Jasper Jolly and Angela Monaghan 

German economy in recession as coronavirus hits – as it happened

Rolling live coverage of business, economics and financial markets as data show the economic toll from the pandemic
  
  

A worker wears a protective mask at the Volkswagen assembly line in Wolfsbrug after Europe’s largest car factory restarted production in April.
A worker wears a protective mask at the Volkswagen assembly line in Wolfsbrug after Europe’s largest car factory restarted production in April. Photograph: Reuters

Closing summary: Recession comes early in Germany

Almost anyone in any country around the world could tell you that economies are in recession: the question is, how deep?

For Germany the technical marker of recession - two consecutive quarters of declining growth - came earlier than expected, with the news that the fourth quarter of 2019 saw output fall, before the steep decline seen in the first three months of 2020 and the deeper losses expected in the current quarter.

However, while steep, Germany’s downturn has so far been less severe than France and Italy, and only slightly worse than the UK’s (subject to the big revisions that are likely because of the difficulties of collecting data). Overall the eurozone economy shrank by 3.8% in the quarter.

Here are some of the other important business and economics developments from throughout the day:

  • US retail sales fell in April at the fastest rate ever seen as lockdowns prevented consumers from spending.
  • Brexit news is here again: the latest round of negotiations ended with no progress and fighting talk from the EU and the UK, with time running out on agreeing a trade deal or transition extension to avert an abrupt move to World Trade Organisation trade terms at the end of the year.
  • The number of companies or countries at risk of having their credit ratings cut to junk from investment grade has been pushed to a record high of 111 by the coronavirus pandemic, according to research by S&P global ratings research.
  • Royal Mail shares jumped 8% after the postal service announced the shock departure of boss Rico Back. Royal Mail will pay £50,000 towards unexplained legal fees for his departure.
  • Transport for London is to raise the congestion charge by 30%, temporarily stop free travel for children and charge over-60s to travel at peak times as part of a deal to secure a £1.6bn bailout from the government.

You can continue to follow our live coverage around the world:

In the UK, NHS England has announced 186 more deaths of people who tested positive for Covid-19, bringing the total number of confirmed reported deaths in hospitals in England to 24,345

In the US, the House will vote on a $3tn stimulus package opposed by Trump and Senate

And in our global coverage, Spain hails large-scale antibody study as a key tool in the fight against the coronavirus

Thank you for reading our live coverage of economics, business and financial markets this week. Please join us as ever on Monday for more. JJ

And more on airlines: this time, Virgin Atlantic.

The carrier, which is still looking for a bailout after announcing 3,000 job cuts, has had interest from a dozen private investors, according to a source cited by Reuters.

The airline is also reportedly looking to defer orders for six Airbus A350 aircraft and 14 A330 Neo planes.

Wall Street stocks have dropped at the opening bell.

Here are the opening moves:

  • S&P 500 DOWN 27.40 POINTS, OR 0.96%, AT 2,825.10
  • DOW JONES DOWN 210.67 POINTS, OR 0.89%, AT 23,414.67
  • NASDAQ DOWN 102.53 POINTS, OR 1.15%, AT 8,841.19

More bad (if expected) news on the US economy: industrial output fell 11.2% in April compared to March.

That was a slightly smaller fall than expected by economists, but still a marked hit to a large part of the US economy.

Manufacturing output fell by 13.7% as car production slumped from 7.18m units in March to only 180,000 in April.

Some updates on the embattled aviation sector.

First up, Ethiopian Airlines, whose Boeing 737 Max crashed fatally in March 2019, expects compensation talks with the US manufacturer to finish by the end of June.

The crash was the second in the space of a few months, and triggered the worldwide grounding of the 737 Max after a sensor fault was identified.

Reuters reported that Ethiopian Airlines boss Tewolde Gebremariam said the airline is asking Boeing to compensate it for the accident’s “impact on the brand”. He also said:

We have invited Boeing to discuss compensation. It’s compensation for the grounded Max... there is also compensation for delayed delivery of the Max that was supposed to come and loss of revenue.

By the end of June, which is the end of our fiscal year, we should have something... meaning compensation.

The 737 Max grounding was then of course followed by an almost global freeze on passenger flights, putting airlines all over the world at risk of collapse. Germany’s Lufthansa is looking for state aid for its various airlines in their home countries, including Belgium’s Brussels Airlines.

The Belgian government said on Friday it had told Lufthansa it could only invest in its Belgian subsidiary Brussels Airlines if certain conditions were met, according to a joint statement with Lufthansa. That included the prospect of the business returning to profitability.

US stock market futures have taken a tumble ahead of the opening bell on Wall Street today - and they were not helped by the worse than expected US retail sales.

The S&P 500, the Dow Jones industrial average and the Nasdaq are all set for declines of about 1%.

Economists had expected a 12% decline in US retail sales, so a huge fall was priced in. However, the fact that it was so far off estimates shows the extent of the turmoil in the US economy.

The data also show a big redistribution of spending underlying the overall decline.

Retail trade sales were down 17.8% on last year, with clothing shops down 89.3% - a wipeout. Yet non-store retailers - including online giants such as Amazon - were up 21.6% from last year.

Updated

US retail sales fall at fastest rate on record

US retail sales plunged by 16.4% in April compared to March as lockdown restrictions bit, according to the US Census Bureau - the fastest rate on record.

Barnier is still talking. Via Reuters, he has said that an agreement is still possible but that the EU is ready for “no deal” and will be stepping up preparations.

Before the pandemic a no-deal end to the Brexit transition period was seen as one of the biggest risks to their prospects by many British businesses.

It would mean that trade between the UK and the EU would default to World Trade Organisation terms - which could mean an overnight imposition of tariffs on all manner of goods and complex disruptions to services.

However, in the light of the coronavirus pandemic, some analysts are speculating that it would be difficult to identify precisely the effect of WTO trade, making it more politically palatable.

Barnier: "We will not bargain away our values for the benefit of the British economy"

Sterling has fallen by 0.6% today against the US dollar, hitting its lowest level since 27 March, with traders blaming the Brexit impasse. One pound bought you $1.2155 at its lowest.

The EU’s chief negotiator, Michel Barnier, has added his tuppence, following his counterpart, and it’s fiery stuff:

We will not bargain away our values for the benefit of the British economy.

Here are the key points from him so far:

  • The trade talks were disappointing, after the UK refused to engage on discussing a level playing field [promises to uphold common standards on the environment, health and workers’ rights so UK businesses don’t get an unfair advantage]. There will be no deal without this agreement.
  • The UK will have to be more realistic if it wants a deal.
  • The UK cannot pick and choose the best aspects of the EU without meeting obligations that members must meet.
  • The next round of negotiations must bring new dynamism to avoid a stalemate.

Remember, the UK officially has until the end of June to either ask for an extension of the Brexit transition or else decide to end the transition period without a trade deal in December (or agree some kind of fudge).

Some of the earlier enthusiasm among European investors has tailed off, with market gains diminishing. Some indices are now in the red:

  • FTSE 100: +0.6% at 5,775
  • Germany’s DAX: +0.7% at 10,412
  • France’s CAC: -0.1% at 4,267
  • Italy’s FTSE MIB: -0.1% at 16,846
  • Spain’s IBEX: -0.7% at 6,502
  • Europe’s STOXX 600: +0.3% at 328

US futures are down, indicating a drop of roughly 1% for the Dow, S&P and Nasdaq when Wall Street opens. A revival of fears over the US-China trade wars adds to concerns about the impact of the coronavirus crisis.

Updated

Brexit talks end with 'very little progress'

Brexit.. remember that? Round 3 of negotiations with the EU have ended with “very little progress” towards an agreement according to David Frost, the UK’s chief negotiator.

According to Reuters, he said the major obstacle proved to be the EU’s insistence on including a set of novel and unbalanced proposals on the so-called “level playing field”.

Frost said “we very much need a change in approach for the next round of talks beginning on 1 June.”

The UK intends to make public all the UK draft legal texts next week so that the EU’s member states and “interested observers” can see the UK’s approach.

The eurozone economy will shrink by 8.1% this year, before bouncing back with 6.5% growth in 2021, according to forecasts from economists at HSBC.

They expect policymakers at the European Central Bank, led by Christine Lagarde, to extend its emergency Covid-19 package by €500bn at their 4 June meeting. In March, the ECB announced a €750bn asset purchase programme (known as PEPP), targeting both public- and private-sector assets.

Simon Wells, chief European economist at HSBC, says:

In the face of ballooning public finance deficits and the ever-present threat of market pressure on fiscally-weaker countries, the ECB remains the main game in town for preventing debt crises that could threaten the stability of the euro. At the ECB’s recent purchase rate, it will have exhausted the €750bn PEPP by end-September. Significant PEPP expansion could help allay market concerns for now, even if it isn’t a lasting solution.

Although we now expect a slower rebound [in eurozone growth in 2021], it is still very swift by historical standards. This reflects the unusual composition of the recession. Typically, household spending holds up relative to investment through a slump as firms slash capex. This time, we expect a double-digit drop in consumption and a sharp spike in savings. But as lockdowns are eased, consumer spending could rise rapidly - provided the furloughing measures, fiscal cushions and central bank lending schemes work.

Royal Mail shares jump 8% after it announces shock departure of boss Rico Back

Investors have welcomed the news that Rico Back is no longer running Royal Mail, with shares up 8% this morning at 175p.

The company said he was leaving immediately, less than two years after being appointed chief executive, as it announced a £22m drop in revenues in April, mainly due to a sharp drop in letter volumes which were down by a third.

Russ Mould, AJ Bell’s investment director, gives his take on the news:

The middle of a global crisis feels like an odd time to part ways with a CEO, particularly one who has been in post for as short a time as Royal Mail’s Rico Back.

With his P45 delivered, Back is being given more time to enjoy the Swiss penthouse from which he has reportedly been running the company.

The best hint at the reasons behind his departure is the company’s statement that interim executive chair Keith Williams will lead discussions on ‘an accelerated pace of change across the business’.

Royal Mail’s board will need to move fast to appoint a successor given the big challenges facing the business and the market will want to hear more as promised when full year results are posted on 25 June.

The bonus to be paid to frontline staff and withdrawal of incentives for the executive team may go some way to mending fences with a disgruntled workforce.

Read our full story here:

Other UK companies at risk of falling into S&P’s “fallen angel” category (when a debt issuer’s rating is cut to junk from investment grade) this year include:

  • Next
  • British Airways
  • ITV
  • Ashtead
  • Kingfisher
  • Virgin Money

Commenting on the trend globally, S&P said:

The financials sector led the additions to the potential fallen angels list [for 2020], highlighting the challenges the sector is facing.

However, we see the highest downgrade potential in the lodging and leisure and auto sectors, which have the greatest number of potential fallen angels that have ratings on CreditWatch negative.

S&P: companies at risk of 'fallen angel' status at record high

In other news, the number of companies or countries at risk of having their credit ratings cut to junk from investment grade has been pushed to a record high of 111 by the coronavirus pandemic, according to research by S&P global ratings research.

The number of so-called ‘fallen angels’ has so far this year reached 24, with more than $300bn in rated debt, S&P estimates. The 111 potential fallen angels have another $444 billion of bonds, suggesting the amount is likely to spiral further.

Sudeep Kesh, head of S&P global credit markets research explains the significance:

Potential fallen angels are significant because the loss of investment-grade ratings typically carries both higher capital costs and sometimes the need to revise contracts with bondholders to protect investors - further adding to capital costs - or worse, could lead to the sale of the bonds in favour of more creditworthy companies.

Companies that have fallen into this category already this year include financial institutions, utilities, and one each in aerospace and defence, consumer products, media and entertainment, metals and mining, property, and transport.

Of the 24 companies to have reached “fallen angel” status so far this year, higher street retailer Marks & Spencer is the only one from the UK.

Others include France’s Renault, and several in the US including Royal Caribbean Cruises, Ford, Delta Air Lines, Macy’s and Kraft Heinz.

Unlike Germany, the eurozone as a whole is not yet in recession. The good news ends there.

It is the steepest quarterly downturn since before the euro was created, and since comparable data was first collected in 1995, according to Eurostat, the European commission’s statistics office.

It was a 3.3% decline across the whole EU, which also includes countries such as Sweden and Finland, which were not as badly hit - potentially because of less severe lockdowns.

The UK’s GDP dropped by 2% in the quarter, less than countries that locked down earlier such as Italy and France, which suffered quarterly GDP declines of 4.7% and 5.8% respectively.

Eurozone GDP falls 3.8% as pandemic hits

Eruzone GDP fell by 3.8% quarter-on-quarter in the euro zone in the first quarter of 2020, according to a flash estimate from the EU’s statistics agency released on Friday.

Germany is in recession, and worse is coming, said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics:

The German economy has been tip-toeing on the edge of recession since the beginning of 2019, but it can hide no longer. The revision to Q4 means that the economy entered a technical recession at the start of the year, and this before the incoming collapse in Q2 activity.

Q2 will be orders of magnitudes worse, though we suspect the German economy will continue to “outperform” its EZ peers. In addition, employment was hardly affected by the Covid-19 epidemic in Q1, rising by 0.3% year-over-year in Q1. This is consistent with the fact that the labour market is a lagging indicator.

But it also reflects the fact that the jump in the use of the short-time work scheme, Kurzarbeit, means that workers remain employed, even if they are, strictly speaking, furloughed.

Jack Allen-Reynolds, senior Europe economist at Capital Economics, said:

[The release] confirms that the government’s less stringent virus containment measures mean that the economy is not faring as badly as the other major euro-zone countries. That said, the crisis is still taking a heavy toll.

For comparison, the declines in GDP in France and Italy were much deeper, at 5.8% and 4.7% respectively. This will have been partly because strict social distancing measures were not introduced in Germany until 22nd March, compared to 10th March in Italy for example. But the lockdown was also less stringent, which allowed the construction sector, for example, to record an expansion of 1.8% m/m in March. That compares to a 40.2% m/m drop in construction in France.

Further ahead, we have pencilled in a much bigger decline in German GDP in Q2 of about 10% q/q. The lockdown is being eased in May and June, but only gradually, and Germany’s recovery will be constrained by the problems elsewhere in Europe.

German GDP in the first quarter was 2.3% lower than the same quarter in 2019, also the biggest annual drop since the financial crisis.

It was a 7.9% year-on-year drop then, which is widely expected to be beaten in the second quarter.

Household spending fell sharply, investment in machinery fell, but government spending held up, following patterns elsewhere. Exports and imports both fell, reflecting the global decrease in international trade.

However, the data have not moved the euro very much: it is up by less than 0.1% against the US dollar at $1.0813.

The German economy had already flirted with recession over the past few years, with the manufacturing industry in particular seeing declining output.

However, the coronavirus pandemic has tipped it over the edge, with two consecutive quarters of falling GDP - the technical definition for a recession.

German economy already in recession

The German federal statistics office has revised down its reading for the fourth quarter of 2019 to -0.1% - which means the German economy is already in recession.

The report from Germany’s federal statistics office shows how brutal the hit was: only in the second quarter of 2009 has growth been lower for the country since unification.

And the office warned that it was only really in March that the coronavirus pandemic hit, meaning there is likely much worse to come in the second quarter:

The corona pandemic hits the German economy hard. Although the spread of the coronavirus did not have a major effect on the economic performance in January and February, the impact of the pandemic is serious for the 1st quarter of 2020. [...] That was the largest decrease since the global financial and economic crisis of 2008/2009 and the second largest decrease since German unification. A larger quarter-on-quarter decline was recorded only for the 1st quarter of 2009 (-4.7%).

German economy shrinks by 2.2% in first quarter

Germany’s economic output shrank by 2.2% in the first three months of the year, according to the German statistics agency, the largest quarterly decrease since the financial crisis.

More details shortly.

Royal Mail boss Rico Back resigns with immediate effect

Royal Mail chief executive Rico Back has stepped down with immediate effect, it announced on Friday morning.

Back will receive salary and benefits until 15 August, plus another £480,000, representing nine months’ pay in lieu of notice.

He also received £50,000 towards “legal fees incurred in connection with his departure”. Royal Mail did not give a reason for him leaving.

Keith Williams becomes interim executive chair of Royal Mail Group and Stuart Simpson becomes interim chief executive of Royal Mail (UKPIL), its main parcels and letters business.

No bonuses will be paid to executive directors for 2019-20, and £25m has been set aside for cash awards for frontline staff “in recognition of their role during Covid-19”.

Revenues were down by £22m year-on-year in April, Royal Mail said, with letter volumes down by 33%. High levels of absence during the pandemic have contributed to £40m in new UK costs.

Back’s resignation comes after a tumultuous time at Royal Mail, with fraught and sometimes furious negotiations with unions over strike action and struggles in its core business - before the coronavirus pandemic hit.

Back also faced stinging criticism for his pay packet, with nearly three-quarters of investors refusing to support the remuneration package handed to him in 2018.

The postal service handed Back an annual deal worth up to £2.7m if he hit bonus targets, on top of a £6m “golden hello” for leaving the company’s European subsidiary.

Oil prices hit one-month high amid signs of demand pickup

Oil prices have risen as investors look for tentative signs of emerging demand for fuel.

Brent crude futures prices, the international benchmark, have risen by 3.4% today to a high of $32.44 per barrel.

After the astonishing market moves of last month - that briefly saw US crude futures prices fall far below zero - a 3.4% gain barely seems noteworthy. But the rebound in oil prices does tell us that traders are starting to see green shoots of economic recovery - the same story that appears to be helping stock markets.

While still low by historic standards (indeed, low by the standards of January - see chart), it nevertheless represents a doubling of prices from Brent’s fall to below $16 per barrel during last month’s turmoil.

Reuters reports:

Data released on Friday showed China’s daily crude oil use rebounded in April as refineries ramped up operations.

The market mood remains less than euphoric, though, with the coronavirus pandemic far from over and new clusters emerging in some countries where lockdowns have been eased.

“Market forces have aligned producers around the world to support fundamentals, and demand is increasingly showing signs of having troughed,” Barclays analyst Amarpreet Singh said in a note.

“However, the sheer size and speed of the disruption and associated inventory overhang will take time to get fully absorbed, in our view,” he said.

Betting giant William Hill has put out an update on its results in the year to 28 April, highlighting the massive fall off in revenues as lockdown hit.

The bookmaker’s revenues slumped 57% year-on-year after 11 March, with sports betting down 83% in its retail branches.

However, it only fell by 56% online as gamblers turned to more esoteric interests in search of entertainment: “table tennis and emerging market football”. Online gaming revenues also increased during the period.

You can read more on the unusual gambling patterns during lockdown here, including an increase among regular gamblers:

The company said it has delayed recruitment, cancelled salary increases and all bonus payments and incentive schemes for 2020, furloughed employees and used government support schemes, including business rates relief.

It has also suspended its dividend, cancelled spending plans and cut marketing costs.

But it has access to £700m in ready cash or equivalents - with the monthly cash outflow limited to only £15m (even if costs will rise as the UK’s furlough scheme tapers away).

The FTSE 100 has gained 1.4% in the opening minutes of trading, while the FTSE 250 is up 1.3%.

Across Europe stocks are also looking positive, with France’s Cac 40 up 1% and Spain’s Ibex up 0.8%. The Dax in Germany has posted a 1.6% gain - let’s see if that holds.

And all this a few hours after the US president raised the possibility of cutting off relations with China completely...

Transport for London faces £3bn budget shortfall this year

Transport for London has this morning said that it is facing a £3bn hole in its finances this year due to the impact of the coronavirus, meaning further help government help may be necessary for the authority.

TfL, which on Thursday agreed a £1.6bn bailout from the government to keep the business running until October, has seen a 90% fall in income as journeys on London’s buses and underground have dried up during the nationwide lockdown.

TfL said that a financial forecast, assuming the prioritisation of essential services and activities, will see a £1.9bn funding gap in its first half year to the end of October. For the full year to the end of March 2021 that gap is forecast to be £3bn.

Trump's China bashing and eurozone GDP in focus for investors

Good morning, and welcome to our live coverage of business, economics, and financial markets.

We know it’s bad, but just how bad? That is the question facing economists and markets this morning as they await German and Eurozone GDP data as well as the prospect of worsening US-Chinese relations.

German GDP data expected at 9am BST (unusually) will fill in the final piece of the puzzle for just how badly the eurozone was hit in the first three months of the year.

Reuters’ poll of economists shows an average expectation of a 2.2% decline in first-quarter German GDP. And remember, although China was hit hardest in the first quarter, there is much worse to come for Europe in the April-to-June period.

Here’s what has happened so far among rich economies (up to Wednesday):

Adding to the uncertainty is concern over the trading relationship between the US and China. In an interview published last night President Donald Trump suggested that cutting ties with China would be an option and said that the Chinese failure to contain the disease had affected the trade deal between the two countries.

Here are quotes from the Reuters report on the Fox Business Network interview:

“They should have never let this happen,” Trump said. “So I make a great trade deal and now I say this doesn’t feel the same to me. The ink was barely dry and the plague came over. And it doesn’t feel the same to me.”

Trump also suggested his relationship with Xi had deteriorated.

“But I just – right now I don’t want to speak to him,” Trump said in the interview, which was taped on Wednesday. [...]

“There are many things we could do. We could do things. We could cut off the whole relationship,” he replied.

Yet at the same time the easing of lockdowns around the world (despite the absence of a coronavirus vaccine) has given hopes for the future, giving a mild boost to stock markets in Asia and Europe on Friday morning.

The agenda

  • 9am BST: Germany GDP growth rate (first quarter 2020)
  • 10am BST: Eurozone GDP growth rate (first quarter 2020)
  • 1:30pm BST: US retail sales (April)
  • 2:15pm BST: US industrial production (April)
 

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