FTSE closes in the red as UK economy heads for recession

ftse The London headquarters various banks, including Citi, HSBC and Barclays, at Canary Wharf in east London. Many banks are moving assets from London to other EU cities in the face of uncertainty over Brexit. Picture date: Monday December 3, 2018. Photo credit should read: Matt Crossick/ EMPICS Entertainment.
The FTSE fell on Friday. Photo: Matt Crossick/EMPICS Entertainment

The FTSE 100 (^FTSE) fell 0.7% on Friday, underperforming against its peers, as the UK economy shrank in the third quarter, in the latest sign Britain is heading for a recession.

According to the Office for National Statistics (ONS), gross domestic product (GDP) fell 0.2% in the period from July to September. This was down from 0.2% growth in the previous three months.

Britain is so far the only G7 nation to report a contraction in the third quarter, with Japan still to reveal its data.

In the eurozone, the CAC (^FCHI) climbed 0.7% in Paris, and the Frankfurt DAX (^GDAXI) closed 0.6% higher.

Dutch bank ING said that the scale of the looming UK recession will partly depend on how much support the government provides for energy bills

ING predicts UK GDP will fall by 2% by the middle of 2023, a comparable hit to the 1990s recession.

The pound (GBPUSD=X) also pushed 0.7% higher against the dollar on Friday at $1.1780, building on sharp gains on Thursday.

Yael Selfin, chief economist at KPMG UK, said: “Interest rate rises and the prospect of the Bank of England raising them even further could exacerbate the stalemate in the UK housing market, causing more pronounced cutbacks in spending. In addition, a turn to a more austere fiscal policy expected from next week’s Autumn Statement could contribute to prolonging any downturn.

“UK GDP fell by 0.2% in the third quarter, driven largely by falls in consumer spending, leaving the economy 0.4% smaller than prior to the pandemic.”

Watch: What is a recession and how do we spot one?

Across the pond on Wall Street, the Dow Jones (^DJI) slid 0.8% to 33,455 as trading ceased across Europe. The S&P 500 (^GSPC) gained 0.1% to 3,962 points and the tech-heavy Nasdaq (^IXIC) climbed 0.8% to 11,206.

On Thursday, data showed that US CPI rose significantly less than expected in October to its lowest level since January.

Michael Hewson of CMC Markets said: “US headline CPI has been falling from its peaks in June for several months now, but core prices have proved to be slightly stickier.

“Yesterday these fell back as well, and while the rise in the US dollar may have had a part to play in that, it's still welcome news at a time when investors are concerned about central banks overtightening.”

Bond yields also declined as the Federal Reserve appeared closer to moderating its aggressive rate-hike campaign after consumer price increases slowed.

Read more: UK economy shrinks 0.2% as recession looms

Stocks in Asia rallied overnight amid news of slowing US inflation, and thanks to Beijing’s softening on its COVID policies. It announced decisions to scrap flight restrictions, as well cutting the quarantine requirements for inbound travellers to eight days.

The Hang Seng (^HSI) surged 7.7% in Hong Kong after while the Nikkei (^N225) climbed 3% in Japan, and the Shanghai Composite (000001.SS) rose 1.7%.

The MSCI Asia Pacific Index climbed as much as 3.5%, its best weekly gain since April 2020, while chipmakers soared.

It came as China’s top leaders called for a more targeted approach to controlling coronavirus.

Local currencies also received a boost as the US dollar suffered its worst day since 2009.

Watch: How does inflation affect interest rates?