Business news 3 May 2022
James Salmon, Operations Director.
Business leaders’ confidence in the economy dips, says IoD. Economists in recession warning. Fears growing over financial pressures. BoE set to push interest rate to 1%. And more business news.
Business leaders’ confidence in the economy dips, says IoD.
An Institute of Directors (IoD) survey shows that business leaders fear the cost of living crisis and weaker consumer confidence have increased the risk of an economic downturn this year. The poll saw company directors cite a lack of confidence in the economic outlook as “the number one issue” facing British businesses.
The IoD economic confidence index, a measure of optimism in the economy, fell to -36 in April from -4 in February. Kitty Ussher, chief economist at the IoD, said that optimism in economy “remains very low” and is the key issue having a negative impact on businesses, “even above the other very real pressures of high energy costs, difficulties in the labour market and problems with international supply chains”. She also noted that the invasion of Ukraine had “sent shockwaves around British boardrooms”.
Economists in recession warning.
With interest rates set to climb again this week, economists have warned the UK could slip into recession. Gerard Lyons, a former adviser to the Prime Minister, said “a sharp slowdown is now inevitable” and recession “possible.” Mr Lyons, chief economic strategist at Netwealth, believes the Bank of England has committed ‘two wrongs’, first by easing policy last year despite inflation warnings and then by tightening policy just as “the economy is heading into a recession under a cost of living crisis.” The Bank’s Monetary Policy Committee is expected to raise the base rate from 0.75% to 1% this week – the highest since 2009. The Mail on Sunday cites a former regulator who says: “’I’ve been surprised how slowly the Bank has responded. I would have taken interest rates to 1.5% by now.”
Ahead of this week’s Monetary Policy Committee (MPC) meeting economists at Investec have warned that the UK “is in the grip of the cost-of-living crisis,” adding: “Coupled with tax rises, this leaves a rocky road ahead.” The experts suggest that while a recession will be avoided, due largely to the savings built up by households in the pandemic, slowing growth and soaring inflation “leaves the MPC in a bind.” The economists believe that the MPC will increase rates further in August, to 1.25%, but pause after this “to assess how big the effect of the real income.
Adam Posen, a former Bank of England (BoE) official who runs the Peterson Institute think-tank, says policymakers are “duty bound” to push the UK into recession in a bid to tackle soaring inflation. With the Bank’s Monetary Policy Committee expected to increase interest rates by 0.25% to 1% at Thursday’s meeting, Mr Posen said: “The central bank has no choice but to cause a recession when a broad range of prices are rising at such a strong pace.” He also warned that the UK has a “greater risk of inflation persisting without further action” than some nations as it has “Brexit, which is going to restrict the supply of labour over the longer term, and trade restrictions that will keep prices higher than they would otherwise be.”
Fears growing over financial pressures.
Fears are rising over the financial pressures facing British companies and individuals. The latest Lloyds Bank Commercial Banking barometer shows that business confidence in London fell by 20 points during April to 40%, while Begbies Traynor warned that there was a 20% rise in the number of companies in distress over just three months.
Begbies partner Julie Palmer said there will be a wave of business failures, adding that “it’s just a case of when the dam holding it back finally bursts”. Meanwhile, banks are urging customers to seek help with personal debt, with NatWest referring more than 2,000 people to Citizens Advice over the issue. The bank’s CEO Alison Rose warned: “The world has changed considerably during the last three months.”
Elsewhere, ING Economics predicts continued inflation, “which will add to upward pressure on consumer prices.” In addition, Capital Economics has suggested that the Bank Rate will increase to a peak of 3.00% next year, rather than the peak of 2.50% currently priced into the markets. Capital also predicts that the pound could fall from $1.26 to $1.22 later this year.
BoE set to push interest rate to 1%
The Bank of England is expected to increase the base rate by a quarter point to 1% on Thursday as officials look to ease soaring inflation. However, economists have warned by upping the rate, the Bank’s Monetary Policy Committee (MPC) will add to pressure on household finances by raising the cost of loans and mortgages. Resolution Foundation research director James Smith says that when the base rate increase delivers higher mortgage and loans costs, it will mostly hurt lower income households. He said: “With Office for National Statistics data showing wages not keeping pace with rising prices, Britain’s cost-of-living crisis … will continue to worsen before it starts to ease at some point next year.” Martin Beck, chief economic adviser to the EY Item Club, said with the base rate at 1%, it has reached the Bank’s threshold to start unwinding quantitative easing. He added that with the economic outlook uncertain, the MPC opt against immediately withdrawing QE stimulus, saying: “A move to quantitative tightening would be a step into uncharted waters.”
Nearly a third of hauliers at risk of financial collapse
New research by Price Bailey has found that nearly a third of hauliers are at risk of collapse as new lockdowns in China spark fears of further financial difficulties. Over the last year the number of hauliers considered at maximum risk of collapse has doubled, rising to 28,557 from 14,020 at the end of March 2021. John Warren, a partner at Price Bailey, said: “Hauliers are facing a perfect storm of record fuel costs and high wage demands. In isolation these would prove a difficult challenge but in combination they are likely to prove fatal to many haulage businesses.”
Small manufacturers want a minister
Engineering company bosses have launched a parliamentary petition calling for a dedicated “minister for manufacturing,” having expressed concern that the current set-up is geared more toward large companies. A petition has been submitted on behalf of 24 companies and organisations behind the Support UK Manufacturing initiative. Company director Andrea Wilson said: “We are trying to fix the Government’s one-size fits all approach to engineering and manufacturing support.” She added: “Unfortunately, what happens in the majority of cases is the people feeding into Government policy represent much bigger businesses. They employ lots of people and tell the Government what the UK’s supply chain needs.” Ms Wilson said that while the industry employs 2.5m people, generates £183bn in revenue and is responsible for 50% of UK exports each year, it is not receiving the tailored support required. The Times notes that responsibility for advanced manufacturing is one of more than 16 areas covered by the Minister for Industry within the Department of Business, Energy and Industrial Strategy (BEIS). A BEIS spokesman said the minister represented “manufacturers of all sizes” and that he had met “many” SME manufacturers and groups representing them in recent weeks, including Make UK, the CBI and the Manufacturing Technologies.
CMA: Poorer households to suffer from lack of competition
The Competition and Markets Authority has warned that waning competition in British markets is exacerbating the cost of living crisis for poorer households. A report by the regulator found that the level to which markets are dominated by a limited number of companies is now higher than it was prior to the 2008 financial crisis, which is allowing the largest companies to consolidate their positions and raise prices for consumers. This comes at a time when millions of people in the UK are struggling to cope with soaring household costs, including rising energy bills, council tax, national insurance, fuel and inflation. The report stated that since 2008, average mark-ups have increased from just over 20% to around 35%. CMA chief economic adviser Mike Walker said: “We are seeing markets getting more concentrated, companies enjoying higher mark-ups and the biggest firms maintaining their leading positions for longer,” adding: “We’ve found that the poorest households are likely to suffer the effects of these changes the most – at the very time when they are already being hit by sharp rises in the cost of essential items.”
Time for a permanent bank holiday?
In the wake of the Prime Minister’s office suggesting that a new bank holiday would mean an annual £2bn hit to the UK economy, PwC has found that the Government has overestimated the potential cost. According to the PwC research, commissioned for the Thank Holiday campaign, the net cost of an extra public holiday would be £831m. The cost would come down to £736m if the bank holiday was on a Friday – as fewer hours are worked at the end of the week anyway. The research also finds “strong suggestive evidence that the relatively small potential macroeconomic cost” could be “partially or wholly offset” by the “wellbeing” boost a nation’s economy can get from an extra holiday.
MP calls for fraud fighting agencies to be merged.
Mel Stride, chairman of the Treasury Select Committee, believes Britain’s fraud fighting agencies should be merged, creating a single, expanded agency tasked with tackling economic crime. Currently, the Serious Fraud Office works alongside the National Crime Agency, HMRC, the City of London Police and the Financial Conduct Authority on the National Economic Crime Centre, with these variously accountable to the Home Office and the Treasury. Mr Stride has suggested that the Government should consider creating a single agency under the supervision of a single government department, criticising “fragmented” efforts to tackle white-collar crime. He has also warned that a £400m funding package for tackling economic crime up to 2025 is not enough, saying the figures “seem relatively light given the extent of the problem.” The Government has said that a “multi-agency approach is the right way to fight economic crime and fraud” because the crime is so diverse.
Recruiter pay growth may outpace inflation
Rachel Mortimer in the Telegraph says pay rises will fail to keep pace with inflation this year, noting that real wages fell by 1.4% in 2021 as inflation wiped out a 3.4% rise in pay. While average pay across the economy grew by 4% in the year to February, rises have been unable to keep pace with soaring inflation. Despite this, she notes that several occupations have seen notable pay increases over the past year, with some employees potentially seeing wage growth that outpaces inflation. Ms Mortimer says that with job vacancies hitting a record high of almost 1.3m in Q1, “the business to fill these roles has boomed.” Recruiters, she notes, are in high demand and pay in the industry has climbed by 12.4% in the past year, taking the average annual salary to £27,500.
Nasdaq
The Nasdaq was down 4% on Friday – 13% for the month of April – its worst monthly performance since 2008, led by Amazon as investors braced themselves for higher interest rates and persistent inflation.
BP
BP has booked a Q1 loss of $23bn following a $24bn writedown of its stake in Russian oil major Rosneft. BP warned of elevated oil price risk and market disruption given the impact of the Russia/ Ukraine was and subsequent supply changes resulting from sanctions. BP said Q1 oil production was flat. BP has started a $2.5bn share buyback helping the shares in early trading.
US Dollar
Interest rate speculation has lead the US dollar to 2 decade high against peers as the Ukraine war has also driven money to the perceived safe haven of the US.
AO World
AO World has issued its third profit warning within six months, shares tumbled 13%. They expect revenues to fall 6% for the year to March. They stated consumers cancelling repair warranties on their home appliances amid the cost-of-living crisis were hurting the companies revenues. They were also feeling the effects of supply chain problems and inflationary pressures on its cost base.
Johnson Matthey
Johnson Matthey’s shares soared on Friday as it was revealed a US fund had bought a 5% stake in it. Shares rose 19% on the day, after Standard Latitude Master fund disclosed it’s stake. The companies’ shares have been suffering as of late due to the disposal of its proprietary technology, however the recent news has brought its share price back to a level not seen since November 2021.
Avast
Avast reported Q1 revenues of $234.6m and expects low single digit growth for 2022.
Kwarteng in tax warning to oil and gas firms
Business Secretary Kwasi Kwarteng has called on big oil and gas companies to invest in domestic production, warning that they risk being hit with a windfall tax if they fail to do so. He has written to firms urging them to come forward with a “very clear plan” setting out how they will “reinvest profits, double down on investments in the clean energy transition and importantly accelerate and maximise domestic oil and gas production.” The Sunday Times’ Caroline Wheeler says that although Mr Kwarteng has publicly opposed a windfall tax, suggesting it would be a “tax on jobs”, he is understood to back Chancellor Rishi Sunak’s threat to consider one if companies fail to help the UK produce more of its own energy. She cites a source close to the Business Secretary who says he is “more carrot”, while the Chancellor is “more stick”.
Administrator secures less than £4m of the £64m owed to Safe Hands customers
Administrators appointed to look into failed funeral plans provider Safe Hands Plans have warned that the firm’s 47,000 customers are unlikely to get back much of their money. Administrators FRP Advisory have managed to take control of £3.8m so far, leaving more than £60m of customers’ money outstanding. These assets were held in liquid investments but most of the trust’s assets – more than £60m – are in “illiquid, high-risk investments”, many based in offshore jurisdictions. The Mail on Sunday says there are “now major question marks over whether this remaining money can be retrieved.”
Lonely people more likely to be unemployed in the future
People who report frequently feeling lonely are more likely to experience unemployment in the future, researchers at the universities of Exeter and Leeds have found. The study found that loneliness in adults increases the likelihood of being unemployed up to three years later by 17.5%. The research is based on data from 15,000 people who are participating in the Understanding Society Household Longitudinal study. Academics analysed responses from given over two strands of the study covering periods between 2017 and 2020. People who felt lonely often were 16% more likely to be unemployed between 2017 and 2019, with the probability of unemployment among this group climbing to 19.6% between 2018 and 2020.
Office return boosts demand for city flats
Analysis by Rightmove shows that demand for flats in UK cities and commuter areas is increasing as people return to the office and more settled working patterns. In January 2021, terraced houses were the most popular property but flats are now the properties in highest demand. Tim Bannister, a property data expert at Rightmove, said: “In the initial stages of the pandemic, houses stole the show, as people looked for as much room as possible. As restrictions have eased, being closer to city amenities has become more of a priority.”
Pandemic debts hits £450bn
David Smith in Sunday Times reflects on the impact the pandemic has had on public finances, with official figures covering the 2021/22 fiscal year showing that the deficit fell from £317.6bn in 2020/21 to £151.8bn. He says that the Office for Budget Responsibility was “too optimistic”, with the deficit coming in £24bn above the forecast it made last month, before noting that “the gap should narrow as later data comes in.” Mr Smith highlights that public sector net debt was more than £2.3trn and equivalent to 96.2% of GDP at the end of March, while at the end of March 2020, the debt was nearly £1.8trn – or 82.8% of GDP. Government debt at the end of March was £551bn up on two years earlier and, relative to GDP, it rose from just over 80% to close to 100%. Mr Smith calculates that the cost of the pandemic to the public finances, in terms of the addition to government debt, is about £450bn. Suggesting that there will be further costs down the line, he adds: “It is, of course, too soon to close the books on the pandemic.”
Chancellor urged to incentivise climate targets
The Social Market Foundation (SMF) has urged Chancellor Rishi Sunak to issue green bonds that would offer higher returns to investors if the Government fails to hit its climate change targets. The think-tank believes that sustainability-linked bonds would offer a greater incentive to meet carbon-reduction goals, while at the same time boost the UK’s prospects of being a global financial hub for green finance. Scott Corfe, research director at the SMF, said: “Financial services will be key for delivering on net zero, and green finance could be one of Britain’s great economic success stories in the 2020s.” Calling for a new generation of sustainability-linked government bonds which would tie interest payments to the country’s net zero targets, he added: “Government needs to work in partnership with the financial services industry to make Britain the leading hub of sustainability-linked finance.”
PM plans to bring back Right to Buy
Boris Johnson wants to give people the right to buy the homes they rent from housing associations, with the Prime Minister reportedly ordering officials to develop the plans after becoming convinced the move will help the so-called generation rent. The plan would give the 2.5m households in England who rent properties from housing associations the power to purchase their homes at a discounted price, in a move the Telegraph’s Ben Riley-Smith likens to the Thatcher-era policy allowing families to buy properties from councils. Another proposal being developed is for the taxpayer money paid out in housing benefit to be used to help recipients secure mortgages.
House prices expected to put brakes on
Property prices have risen by 12.1% in the past year but the rate of increase is set to slow, according to the Nationwide. The mortgage lender said that the increase in April was lower than in March, and the trend was likely to continue as budgets were squeezed. The likelihood of further interest rate rises could also affect the market. First-time buyers will still be concerned that annual price rises have been in double digits for months. In all but one month in the past year, annual house price rises have been higher than 10%, the Nationwide said. Across the UK, it said the average house price in April was £267,620.
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