’s plea to rally behind its effort to fend off the country’s bankruptcy. Hospitals ran on emergency staff and state schools shut in the first nationwide strike since the summer lull. In Athens’ airport, more than 400 domestic and international flights were cancelled, Reuters reported. The country’s unions expect hundreds of thousands of people to strike. “Unfortunately the new measures are just extending the unfair and barbaric policies which suck dry workers’ rights and revenues and push the economy deeper into recession and debt,” Stathis Anestis, spokesman for the GSEE union told Reuters. “With this strike, the government, the EU and the IMF will be forced to reconsider these disastrous policies.” 8.28am: This is what is happening today: • 9.30am The UK services PMI should show further weakening; European services PMI also out • 9.30am The UK Blue Book is expected to show massive revisions to past GDP data • Bank of England’s two-day monetary policy committee meeting begins • General strike in Greece 8.16am: Here are Tuesday’s comments on shoring up the banks from Olli Rehn, European commissioner for economic affairs, in full. He spoke to the Financial Times . There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states. There is a sense of urgency among ministers and we need to move on. Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty. This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis. 8.11am: Shares in Dexia have leapt nearly 10% to €1.106, after the French finance minister promised a rescue by Thursday, while Bank of France governor Christian Noyer said the central banks of France and Belgium would ensure the troubled lender has enough liquidity. The FTSE is still up over 100 points at 5045, a 2% gain. Barclays is the biggest riser, up 7.6% at 151.9p, followed by miners Rio Tinto, Eurasian, BHP Billiton, Cairn Energy, Kazakhmys and Xstrata. Oil, which fell below $100 a barrel on Tuesday, is back up over $100. 8.07am: Here’s more on the EU bank plan. Gary Jenkins, head of fixed income at Evolution Securities, sums it up: The markets are not so much driven by fear and greed nowadays as they are by hope and despair. For most of yesterday the latter had the upper hand with further concerns about the European banks leading equity markets sharply lower; the Eurostoxx 50 closed down 2.21% and the FTSE 100 was down 2.58%. However the last hour of US trading saw a remarkable turnaround as the S&P 500 gained 4% to close up 2.25% on the day. This was on the back of an FT story that European finance ministers discussed the need to recapitalise Europe’s banks at yesterday’s meeting. Olli Rehn said “There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe……there is a sense of urgency….capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty…”. Note however that there has been “no formal decision” to commence a co-ordinated recapitalisation of the banks… The recapitalisation of banks is a fine idea, but if the politicians could solve the sovereign crisis that would go a long way to solving the banking crisis. Recapitalising the banks would be positive and it would no doubt help risk assets in the short term. But it would not solve the sovereign problems and thus unless the EU is happy to just keep buying Italian bonds (via the ECB / EFSF) then at some stage the market will focus on the sovereigns rather than the banks. 8.01am: The FTSE has opened 120 points higher at 5064, a 2.4% gain, as markets digest the EU bank plan . There was also some reassuring news on troubled Franco-Belgian bank Dexia this morning. The French finance minister Francois Baroin said “tomorrow a solution should be found”. He added that Dexia could not stay in its current form. “It’s indisputable,” he said on RTL radio. He also said a solution involving French state-owned banks Caisse des Dépôts and Banque Postale, the finance arm of its postal service, would be the most “solid”. Meanwhile, the Belgian caretaker prime minister Yves Leterme said nationalisation of Dexia’s Belgian activities was one possibility being considered. Later this morning markets will be looking at the key UK services PMI data for September, which is expected to slip back from August’s 51.1 to 50.6. It’s out at 9.30am London time. At the same time, the Office for National Statistics will be releasing its annual “Blue Book”. New methodology will mean massive revisions to past GDP data, while the final estimate for the second quarter is expected to be reaffirmed at GDP growth of 0.2%. No doubt the figures will give the Bank of England’s monetary policy committee plenty of food for thought when it starts its two-day meeting today. And Greece faces a general strike. 7.49am: Good morning. After lively trading on Wall Street on Tuesday – the Dow Jones was down about 2% but surged 4% in the last hour of trading to close 1.4% higher at 10808.71, a gain of 153 points – the FTSE 100 index in London is expected to open 60-70 points higher. On Tuesday US shares rallied on news that EU finance ministers were examining ways of co-ordinating recapitalisations of financial institutions. Not all Asian markets followed Wall Street’s lead, however. Japan’s Nikkei slid 0.86% to 8382.98 while Hong Kong’s Hang Seng lost 3.4% to 16,250.27. Dampening any euphoria over EU plans to shore up banks, Moody’s downgraded Italy by three notches last night, to A2 from Aa2 with a negative outlook – giving Italian bonds a lower rating than Estonia and putting them on a par with Malta. The credit ratings agency said it saw a “material increase” in funding risks for highly indebted eurozone countries, and warned of possible further downgrades. “The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area,” Moody’s said in a statement . “The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt markets.” Michael Hewson market analyst at CMC Markets explains: The fluidity of the situation in Europe was aptly illustrated last night in the space of a fraught sixty minutes with stocks rallying sharply on reports that European finance ministers were examining ways of co-ordinating large scale recapitalisations of banks on a local level in an attempt to convince markets that governments would do all they could to safeguard and support the European banking sector. Just as they market had begun to digest that little nugget, ratings agency Moody’s with impeccable timing finally delivered on its ratings downgrade for Italy, downgrading them three notches to A2, with a negative outlook, citing increased risk in long term funding as well as increased downside risks to economic growth and to fiscal consolidation. European debt crisis Europe Julia Kollewe guardian.co.uk

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