Business news 24 August 2022
James Salmon, Operations Director.
Shielding UK families from fuel bills crisis forecast to cost £100bn. UK economic activity hit as weak demand and labour shortages bite. BoE may be forced to raise interest rates to 4% in 2023. And more business news.
Shielding UK families from fuel bills crisis forecast to cost £100bn
A proposal to cap household energy bills at around £2,000 a year for two years would cost the taxpayer £100bn. Scottish Power CEO Keith Anderson made the suggestion during a meeting with Business Secretary Kwasi Kwarteng last week. He urged Westminster to set up a deficit fund to cover the difference between what people pay for energy and how much it costs to supply their homes.
The cost of this would be repaid through energy bills over the 15 or 20 years. Mr Kwarteng – who is tipped to become chancellor if Liz Truss wins the Tory leadership – is reportedly receptive to the plan. Separately, the National Grid is drawing up emergency plans to reduce power demand by paying factories across Britain to cut gas usage every winter until 2025 in an attempt to avoid uncontrolled blackouts.
UK economic activity hit as weak demand and labour shortages bite
The S&P/CIPS global flash UK composite purchasing managers’ index dropped to 50.9 in August from 52.1 last month, its lowest since February 2021 and close to the 50 level that separates growth from contraction.
Output in the services sector remained in growth, edging down to 52.5 from 52.6 the previous month, but still the pace of growth was the slowest since the lockdown early last year. Manufacturing contracted following a steep decline in customer demand, staff shortages and long delivery times for materials.
Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said: “The UK private sector moved closer to stagnation in August, as mild growth of activity across the service sector only just offset a deepening downturn at manufacturers.” She added: “Waning customer demand amid the weaker economic outlook, and shortages of both staff and inputs, were reported to have hit goods producers hard, with firms registering the quickest drops in output and new work since May 2020. Excluding the initial phase of the pandemic in early 2020, the reduction in manufacturing output was the quickest seen since the start of 2009. Meanwhile, the service sector registered the weakest increase in activity since the recovery began in early 2021.”
BoE may be forced to raise interest rates to 4% in 2023
City traders are betting the Bank of England will more than double the cost of borrowing to 4% by May 2023, the Guardian reports. The base rate is expected to finish the year above 3% and could peak at close to 4.1% in June 2023, based on interest-rate derivatives linked to the meeting dates of Threadneedle Street’s monetary policy committee. The Bank is then expected to cut rates close to 3.8% by the end of next year amid expectations of fading inflationary pressures and a lengthy recession.
Pandemic impact on GDP worse than thought
The Office for National Statistics has revised its estimate of the pandemic’s impact on GDP in 2020, declaring that the UK economy recorded its biggest fall in output in more than 300 years, falling by 11% – up from the previous estimate of 9.3%. The contraction in the second quarter of 2020, during the most stringent pandemic lockdown, is now 21%, from 19.4% previously forecast.
Demand for high-quality space leaves many offices empty
Real estate data provider CoStar has revealed that there is 31m sq ft of available office space in the capital, up from about 20m sq ft in the lead up to the pandemic. CoStar said there hadn’t been so much empty office space available to let in London for 17 years. Lower office occupancy levels has been fuelled by the changing ways of working during the pandemic, but Bank of America’s European real estate analyst Marc Mozzi points out that all of the space vacated over the pandemic was in poorer quality buildings – those rated grade B or below. By contrast, demand for the highest-rated, grade A space is now outstripping supply. “Firms will likely continue to seek high-quality space to retain staff, welcome clients and meet growing ESG commitments, even if many take less space overall as hybrid working becomes the norm,” Mark Stansfield, senior director of UK market analytics at CoStar, said.
CBI: Manufacturing output down for the first time since February 2021
The CBI’s industrial trends survey showed that in the latest three months manufacturers’ order books shrank and output fell for the first time since February 2021. Alpesh Paleja, a CBI economist, said: “From rising prices to bottlenecks in supply chains, manufacturers continue to operate against a background of high input costs and significant operational delays. When coupled with an oncoming economic downturn, it is not surprising to see orders and activity ebb away as we move through the year.”
Banks and surveyors are down valuing 50% of homes
Properties in some parts of the country are being down valued by banks and surveyors as fears grow of an impending fall in prices. Anthony Harris, of Continuum, a financial advice firm which manages over £1.53bn in mortgages and other assets, said: “I am seeing more than 50% of purchase applications being down valued at present.” This level is likely to rise further, he added. “Sellers are asking high prices and there always seems to be more than two buyers who are prepared to enter a bit of a bidding war, pushing up prices further. But the lenders’ surveyors are not supporting the prices agreed.”
Price of two-year fixed passes 4%
The average new two-year fixed rate mortgage has increased by 0.14% since the start of this month, according to Moneyfacts, and now stands at 4.09%. This is the first time the average figure has broken through 4% since early 2013. In December 2021, the average new two-year fixed rate was priced at 2.34%. The average new five-year fixed rate has now reached 4.24%, a rise of 1.6 percentage points compared with December 2021, when the typical price was 2.64%. Lenders have also been withdrawing products just as demand surges. Millions of borrowers with deals coming to an end have rushed to secure deals before rates have a chance to climb even further. “The level of choice has reduced…We have seen lenders withdraw parts of, or entire, product ranges, with a number citing the pause in lending being due to unprecedented demand,” said Eleanor Williams, a mortgage expert at Moneyfacts.
Truss team would shun OBR forecasts for emergency budget
Tory leadership frontrunner Liz Truss will eschew an Office for Budget Responsibility forecast when she takes emergency action to tackle the cost of living crisis, should she become prime minister. Allies in her team say Truss will use Rishi Sunak’s statement in late May, when he offered support for energy bills and introduced a windfall tax without the independent fiscal watchdog producing an official forecast, as a precedent. She will provide tax cuts, eliminate green levies from energy bills and provide some targeted support for the vulnerable. The OBR has come under attack from Sir John Redwood, a backer of Truss, who claims the forecaster is “hostile“ to the tax cuts planned by the Foreign Secretary. The Tory MP said the OBR/Treasury model performs poorly when forecasting the public sector deficit – an important driver of tax policy. Finally, Matthew Lynn opines on the OBR in the Telegraph asserting that it has outlived its usefulness and “turned into little more than yet another vehicle for the establishment groupthink.”
Cost of living crisis means a harsh winter for ‘quiet quitters’
The Telegraph looks at how the cost of living squeeze could adjust the attitude of those young workers who prioritise flexibility over income and career prospects. A study from Deloitte found that, while they still care about money, Gen Z workers value salary less than any other generation. Instead, they prioritise work-life balance, fulfilment, flexibility and a social conscience. Data from LinkedIn show that 72% of them would consider leaving or have left a role due to a lack of flexibility – a much higher proportion than previous generations. However, 30% of Gen Z also cite the cost of living as their biggest concern; two-thirds of young people believe their generation will be worse off than their parents. The piece concludes that, “however appealing the idea of quitting the rat race may be, economic hardship on the horizon will mean that flexibility is a luxury, not a given.”
Consumers advised on energy efficient cooking as food prices soar
Iceland, the supermarket group, and energy firm Utilita have teamed up to provide advice to consumers on how to reduce the cost of cooking as the cost of energy soars and inflation pushes up the cost of food. Iceland and Utilita believe households could cut their cooking energy usage by between 60 to 90 per cent a year by altering their cooking habits. The Office for National Statistics revealed that UK inflation rose to 10.1% in July, with food and non-alcoholic drinks the biggest contributor to rising prices. Kien Tan, a director of retail strategy at PwC, said: “Supermarkets have had little choice but to pass on price increases from suppliers, themselves contending with unprecedented inflation in raw material and ingredient input costs. This has been particularly acute in labour and utility intensive categories like dairy, with reports of the price of a pint of milk having more than doubled in some stores since the start of the year. Furthermore, the Bank of England reported in its latest Monetary Policy Report that supermarkets expected inflation to increase further in coming months, so there is unlikely to be any let up in the run up to Christmas, particularly as the delayed effect of input cost inflation starts being passed through in other categories such as meat, vegetables and packaged groceries.”
Nearly three quarters of pubs do not expect to survive winter
The Society of Independent Brewers has written to the Chancellor calling for immediate action to support the sector. Independent brewers are facing “grave uncertainty” as energy bills surge and sales fall as household tighten the purse strings. The letter, also signed by the chair of the Campaign for Real Ale, said: “Small brewers are reporting that their energy bills are doubling or trebling, putting their future ability to brew at risk”. Meanwhile, 35% of pub operators said they had seen their utility costs double, while 30% said their costs had tripled. A survey for the trade publication the Morning Advertiser revealed that almost three quarters of pubs said they would not be able to afford the increases. But operators that can afford to pay the elevated prices are not being offered new power contracts because the sector is deemed to be high risk, one pub owner said. Nik Antona, chair of Camra, said: “Pubgoers and beer drinkers want to see urgent action from government. “With businesses having pulled out all the stops to make it through the pandemic, it would be a travesty if more of our local, small and independent breweries were forced to close for good now due to the crisis with the cost of energy, goods and doing business.”
Euro
The Euro has fallen below parity with the US dollar, having fallen 12% so far this year.
Ryanair
Ryanair has announced it was adding one million extra seats to its winter schedule while the likes of British Airways (BA) continue to axe flights. The airline now expects to carry 166.5 million passengers by the end of the year, 1.5 million more than initially predicted. The low-cost carrier said it was increasing its capacity to and from 20 UK airports in response to BA’s decision to cancel 10,000 flights due to staff shortages and Heathrow’s decision to extend passenger cap until the end of October
Grain traders see profits soar, prompting calls for a windfall tax
The world’s top four grain traders have seen record or near-record profits or sales this year, the Guardian reports. As food prices soar around the world and demand is forecast to outstrip supply until at least 2024, concerns are growing that traders are profiteering and should be subject to a windfall tax. Experts say just four companies control the world’s grain trade and it’s impossible to see how much stock they hold. Charity leaders are now calling for a windfall tax on grain traders’ profits, but John Rogers, an analyst at Moody’s said he didn’t think the companies were “acting immorally – they’re not intentionally driving up prices.”
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