Stock prices in London were higher on Thursday morning on news the UK has officially entered a mild recession, raising Bank of England interest rate cut hope.
The economic figures could also carry political significance, as the UK prime minister faces a pair of by-election tests.
On the corporate front, results from British Gas owner Centrica impressed. Among mid-caps Genus plunged on a China warning and Close Brothers axed its dividend.
The FTSE 100 index traded 22.00 points higher, 0.3%, at 7,590.40 in opening dealings.
The FTSE 250 was up 57.35 points, 0.3%, at 19,061.24, and the AIM All-Share was up 0.93 of a point, 0.1%, at 751.38.
The Cboe UK 100 was up 0.4% at 759.10, the Cboe UK 250 rose 0.2% to 16,485.81, and the Cboe Small Companies was up 0.1% at 14,422.70.
The pound was quoted at $1.2550 early Thursday, up from $1.2542 at the London equities close on Wednesday, but off the $1.2573 it bought in the early hours of the morning.
The UK economy suffered a sharper than expected decline in the final quarter of last year, entering a technical recession, according to numbers from the Office for National Statistics on Thursday.
UK gross domestic product slumped 0.3% in the three months to December from a quarter earlier, underperforming the expected 0.1% fall, according to consensus cited by FXStreet.
The UK economy had declined 0.1% quarter-on-quarter in the third-quarter of 2023.
It means the UK has entered a technical recession, which is generally defined as two successive quarterly falls in gross domestic product.
‘The UK economy officially entered into a technical recession in the second half of 2023, a damp squib of a performance that will sound a few alarm bells among politicians and Bank of England officials alike. While this was no big surprise to investors, the 0.3% downturn in activity in the fourth quarter was much larger than anticipated. Moreover, the economy also unexpectedly shrank on an annual basis, as elevated consumer prices and tight monetary conditions squeezed household purchasing power to a greater extent than originally foreseen,’ Ebury analyst Matthew Ryan commented.
‘The pound sold-off against its peers, albeit only very modestly, with sterling remaining one of the better performing major currencies in the world so far this year. Clearly, investors are not convinced that a mild recession will be enough to encourage the Monetary Policy Committee to pull the trigger on lower interest rates just yet, as policymakers are far more focused on bringing down UK inflation than propping up near-term growth - we continue to see the first BoE rate cut no sooner than the bank’s June meeting.’
Ebury analyst Ryan noted the figures could also grab the attention of those in Westminster.
‘The Labour Party continues to hold a very solid advantage over the Tories of around 20 points, and confirmation of a recession will do nothing to help narrow the deficit. What it does mean, perhaps, is that PM Rishi Sunak will be in absolutely no rush to call for an election any time soon, in the hope that economic fortunes improve before Brits take to the polls at some stage towards the end of the year,’ Ryan added.
Voters in the UK will head to the polls in two by-elections that could give an indication of the scale of the challenges facing the main political parties ahead of a national contest later this year. Prime Minister Sunak is braced for tests in Wellingborough and Kingswood, where Labour hopes to flip Tory majorities in the tens of thousands.
Headlines this week have been dominated by a different by-election – the upcoming Rochdale vote, in which Labour’s candidate has had party support withdrawn over remarks he made about Israel and Jewish people.
But Thursday’s results will also be significant, with a Tory defeat in either constituency meaning that the government has clocked up more by-election losses in a single parliament than any administration since the 1960s.
Both votes are seen as largely two-horse races between Labour and the Conservatives – though the Tories are also threatened by strengthening support for Reform UK, which is targeting disgruntled voters on the right. The circumstances surrounding the by-elections could also prove difficult for the governing party.
The euro stood at $1.0734 early Thursday, up from $1.0720 late Wednesday. Against the yen, the dollar was trading at JP¥150.04, down from JP¥150.62.
In New York on Wednesday, the Dow Jones Industrial Average rose 0.4%, the S&P 500 surged 1.0% and the Nasdaq Composite jumped 1.3%.
In Tokyo on Thursday, the Nikkei 225 added 1.2%, while the Hang Seng in Hong Kong ended up 0.4%. The S&P/ASX 200 in Sydney closed 0.8% higher. Financial markets in Shanghai remained closed for the Chinese New Year holiday.
In London, Centrica shares rose 4.5%.
Its revenue totalled £26.46 billion for 2023, a rise of 11% from £23.74 billion. It swung to a pretax profit of £6.47 billion, from a loss of £383 million.
Excluding exceptional items and some re-measurements, revenue totalled £33.37 billion, down 0.8% from £33.64 billion. Pretax profit by this measure fell 14% to £2.71 billion from £3.17 billion.
It provides the re-measurement adjusted figures as these items are judged to ‘distort the group’s underlying business performance’.
Chief Executive Chris O’Shea said: ‘This strong underlying operational performance has continued into early 2024. As you would expect, sharply lower commodity prices and reduced volatility will naturally lower earnings in comparison to 2023 as we return to a more normalised environment. Our performance over the past year has reinforced our confidence in delivering against our medium-term sustainable profit ambitions and continuing to create value for shareholders.’
Centrica lifted its final dividend by just over a third to 2.67p per share from 2.00p. Its total dividend amounted to 4.00p, up by a third from 3.00p. It said total cash returns to shareholders for 2023 amounted to £800 million.
Edison analyst Andrew Keen commented: ‘Centrica’s 2023 results demonstrate the company’s ability to create value through a balanced portfolio, despite facing various challenges.’
Elsewhere, Genus plunged 25% as it warned the Chinese porcine market continues to be ‘challenging’.
The firm, which makes biotechnology products for cattle and pig farmers, expects to report adjusted pretax profit for the first-half ended December 31 of £29 million, on revenue of £334 million.
Both outcomes will be in line with expectations, but would represent a 4.6% on-year decline on the top line and a 31% slump in adjusted pretax profit.
‘PIC ex-China performed robustly, with North America, Latin America and Europe delivering adjusted operating profit growth in constant currency. China continues to be a challenging porcine market, however our enhanced commercial focus has resulted in winning new royalty customers in the period which will positively impact fiscal year 2025 and beyond,’ Genus added.
Close Brothers gave back 14%. It warned on its dividend, sending its stock crashing, as it prepares to count the cost of a UK probe into motor finance.
Close Brothers cautioned on a ‘potential financial impact’ stemming from the UK Financial Conduct Authority’s probe of historical motor finance commission arrangements.
The UK financial services watchdog in January explained it is probing whether compensation could be due for people who were potentially overcharged for car loans.
‘While there is no certainty regarding any potential financial impact as a result of the FCA’s review, the board recognises the need to plan for a range of possible outcomes. It is a long-standing priority of the group to maintain a strong balance sheet and prudent approach to managing its financial resources. To that end, the board considers it prudent for the group to further build capital strength, while supporting our customers and business franchise,’ Close Brothers said.
The bank explained it will pay no dividend for the current financial year, which runs to July 31, and the reinstatement of payouts for financial 2025 will be reviewed once the FCA has concluded its probe.
On the up, Jet2 climbed 5.7%. The travel company said forward bookings for winter 2023/24 have ‘performed well’.
‘The mix of higher margin per passenger package holiday customers is slightly ahead of last winter at approximately 60%, which is particularly pleasing given the resurgence of city breaks in this period,’ it added.
Jet2 said these positive trends continued with bookings for this month and the next strong. It will ‘tighten’ and lift annual profit guidance as a result.
Pretax profit before currency exchange revaluation for the year to March 31 will land in a £510 million to £525 million range. Its previous guidance spanned £480 million to £520 million.
Brent oil was quoted at $81.23 a barrel early Thursday, down from $82.63 late Wednesday. Gold was quoted at $1.995.04 an ounce, up from $1,988.99.
Still to come on Thursday is the latest US initial jobless claims reading and retail sales at 1330 GMT.
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