Business news 2 August 2022
James Salmon, Operations Director.
Small firms on high alert for recession. Economic downturn hits factories. Households struggle to cut back. MPC faces tough call on rate rise. Inflation expectations decline. And more business news.
Small firms on high alert for recession
Small businesses are preparing for a looming recession, with a poll from fintech firm iwoca showing that more than three quarters of small firms are concerned that the economy is going into reverse. Amid these concerns, firms are looking to boost their cash reserves. The research shows that almost half of business loan brokers have filed more applications for credit for their clients. Steven Scoufarides, head of broker channel at iwoca, said: “The current economic outlook for small businesses is precarious – we are seeing signs of an increasing number of SMEs searching for finance solutions to manage their cash flow and brace for the potential of a recession.”
Economic downturn hits factories
With inflation driving up prices and hitting demand, activity in the British manufacturing sector fell to a 25-month low of 52.1 in July, with this down from 52.8 in June, according to the S&P Global/CIPS purchasing managers’ index (PMI). Prices are up 9.4% over the last year, the steepest increase since 1982. New orders for factories’ products fell for the second month in a row for the first time for two years. The PMI remained above the 50 point threshold that separates growth and contraction as manufacturers pushed to complete work that had been delayed due to a shortage of resources. Martin Beck, chief economic adviser to the EY Item Club, said: “The combination of weaker input cost pressures and softer demand meant that companies increased their prices at the slowest pace since last May.” He expects price rises for goods and services will begin to slow amid weakening demand over the rest of the year.
Households struggle to cut back
A survey from Legal and General suggests that households are struggling to find any more areas of spending to cut back amid the cost of living crisis, with more than one in ten saying there will be nothing else to cut from their budgets after October’s energy price cap increase. Nearly a third of households with income less than £20,000 will be unable to cope with a rise in energy bills, with the cap on energy costs potentially rising by more than 60% this autumn. Nearly half of the 20,000 people polled voiced concern about keeping up with their mortgage payments over the next year. Nigel Wilson, chief executive of Legal and General, said: “Many households across the UK are currently facing very tough financial choices. For some, those choices seem impossible.”
MPC faces tough call on rate rise
Ben Chapman in the Independent looks ahead to this week’s Monetary Policy Committee (MPC) meeting, saying members will make their latest interest rate decision against a backdrop of soaring prices and warning signs that the UK is heading for a recession. He says that while it is almost certain that interest rates will be raised from the current level of 1.25%, marking the sixth consecutive increase, the big question is how much rates will rise. Mr Chapman notes that a 0.5% increase would be the largest in 27 years, warning that this “could drag on the economy, push it deeper into a recession” but arguing that “failing to bring inflation down would also create problems.” Martin Beck, chief economic advisor to the EY Item Club, says the MPC “should be heartened by the cooling in inflationary pressures,” but says this is “unlikely to have any impact on their thinking for this week’s meeting, where a rate rise of at least 25bps is certain and an increase of 50bps is a live possibility.”
Inflation expectations decline
A YouGov poll for investment bank Citi shows that expectations for future inflation declined in July, with the public saying inflation will settle at 3.8% in five years, down from 4% in June. Asked where inflation will be in 12 months, Brits think inflation will drop to 6%, down from 6.1% a month earlier. Despite predicting a decline in price rises, consumers still think inflation will be nearly double the Bank’s 2% target in five years.
HMRC suspects big firms are underpaying £1.4bn in employment taxes
HMRC believes large businesses could be underpaying £1.4bn in tax by classifying workers as self-employed when they should be classed as employees for tax purposes, according to law firm Pinsent Masons. The report suggests firms may be classifying staff as self-employed to avoid making Employers’ National Insurance contributions. The tax office has been clamping down on the so-called ‘hidden employees’ loophole, with Pinsent Masons partner Steven Porter saying off-payroll workers “are one of HMRC’s biggest priorities at the moment.” He added that even businesses that have sought to comply with the IR35 rules for off-payroll workers “are finding themselves in the crosshairs.” Tax regulation for off-payroll workers changed in April 2021, with the new rules imposing tax and compliance risks on large and medium sized businesses when engaging individuals through a personal service company. Previously, the contractor was responsible for applying IR35 and paying all employment taxes that were due.
IFS: Sunak’s pledged tax cut smaller than his increases as Chancellor
The Institute for Fiscal Studies (IFS) says Rishi Sunak’s promise to cut the basic rate of income tax from 20p to 16p by the end of the decade is smaller than the tax rises he made as Chancellor. The economic think-tank said Mr Sunak’s plan to cut the basic rate from 20p to 19p in 2024 would cost around £6bn a year and that the cut to 16p by the end of the decade would cost a further £19bn annually. It added that Mr Sunak’s proposed cuts would be “much smaller than the tax cuts Ms Truss is proposing, and indeed less than half the size of the tax rises he announced as Chancellor.” In a briefing note, the think-tank also calculated that together with tax policies he announced while Chancellor, Mr Sunak’s new policy “would still leave the total tax take, as a proportion of national income, at its highest level since around the early 50s.” The IFS said the tax plans of Mr Sunak and Tory leadership rival Liz Truss are now in a similar “direction of travel,” with the biggest difference between their tax plans “one of scale and timing.”
CBI calls for investment boost
With private sector firms saying they expect to see zero growth over the next three months, the Confederation of British Industry (CBI) has urged Conservative leadership candidates Rishi Sunak and Liz Truss to implement a permanent successor to the 130% business investment tax relief that ends next April. Alpesh Paleja, lead economist at the CBI, has warned that consumer spending “isn’t going to restart the engine on growth this time,” arguing that “boosting business investment will help to fill the void left by households, but incentives need to be bold, or they won’t scratch the surface.” While Ms Truss has promised to reverse the planned six percentage point corporation tax increase. Mr Sunak believes tax reliefs are a more effective way to stimulate business investment.
Truss: Trust me on tax
Conservative leadership candidate Liz Truss says that if elected Prime Minister, “people can trust me to cut taxes immediately, supporting people who work hard and do the right thing.” She added: “I’ll keep my promise on cutting taxes, helping families keep more of their hard-earned money in their own pockets.” Ms Truss also warned that leadership rival Rishi Sunak’s plan to increase corporation tax would stifle growth and trigger a recession, saying: “What we know is if you put taxes up too high it chokes off investment, it chokes off growth and it leads to bad outcomes.”
Deutsche ‘broke bank’s own rules to enable tax fraud’
An internal investigation has found that Deutsche Bank allowed clients to syphon off millions of euros in state funds in one of Europe’s biggest tax frauds. Deutsche’s internal investigation, which dates back to 2015 and was conducted by law firm Freshfields, identified a “number of breaches of legal or regulatory requirements or internal policies.” The report found that Deutsche generated millions of euros in fees by knowingly providing investment banking services to clients that specialised in cum-ex trading. While the bank’s tax department tried to stop it engaging in cum-ex activities, investment bankers were found to have worked around that ban.
Half of first timers bank on mum and dad
With house prices and mortgage rates continuing to climb, analysis suggests one in two first-time buyers will rely on the so-called Bank of Mum and Dad to purchase a home. Savills calculates that around half of buyers will use money from their parents to help get on the ladder over the next three years, with this support totalling £25bn. The report says that parents will lend £8.4bn to help their children buy homes this year, with this 68% more than in 2019, the year before the pandemic. It is forecast that the Bank of Mum and Dad will support 160,000 first-time buyer purchases this year – nearly a fifth more than in 2019 – while nearly half a million first-time buyers (469,000) will get financial help from their parents in the three years to 2024. Parents lent £10.7bn to 198,000 first-time buyers in 2021, with both of these figures breaking records.
BoE scraps mortgage affordability test
Mortgage borrowing rules have been eased after the Bank of England scrapped an affordability test which forced lenders to calculate whether potential borrowers would be able to cope if interest rates climbed by up to 3%. The shift comes after a 2021 review of the rules saw the Bank’s Financial Policy Committee declare that the loan-to-income flow limit “is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.” The Financial Conduct Authority’s responsible lending rules still require lenders to make a broad assessment of affordability before approving a loan.
Searches for overseas jobs surge
Searches for work abroad have surged among UK workers, according to data by overseas job website Anywork Anywhere. The study, which analysed Google search data, found that searches for overseas work by British workers jumped by 56% in the last year. Dubai was shown to be the most sought-after destination for those looking to work abroad, with the 1.1m searches marking an 83% year-on-year increase. Canada, Spain, and Australia were the next most popular destinations. Teaching jobs abroad were the most searched for positions for Brits, at 271,680 searches, while work in hotels, nursing, and engineering were the next most sought-after jobs, respectively.
BP
BP reported interim profits of $9.25bn and a drop in net debt to $22.8bn. The board intend to execute a $3.5bn share buyback prior to Q3 results.
Travis Perkins
Travis Perkins reported 10.3% revenue growth to £2.53bn and net profit of £106m up 6% with EPS of 49.7p. Net debt rose to £383m due to seasonal outflows and the share buyback.
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