UK GDP snapshot, the Shanghai shutdown and energy security concerns add up to an uncertain picture for markets

The latest reading on quarterly UK GDP is a bit like assessing the fitness before being sideswiped by a severe cold. Although growth was marginally upgraded for the October to December period to 1.3%, it came before the full impact of Omicron hit and well before commodity chaos was unleashed by the invasion of Ukraine. On the face of it, it could be viewed as a snapshot that the economy was in slightly better shape to withstand the impact of a fresh round of pummelling. However, the fact that the rise in output in the fourth quarter was driven by visits to GP surgeries and test and trace activities rather than an increase in industrial or manufacturing output doesn’t add that much to a picture of better resilience. There is a worrying trend in terms of household finances with people are clearly eating into savings quickly faced with rising prices. The household saving ratio decreased to 6.8% compared to 7.5% in the third quarter, and if financial buffers continue to decrease at that rate, there will be little left by the Autumn when people will be hit with another bill shock in terms of rising energy prices.

The Shanghai shutdown is already hanging heavily on China’s economy, with manufacturing output shrinking by more than expected, as plants idle while many millions of people are forced to stay home. The closely watched NBS Purchasing Managers Index (PMI) has highlighted a contraction of the sector, the first scale back in factory activity in five months, and activity in services also fell back. 25 million citizens have been faced with phased lockdowns in Shanghai alone, a major tech and manufacturing hub, and with little change to Beijing’s zero-Covid strategy, there are concerns that this draconian policy will continue act as a drag on the economy. The industry snapshot triggered a fall in stocks in Asia, pushing the Nikkei and the Hang Seng in Hong Kong lower. In Europe the FTSE 100 has opened up marginally higher, with mining stocks still resilient despite indications of a China slowdown, but energy giants BP and Shell falling back as the oil price dipped.

Brent crude has pedalled back, retreating to around $108 a barrel, down by more than 4%. China’s demand for oil is playing on minds but the slide was mainly sparked by the US plan to release some of its reserves of oil. Desperate times, clearly call for desperate measures and clearly the Biden administration believes the spike in oil prices warrants this move to eat into the country’s emergency supplies. A drip release of 1 million barrels of oil is on the cards for the next six months, a sign that there is not expected to be a quick resolution to the crisis in Ukraine, which has squeezed oil supplies. Investors will be assessing the implications of this, and any outcome of emergency talks held by the International Energy Agency later. They will also be keeping a close watch on whether members of OPEC+ give hints at their meeting later about the possibility of turning on the production taps more fully, above the current commitment they are expected to approve of around 430,000 barrels a day, but this a strategy they seem so far to be resisting.

Germany’s triggering of its emergency plan to try and wean the country of supplies of Russian gas, highlights its expectation that the conflict in Ukraine is not going to end any time soon, with hopes there will be a breakthrough in talks fading. Amid worries about energy security, Europe is also grappling with the biggest refugee crisis since  World War and its getting worse by the day, with a quarter of Ukrainians having left their homes, and four million crossing the country’s borders.

Worries about a looming global food crisis aren’t going away any time soon with wheat prices inching up again on international exchanges, to above $10 a bushel. This is despite the fact that Ukrainian farmers have been valiantly planting as fast as they can, despite war raging around them. They’ve sown a tenth more hectares of crops compared to the same time last year, but Ukraine’s agricultural industry had already forecast that the planting area could halve this year as agricultural land turns into battlefields and many farmers are sent off to fight.