The Weekend: Shrinking economy casts a pall over Reeves' ambitious spending plan

Yahoo

14 hours ago

It's been a week of big international headlines, mostly bad.
A London-bound aeroplane came down barely a minute after take-off in Ahmedabad, India, killing all but one of the 242 passengers on board. The tragedy is a major setback for Boeing (BA), maker of the 787 Dreamliner involved, whose shares had been on a tear this year as its new boss tried to turn things around after a string of safety-related incidents. The plane maker's stock price took an immediate hit, falling almost 5%.
On Friday the world woke up to news that Israel had launched a co-ordinated assault on Iranian nuclear sites and military facilities, killing two of the country's most senior commanders in the process. The attacks – the first of many to come according to Israel's prime minister, Benjamin Netanyahu – sparked immediate threats of retaliation from Iran.
Oil prices shot up as traders pondered the possibility of Iran disrupting the flow of crude through the Strait of Hormuz or striking its Gulf neighbours' oilfields as it has done in the past. Unsurprisingly, gold prices benefited too, while stock markets didn't fare so well.
Closer to home, finance minister Rachel Reeves delivered her eagerly awaited spending review, promising to put Britain on the path to "national renewal". Healthcare and defence were at the heart of the plan, with the NHS getting a £29 billion annual boost and the defence budget set to rise to 2.6% of GDP from the current 2.3%.
There was an ambitious commitment of £39 billion to social housing, a £14.2bn investment pledged to the Sizewell C nuclear plant and a host of transport and infrastructure projects in cities outside London.
But the optimistic tone of the announcements was undermined somewhat the very next day when official figures revealed the UK economy had shrunk by 3% in April, far more than the contraction expected by analysts. Reeves admitted it was a blow, as the government banks on spurring economic growth to fund its bold spending plans.
Let's take a closer look at these and other stories from an eventful few days.
Boeing stock slumps after deadly Air India plane crash
It was reportedly the first deadly crash involving a Boeing 787 Dreamliner since its launch 14 years ago. Boeing's shares had gained more than 20% this year on the heels of a massive company turnaround following a brutal 2024 sparked by a "door plug" incident on an Alaska Airlines (ALK) flight.
Five years prior to that the plane maker had suffered a serious crisis when two fatal crashes exposed critical flaws in the 737 Max 8 jet's software, leading to a 20-month global grounding of the aircraft.
UK economy shrinks by 0.3% in April
The shock reading for April came a day after chancellor Rachel Reeves unveiled a raft of pledges in the government spending review. The biggest contributor to the fall in GDP was a 0.4% drop in services output, while production output slumped 0.6%.
The contraction came as an increase in employer national insurance contributions and the national minimum wage, which were announced in the autumn budget, came into place in early April.
Professor Joe Nellis, economic adviser to accountancy and advisory firm MHA, said: "This is not an ideal scenario for the chancellor. The sustainability of her spending promises is critically dependent on changing this — kickstarting the economy to grow GDP and collect more revenue through tax receipts.
"Without this, the chancellor may be forced into unwanted – and unpopular – tax increases in the autumn budget to keep public finances on track."
Oil prices surge as Israel strikes Iran
Iran has threatened to hit US assets in the region as part of its retaliation, even as secretary of state Marco Rubio warned against such a move. Rubio claims Israel took "unilateral action" and the US was not involved in Friday morning's strikes.
Iran is the third-largest oil producer within the Organisation of the Petroleum Exporting Countries (OPEC), trailing only Saudi Arabia and Iraq, with output exceeding 3 million barrels per day.
'We can probably expect a temporary slowdown in oil tanker traffic through the Strait of Hormuz,' Ed Hirs, senior fellow at the University of Houston, said in an interview with Yahoo Finance.
Tehran has repeatedly threatened to block the strait, a vital chokepoint through which as many as 20 million barrels of oil pass each day.
Gold hits nearly two-month high as Israel attack spurs demand
Gold prices shot up as the massive escalation of Middle East conflict spurred demand for traditional safe-haven assets.
"Gold surged past resistance around $3,400 on news of the airstrikes, and further upside could be in-store should the escalation continue," said Tim Waterer, chief market analyst at KCM Trade.
The rally has been further underpinned by growing expectations of monetary policy easing in the US. Recent data showing elevated jobless claims and muted producer price inflation have increased speculation that the Federal Reserve could cut interest rates, making non-yielding assets such as gold more attractive to investors.
The UK's rental boom is over
Rental price growth has slowed significantly, according to the latest figures from Zoopla, with the average rents for new lets agreed 2.8% higher in April than the same time a year ago. That's less than half of the average rental growth in April 2024, which stood at 6.4%, and the lowest growth in nearly four years.
The slowdown is a result of weaker rental demand and growing affordability pressures, rather than an increase in supply, Zoopla said.
The chancellor is determined that Wednesday's spending review won't come with a tax sting in the tail. Unfortunately, that pledge is resting on some very fine margins. If the government achieves the growth it wants and a potential funding gap emerges, taxes are likely to be in the frame. Columnist Sarah Coles, a personal finance analyst at Hargreaves Lansdown, examined the possibilities: Why Rachel Reeves' spending review may lead to tax rises
Recent industry studies put the cost of a "moderate" retirement at £31,700 per year and a "comfortable" retirement at an eye-popping £43,900 per year. But before you throw your hands up in despair, take time to think about what you want or need from your post-career years – is it lots of travelling or something more sedate? You may find that what you need differs massively from these figures: How far will your pension go as retirement costs soar?
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UK inflation and interest rates will be the main focus in terms of economic data.
Markets will be watching Wednesday's UK inflation reading for any signs of a cool off after April's jump to 3.5%, later revised to 3.4% due to an error in car tax data. The higher-than-expected figure was driven mainly by large increases in household bills.
With that in mind, the Bank of England is expected to keep interest rates on hold at 4.25% on Thursday as it tries to keep price increases in check. The US Federal Reserve is due to announce its next interest rate decision next week too. The Fed is expected to keep rates on hold once again at its meeting on Wednesday, maintaining the 4.25%-4.50% range.
On the company earnings front, investors will be keeping an eye on the latest results from US-listed consultancy firm Accenture (ACN), given the company narrowed its revenue growth guidance for the year and warned of the impact of federal spending cuts in its previous quarterly update.
On the London market, Berkeley (BKG.L) is due to report, with focus expected to be on whether the housebuilder has any updates cash return plans.
Premier Inn-owner Whitbread is another FTSE 100 (^FTSE) company due to update on its performance, following a slower start to year for its UK business.
The Beach Boys frontman, widely regarded as a genius, left a gaping hole in the rock royalty family this week when he passed away at the age of 82. The troubled songwriter, who formed the band with his brothers, cousin and a friend in 1961, will always be remembered for his ability to craft sublime melodies, his innate gift for soaring harmonies and his relentless drive for studio perfection.
The Beach Boys' 1966 Pet Sounds is frequently cited as one of the greatest albums ever made. Here's one of the best songs ever made, from that very album.
Farewell Brian!