Business news 5 May 2022
James Salmon, Operations Director.
Bank set to hike interest rates to 1%. UK cuts Russia off from professional services. Consumer credit growth up in March. Mortgage borrowing hits £7bn. And more business news.
Bank set to hike interest rates to 1%
The Bank of England is set to raise interest rates to the highest level since 2009 in a bid to ease inflation, with the Monetary Policy Committee (MPC) expected to increase rates by 0.25%, taking the base rate to 1%. The MPC has raised rates at each of its past three meetings as it looked to rein in inflation, which hit a 30-year high of 7% in March. Bank of England governor Andrew Bailey recently warned the Bank is “walking a very tight line” between tackling inflation and avoiding a recession. The economy grew just 0.1% in February, down from 0.8% in January. The Bank last month said it expects Q1 growth to be at around 0.75%, having previously forecast GDP to remain flat. However, experts expect GDP to fall in Q2 as consumer confidence dips as price pressures increase. Meanwhile, former MPC member David Blanchflower has warned that the economy is already in recession and urged the Bank to slash interest rates. Speaking to BBC Radio 4’s Today programme, Prof Blanchflower insisted it would be an “error” for rates to be raised further.
UK cuts Russia off from professional services
Russia has been banned from using British management accounting, consulting and PR services in new sanctions announced by the UK.
Foreign Secretary Liz Truss said the ban will cut off service exports “critical to the Russian economy,” adding that it will “put more pressure on the Kremlin and ultimately help ensure Putin fails in Ukraine.” Business Secretary Kwasi Kwarteng added: “Our professional services exports are extraordinarily valuable to many countries, which is exactly why we’re locking Russia out.” He added: “By restricting Russia’s access to our world-class management consultants, accountants and PR firms, we’re ratcheting up economic pressure on the Kremlin to change course.”
The Government said UK accountancy, management consultancy and PR services account for 10% of Russian imports in these sectors. Many of the big accountancy firms have already reduced their business in Russia, with the Guardian noting that by March 7, KPMG, Deloitte, PwC and EY had all announced they would exit Russia.
Consumer credit growth up in March
Individuals borrowed £1.3bn in consumer credit in March, according to Bank of England figures. The annual growth rate for consumer credit borrowing rose to 5.2%, from 4.5% in February. This marks the highest annual rate since February 2020. The data shows credit card borrowing increased by 10.6% in March, hitting £800m.
The Bank reports that households also deposited £6bn into banks, building societies and NS&I accounts. While small and medium-sized non-financial businesses repaid £700m – the 13th month in a row of net repayments – large businesses borrowed £1.9bn from banks, down from £4.3bn in February.
Karim Haji, head of financial services at KPMG, said that while the cost of living crisis is expected to get worse as the year goes on, “there’s so far little evidence of households running down the stock of savings accumulated during Covid-19, with the squeeze on incomes instead reflected in the rise in consumer credit.” Martin Beck, chief economic adviser to the EY Item Club, believes households “will increasingly take on debt as high inflation squeezes real incomes – especially in the form of credit card borrowing.”
Mortgage borrowing hits £7bn
Bank of England data shows that mortgage lending rose to £7bn in March, up from £4.6bn in February and ahead of the pre-pandemic average of £4.3bn recorded in the 12 months to February 2020. The Bank reported 70,961 mortgage approvals in March, with this down slightly on February’s total, while approvals for remortgaging rose slightly to 48,800.
Adrian Lowery, financial analyst at investing platform Bestinvest, commented: “As house prices stabilise and lenders tighten their mortgage availability criteria in the coming months, the trend is likely to return closer to levels seen before the pandemic disrupted the property market in a quite unpredictable manner.”
More homeowners look to lock in 10-year deals
Analysis by data firm Twenty7Tec shows that thousands of people looked to lock into a long-term mortgage deal last month, with homeowners hoping to get in ahead of further interest rate rises. Almost 7,000 people searched for a mortgage with a fixed rate of more than 10 years in April, a 72% increase on the same month last year. There was a 26% increase in the number of borrowers searching for a 10-year fixed mortgage and a 25% spike in those seeking a five-year fix. The respective number of borrowers searching for two and three-year fixed-rate mortgages fell by 35% and 57% year-on-year in April. On average, people are fixing mortgages for a year longer than they were a year ago.
Large retailers unite to demand business rates cut
A group of the UK’s biggest retailers have teamed up call for an overhaul of business rates. In a letter to Chancellor Rishi Sunak, the firms have urged him to permanently cut business rates to “level the playing field between online and bricks-and-mortar retailers.” They say the cost to the Government could be offset by an online sales tax. The Retail Jobs Alliance wrote: “A meaningful cut in the shops tax would make a big difference to retailers’ ability to invest more in the shops and stores we know customers value, as well as create jobs.” They argue that reducing business rates will help to keep prices down for customers who are facing increasing economic pressure amid the cost of living crisis.
Pension surplus jumps to £270bn
The surplus in UK pensions – the difference in the value of assets against a scheme’s liabilities – jumped to £270bn in April, according to data from PwC’s Adjusted Funding Index. Caps set by most UK pension schemes limit how much firms can increase pension payouts in line with inflation, despite the rising value of assets. Around nine in 10 schemes cap how much inflation they pass into pension increases. Raj Mody, global head of pensions at PwC, said: “Pensioners may well need to wait another year until their benefits catch up with the current inflation rates we’re seeing today.” City AM reports that FTSE 100 pension bosses are exploring “unprecedented” discretionary pensions hikes to ensure pensioners are not left out of pocket.
Inflation drives dealmaking decline
Global mergers and acquisitions fell in the first four months of the year, with soaring inflation and Russia’s invasion of Ukraine having an impact on dealmaking. Analysis by deal intelligence firm Refinitiv shows that around $1.4trn worth of M&A deals were announced globally during the first four months of 2022. This marks a 21% dip on the opening four months of 2021, a period that saw a post-pandemic surge in activity which took deal value to an all-time high. Refinitiv said dealmakers began to show signs of recovery in April, with deals totalling $378.4bn announced last month. This was 23% up on March’s total but still 25% down on the total recorded in April 2021.
Starmer hints at income tax increase
Labour leader Sir Keir Starmer has refused to rule out raising income tax if Labour win the next general election.
Amid speculation that Sir Keir hopes to revive the 50p top tax rate imposed by the last Labour government, he was asked whether he was planning an increase in the top rate of income tax, currently 45p payable on income over £150,000. He did not reject the suggestion, only go as far as to say that he would set out Labour’s full taxation plans before the election.
In the interview with BBC Radio 4’s Today programme, Sir Keir vowed to deliver a “fair tax system” and said Labour would “go aggressively after money lost to fraud, money lost to bad contracts.” In a separate interview with Good Morning Britain, the Labour leader was asked whether he would scrap the 1.25% increase in National Insurance. He replied: “I don’t know what the state of the economy will then be.” Shadow Chancellor Rachel Reeves, however, yesterday demanded an emergency budget to reverse the increase.
Russian Oil
The UK and Europe are look at plans to ween themselves off Russian oil over the next six months. Oil Prices extended gains on on supply concerns as the European Union proposal laid out plans for the new sanctions against Russia.
Shell
Shell today posted “strong” results on the back of higher oil and gas prices, after the firm recorded a $3.9bn write-down on its Russia assets due to its exit from the country in March. The international oil company said it would hike its dividend by 4 per cent and vowed to complete its $8.5bn share buyback scheme, after it reported adjusted earnings of $9.1bn.
BAE Systems
BAE Systems said today it is expecting a surge in demand for its defence systems as Western nations ramp up spending in the wake of Russia’s invasion of Ukraine. In a trading update today, bosses said guidance for the full year 2022 remained unchanged and it expected to report a 4-6 per cent boost to underlying profits on last year when it secured £2.2bn in profits.
Next
Next saw a boost in sales in the first quarter of the year it continues to feel the lift of stores reopening after lock-downs. Total sales at the firm jumped 21.3 per cent, as retail sales across UK and Ireland surged 285 per cent on last year’s levels, when the retailer was forced to shutter its stores due to lock-downs.
National Grid
National Grid’s electricity distribution business will pay just under £15 million to a UK watchdog after failing to properly advise some of its most at-risk customers. Western Power Distribution, focused on the Midlands and south west regions of England, as well Wales, will make a voluntary redress payment of £14.9 million to fund managed by Ofgem.
US interest rates
The Federal Reserve raised interest rates by 0.5%, to a range of 0.75% to 1%, its steepest rise since 2000 and also announced the start of shrinking its QE ballooned $9 trillion balance sheet by an initial $47.5 billion a month, rising to $95 billion, combining to tightly reduce monetary policy.
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