Introduction: Japan shrinks faster than expected
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Japan’s economy has made a weak start to 2024, shrinking faster than expected, and confirming the UK as the joint fastest-growing G7 country this year.
Japan’s GDP contracted at an annualised rate of 2% in January-March, compared to October-December, worse than the 1.5% drop in activity forecast. That works out as a 0.5% quarterly drop in activity, as households and companies cut back.
Weak consumer spending dragged on growth as did a fall in capital spending and net exports.
Japan’s Q1 GDP shrinks more than expected.
Japan’s GDP fell 0.5% in Q1 2024, compared to market expectations of a 0.4% drop. Private consumption fell for the fourth consecutive quarter, with consumers cutting spending due to high living costs, sluggish wages, and a quake.— Kedia Advisory (@kediaadvisory) May 16, 2024
There are temporary factors to blame – including a New Year’s Day earthquake near Tokyo in which more than 200 people died, and a safety scandal at carmaker Daihatsu which disrupted production.
But in another blow for Tokyo, data for the fourth quarter of last year was revised down to show GDP was flat. That means nine months with no growth, since Japan’s economy slumped last summer.
This 0.5% contraction in January-March puts Japan at the bottom of the G7 growth league.
We already know that the UK expanded by 0.6% in Q1, ahead of the US with 0.4% growth and Italy with 0.3%, while Germany and France both expanded by 0.2%. Official Q1 data for Canada isn’t out yet, but it’s estimated to have expanded by 0.6%.
Japan’s weak growth is a headache for the Bank of Japan, as it tries to normalise monetary policy after running a massive stimulus programme. Predictions that the BoJ will struggle to raise interest rates have hurt the yen against the US dollar in recent weeks.
Fortunately for the BoJ, though, the dollar is weakening after yesterday’s drop in US inflation.
The agenda
-
7am BST: Norway’s Q1 2024 GDP report
-
9am BST: European Central Bank’s financial stability review
-
Noon BST: Bank of England policymaker Megan Greene gives speech on “The current state of Britain’s labour market”
-
1.30pm BST: US weekly jobless figures
-
2.15pm BST: US industrial production data
Key events
Elsewhere in the water industry, United Utilities has said it expects financial penalties due to flooding problems last year.
United Utilities, which reportedly pumped millions of litres of raw sewage into lake Windermere earlier this year, has reported profit after tax of £127m for the year to 31 March.
The utility, based in the North West of England, is proposing to raise its dividend by 9.4%, having being ranked as the most polluting water firm in England earlier this year.
It reports that it received an ODI (outcome delivery incentive) reward of £34m from regulator Ofwat, its highest ever. Those ODIs are bonuses which are granted for exceeding services targets.
But it also warned that “exceptionally high rainfall” during the year adversely impacted performance such as flooding, meaning United expects to receive penalties from Ofwat against its ODIs.
Louise Beardmore, chief executive officer, says the company “take our role in protecting the environment very seriously”, and is bringing forward £400m of investment to reduce spills at more than 150 storm overflows, and to accelerate environmental schemes in communities such as Windermere.
The City is not pleased to see Johan Lundgren leaving easyJet, though.
EasyJet’s shares are down 6% in early trading, as traders react to the change in the company’s cockpit.
That’s despite the company predicting a record second half of its financial year (April-September, when summer trading boosts earnings).
Lundgren (who should be at easyJet until 1 January 2025) explained this morning:
We are now absolutely focused on another record summer which is expected to deliver strong FY24 earnings growth and are on track to achieve our medium term targets.
There are “clear signs of progress” at BT, reports Matt Britzman, equity analyst at Hargreaves Lansdown:
Costs associated with the fibre buildout look to be at their peak, and that’s vitally important as telecom giants continue to be punished for investing heavily in the future.
Once that spending comes down, free cash flow should jump higher, and markets can reassess how to price these businesses. Progress on getting costs in check also looks promising, with the £3bn programme completing early, and another £3bn targeted by the end of the decade.
That’s helped give CEO Allison Kirkby the confidence to put out a strong free cash flow guide for the coming year.
Shares in BT have jumped by over 8% at the start of trading in London.
Investors seem cheered by Allison Kirkby’s new cost-savings drive, the 3.9% hike in the dividend announced today, the goal of growing free cash flow, and her pledge that BT has reached “the inflection point” on its long-term strategy.
BT’s shares have risen to 122p, the highest since early January, wiping out almost all their losses for this year.
That will sting the investors who have placed a £300m bet against the telco by shorting its shares (borrowing them, and selling them, in the hope of buying them back more cheaply).
EasyJet chief Johan Lundgren to depart
EasyJet’s CEO is stepping down, after a gruelling seven years in which he handled the Covid-19 disrupion and soaring oil prices after Russia invaded Ukraine.
The budget airline has annnounced that chief executive Johan Lundgren will leave the company at the start of next year. CFO Kenton Jarvis has been appointed as his successor.
EasyJet has also reported that its losses narrowed in the last six months, to £347m in the half-year to 31 March from £411m a year earlier.
The company says it is on track to deliver its “ambitious medium term target” of pre-tax profits over £1bn.
Lundgren will be a loss, says Zoe Gillespie, investment manager at RBC Brewin Dolphin. explaining:
“easyJet continues to reduce losses during the quieter winter period, while summer bookings are strong. Greater airline capacity, increased revenue from ancillary services, and the growth of easyJet Holidays are adding to the spread of revenue sources and giving customers a better connection to the brand.
Johan Lundgren has navigated a particularly turbulent period for easyJet in the last seven years and his departure will be a loss to the company. But, he leaves the airline in a strong position and there are clear succession plans in place, providing a good deal of stability for easyJet as it continues on its upward trajectory. While the shares have rallied since October 2023, they remain some way off their pre-pandemic peak – so there is still plenty of room for growth.”
Thames Water director quits board
Thames Water’s largest shareholder has withdrawn its representative from the utility’s board, as the uncertainty over the debt-laden utility company’s future continues.
Thames told the City this morning that Michael McNicholas, a representative of the giant Canadian pension fund Omers, is stepping down with immediate effect.
Thames’ board members have been in a tricky position since its owners pulled the plug on £500m of emergency funding in late March, and indicated that they were unprepared to stump up more funds to invest in Thames’s infrastructure.
The company’s investors – a consortium of funds from Canada, Abu Dhabi, Australia, Britain and China – had deemed the company “uninvestible”, arguing that the industry regulator, Ofwat, had been too stringent.
The FT says McNicholas’s departure is a further sign that Thames’s owners “are prepared to ditch their stake in the UK’s biggest water company”.
BT in new cost savings push
UK telecoms group BT has announced a new cost savings push to save £3bn per year, after reporting a drop in profits.
BT’s new CEO, Allison Kirkby, says the group is now aiming to make £3bn of gross annualised cost savings by the end of its 2029 financial year.
That’s on top of an existing £3bn cost savings and service transformation programme, which costs jobs, and which BT reports has been competed a year early.
Kirkby reports that BT has now reached “the inflection point” on its long-term strategy, having passed the peak spending point of its full-fibre broadband rollout.
She is now announcing new financial guidance, including doubling BT’s free cash flow over the next five years.
The company is also lifting its dividend by 3.9% this year, to 8p a share.
Kirkby says:
BT Group built and connected customers to our next generation networks at record speed and efficiency over the past year, while continuing to grow revenue and EBITDA.
Having passed peak capex on our full fibre broadband rollout and achieved our £3 billion cost and service transformation programme a year ahead of schedule, we’ve now reached the inflection point on our long-term strategy.
Kirkby is under pressure from sceptical investors, who have taken out short positions worth £300m against BT’s share price.
This morning, the company also reported a 31% drop in pre-tax profits for the last financial year, to £1.186bn from £1,729bn.
That’s despite BT raising prices; average revenue per user for its Openreach broadband division grew by 10%, partly due to price rises and increased volumes.
Introduction: Japan shrinks faster than expected
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Japan’s economy has made a weak start to 2024, shrinking faster than expected, and confirming the UK as the joint fastest-growing G7 country this year.
Japan’s GDP contracted at an annualised rate of 2% in January-March, compared to October-December, worse than the 1.5% drop in activity forecast. That works out as a 0.5% quarterly drop in activity, as households and companies cut back.
Weak consumer spending dragged on growth as did a fall in capital spending and net exports.
Japan’s Q1 GDP shrinks more than expected.
Japan’s GDP fell 0.5% in Q1 2024, compared to market expectations of a 0.4% drop. Private consumption fell for the fourth consecutive quarter, with consumers cutting spending due to high living costs, sluggish wages, and a quake.— Kedia Advisory (@kediaadvisory) May 16, 2024
There are temporary factors to blame – including a New Year’s Day earthquake near Tokyo in which more than 200 people died, and a safety scandal at carmaker Daihatsu which disrupted production.
But in another blow for Tokyo, data for the fourth quarter of last year was revised down to show GDP was flat. That means nine months with no growth, since Japan’s economy slumped last summer.
This 0.5% contraction in January-March puts Japan at the bottom of the G7 growth league.
We already know that the UK expanded by 0.6% in Q1, ahead of the US with 0.4% growth and Italy with 0.3%, while Germany and France both expanded by 0.2%. Official Q1 data for Canada isn’t out yet, but it’s estimated to have expanded by 0.6%.
Japan’s weak growth is a headache for the Bank of Japan, as it tries to normalise monetary policy after running a massive stimulus programme. Predictions that the BoJ will struggle to raise interest rates have hurt the yen against the US dollar in recent weeks.
Fortunately for the BoJ, though, the dollar is weakening after yesterday’s drop in US inflation.
The agenda
-
7am BST: Norway’s Q1 2024 GDP report
-
9am BST: European Central Bank’s financial stability review
-
Noon BST: Bank of England policymaker Megan Greene gives speech on “The current state of Britain’s labour market”
-
1.30pm BST: US weekly jobless figures
-
2.15pm BST: US industrial production data
