Blow for Sunak as UK economy flatlines

Today’s top stories

• US inflation fell to a lower than expected 3.3 per cent in May in a boost to President Joe Biden, leaving investors betting on more interest rate cuts this year. The Federal Reserve makes its next rates decision at 2pm ET/7pm London time today. Check back here for details and reaction.

• France’s finance minister warned that an election victory for the far-right Rassemblement National could trigger a Liz Truss-style debt crisis. The centre-right is calling for an electoral alliance with the RN, while the usually fractured left has agreed a pact to fight it.

• The EU will impose tariffs of up to almost 50 per cent on Chinese electric vehicles, brushing aside German warnings that the move risks starting a costly trade war with Beijing.

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Good evening.

As we hit the halfway point in the UK general election campaign, Prime Minister Rishi Sunak will have been hoping for some upbeat economic news to bolster his party’s faltering performance. Instead, he got news that growth had stalled in April after an expansion of 0.4 per cent the previous month.

The wettest April in more than a decade was a key factor, hitting services and construction. Economists said however that output was still likely to grow over the second quarter as a whole as consumption bounces back, helped by lower inflation and strong wage growth (holding steady at 5.9 per cent, according to fresh data yesterday).

The prime minister put the economy at the forefront of his re-election campaign as he launched the Tories’ manifesto yesterday.

He pledged £17bn in tax cuts, funded by welfare savings and a crackdown on tax avoidance and evasion. The funding plans were queried by analysts however. Paul Johnson of the Institute for Fiscal Studies said: “Those are definite giveaways paid for by uncertain, unspecific and apparently victimless savings. Forgive a degree of scepticism.”

The centrepiece of the tax reductions is another cut in national insurance contributions for employees, from 8 per cent to 6 per cent. Other manifesto commitments include removing NI contributions by the self-employed; raising the tax-free allowance for pensioners; reducing immigration; scrapping stamp duty for first-home buyers on properties up to £425,000; more help for parents; increasing defence spending and the previously-trailed plan to bring back national service for 18-year-olds.

Unhelpfully for Sunak, his party’s reputation on the economy is still suffering from the disastrous “mini” Budget of his predecessor Liz Truss.

Attention now turns to the Labour party, which, according to the FT poll tracker, looks odds on to form the next government, and which unveils its manifesto tomorrow.

Several strands have already been floated, such as proposals to break Britain’s planning deadlock. The Tories meanwhile have been doing their best to paint Labour as tax-raising fanatics, most notably with a — hotly disputed — claim that it would cost households an extra £2,000. 

The latest speculation on Labour’s programme has focused on a potential increase in capital gains tax, fuelling concerns among investors and entrepreneurs. Former head of Lastminute.com Brent Hoberman told the Financial Times that increasing CGT was a “populist trap”. 

A rise in CGT for the wealthiest earners has already been promised by the Liberal Democrats as part of their £26.8bn package of revenue-raising measures, outlined at their manifesto launch on Monday. Also hit will be users of private jets, banks, oil groups and polluting water companies.

The country’s wealthy will also be targeted by the Greens, who launched their manifesto today, with proceeds going to health, housing and a decarbonised economy.

But whichever party comes out on top on July 4, the task ahead is daunting: today’s new edition of the British Social attitudes survey shows public trust in government has hit a record low.

Need to know: UK and Europe economy

Now the European elections are over, the horse-trading is beginning among political groups in the 720-strong parliament. Wrangling is also getting under way over the top jobs at the European Commission, with the focus on whether Ursula von der Leyen can secure another five years as head of the EU’s executive.

The US is set to expand its secondary sanctions programme on Russia, treating any foreign financial institution dealing with a sanctioned Russian entity as though it is working directly with its defence sector.

Powerful alcohol, food, tobacco and fossil fuel lobbies are causing ill health and premature deaths across Europe by weakening targets on diseases such as cancers, diabetes and cardiovascular conditions, the World Health Organization warned.

Need to know: global economy

Chinese consumer prices edged up in May while factory deflation eased as the world’s second-largest economy tried to shake off weak domestic consumption and investor sentiment.

Chief economics commentator Martin Wolf explains why tariffs might be good politics but make lousy policy.

The world faces a “staggering” surplus of oil by the end of the decade, as producers ramp up production, undermining the ability of the Opec+ cartel to manage prices, the International Energy Agency warned.

Argentine’s libertarian president Javier Milei intends to make his country “the world’s fourth AI hub” with hands-off regulation to lure US tech bosses. Six months into his presidency, his minority government has yet to pass any laws to deregulate the economy and attract investment.

South Africa’s President Cyril Ramaphosa is trying to prevent economic chaos while keeping the ANC together and assembling a coalition government ahead of Friday’s deadline. A Big Read assesses his chances.

Need to know: business

Apple overtook Microsoft as the world’s most valuable company as investors warmed to its push into AI. Apple on Monday said it had partnered with OpenAI to integrate ChatGPT into its devices, easing concerns that it was falling behind competitors in the race to take advantage of generative AI. 

Belgium’s Umicore, one of the world’s largest makers of battery materials, warned that electric vehicle demand was slowing. Toyota meanwhile is betting big on the next generation of hybrid cars — but will its famous “just in time” supply chain be able to cope when things go wrong, wonders Tokyo correspondent David Keohane.

The owner of Kernel, one of Ukraine’s largest agricultural companies and the world’s biggest exporter of sunflower oil, warned Kyiv against prolonging its trade dispute with the EU, saying it risks losing the bloc’s support in the war with Russia.

The World of Work

Companies’ attempts to control how staff communicate that they have been laid off often cause more problems than they solve, writes Andrew Hill.

Don’t fancy going to that meeting? How about sending your “digital twin” instead? Listen to the new Working It podcast.

Previous tech booms have tended to advance the careers of computer science students, who were mainly male, but the rise of AI is already creating new opportunities for students who have studied liberal arts and who are predominantly women. Read more in our Special Report: Women in Business.

Some good news

Early stage research says the use of AI in mammography reduces the workload of radiologists while improving screening performance of breast cancer. Another study highlights AI’s potential in helping radiologists to detect prostate cancer.