Business news 5 August 2022
James Salmon, Operations Director.
BoE raises rates to 1.75% and warns of year-long recession. BoE makes move to wind down its asset holdings. More businesses to go bust after rate rise. Construction industry hit by first slowdown in 18 months. Employers become more cautious about hiring. And more business news.
BoE raises rates to 1.75% and warns of year-long recession
The Bank of England raised interest rates by 0.5 percentage points to 1.75% on Thursday, the biggest increase in 27 years, with a prediction that inflation would hit 13% by the end of the year.
It was the sixth consecutive raise and the biggest single increase since 1995 and officials said the Bank was ready to act “forcefully” on interest rates if inflation persists.
The Bank said Britain would enter five consecutive quarters of recession with GDP falling by as much as 2.1%, while real household incomes are expected to fall by 3.7% across 2022 and 2023 – the largest hit since records began in 1963. BoE Governor Andrew Bailey said families faced a “very big” shock to their finances but it was right to take a strong hand to inflation. “The alternative is even worse in terms of persistent inflation,” he said.
Ian Stewart, chief economist at Deloitte, said: “Today’s rate hike is part of a global trend towards more aggressive monetary tightening. The Bank of England and its peers are trying to catch up with far more powerful inflationary pressures than they had expected at the start of this year. With the UK heading for even higher rates and double-digit inflation later this year it will take a lot of luck to avoid a recession.” Elsewhere, EY argues that the UK “economy will perform better than the Bank predicts” and accuses the Bank’s inflation forecasts of “resting on limited foundations.”
BoE makes move to wind down its asset holdings
Separate to the Bank of England’s rate rise on Thursday, the BoE’s Monetary Policy Committee revealed that it was “provisionally minded” to start a bond sale programme next month, offloading some of the debt it purchased during more than a decade of quantitative easing. Sales of UK gilts by the Bank will launch at a pace of roughly £10bn per quarter, with the aim of reducing the total stock by £80bn within 12 months.
Commenting on the move, James Smith, an economist at ING, said: “Assuming a reduction of £80bn per year, this means private investors will have to increase their exposure to gilts by the same amount, on top of regular deficit financing. This is clearly a risk.”
Elsewhere, Martin Beck, chief economic adviser to the EY Item Club, said there was a risk that other investors did not have the appetite to buy government bonds: “In an environment of high inflation and with government borrowing likely to be higher than expected, the Bank may have to reconsider whether private investors are in a position to absorb the proposed increased supply of gilts.”
More businesses to go bust after rate rise
Research from Mazars shows UK businesses face an immediate increase in interest payments of more than £2bn following the Bank of England’s interest rate rise. UK businesses are currently paying £14bn annually in interest payments on their £409bn in floating rate debt. With rates rising by 0.5% annual interest payments on that debt will increase to £16bn almost overnight. Adam Harris, partner at Mazars said rising borrowing costs will only accelerate business closures.
Construction industry hit by first slowdown in 18 months
The construction industry contracted in July as rampant inflation and recession fears dragged the sector into its first slow down for 18 months. The purchasing managers’ index data from S&P Global fell to 48.9, where any reading below 50 indicates a contraction, versus 52.6 in June.
Thomas Pugh, an economist at RSM, said the weak reading “adds to the evidence that economic growth is already slowing sharply and the economy may already be in recession.” He warned growth is likely to be “extremely erratic over the coming year” amid jumps in inflation and further supply disruptions.
Martin Beck, from EY ITEM Club, added that the high energy intensity of the sector made it particularly vulnerable to soaring prices for electricity and fuel, but that there were still signs of hope. “Government plans to boost spending on infrastructure as a share of GDP to a multi-decade high, linked in part to the levelling-up agenda, and a housing market which while slowing, is unlikely to contract significantly, means the sector isn’t out of supports,” he said.
Employers become more cautious about hiring
The latest KPMG and Recruitment & Employment Confederation UK Report on Jobs, compiled by S&P Global, found that hiring in the UK has slowed amidst uncertainty over the economy, with July seeing the slowest increase in the number of permanent jobs filled for 17 months. Ongoing skills shortages, a drop in foreign workers and hesitancy from candidates to move jobs had all led to a tighter supply of suitable staff, the report said.
“The trend of uncertainty in the UK jobs market of the last few months continues,” said KPMG’s Claire Warnes. “Employers are rightly hesitant about their hiring plans… So, a focus on up-skilling existing workers and attracting talent, remains absolutely essential for UK business to play its part in driving forward the economy.”
SMMT cuts 2022 forecast as new car sales fall again
Supply chain problems forced down sales of new cars by 9% in July from a year earlier to 112,162 vehicles. New car registrations fell for the fifth month in a row, although the decrease was the smallest recorded this year. The Society of Motor Manufacturers and Traders (SMMT) subsequently cut its full-year forecast, even though it expects chip shortages to ease in the coming months and lowered its sales forecast for next year to 1.89m, down from 2.02m.
Truss says tax cuts can avert a recession
Liz Truss said in a leadership debate on Thursday that a recession could still be avoided following the grim warning from the Bank of England. The Foreign Secretary argued her tax cuts, including scrapping the Corporation Tax rise and reversing the National Insurance increase, would help avert the downturn, saying: “You simply cannot tax your way to growth.” By contrast, her opponent Rishi Sunak said he would not promise to deliver “goodies” that would only fuel already soaring inflation. He added: “We in the Conservative Party need to get real and fast because the lights on the economy are flashing red and the root cause is inflation.” Meanwhile, 21 current and former Conservative Cabinet ministers argue in a letter to the Telegraph that only the Foreign Secretary can tackle Whitehall’s “failed groupthink” and kick-start economic growth.
Liz Truss to set out economic plans to finance sector
Tory leadership frontrunner Liz Truss will meet with finance bosses today to outline her economic plans should she become prime minister. The meeting will take place at Aviva’s London offices and attendees will include Nigel Wilson, chief executive of Legal & General, and Amanda Blanc, Aviva chief executive.
Sources told Reuters the Foreign Secretary will lay out her agenda for attracting new investment, including reform of Solvency II and MiFID regulations, which Britain introduced while a member of the EU. “For too long, we have allowed those who create wealth and high-quality jobs – dynamic businesses and hard-working people – to be weighed down by onerous EU bureaucracy,” Truss said in a statement before the meeting. “We haven’t moved fast enough to take full advantage of Brexit. I’ll make it a priority to slash EU red tape and ensure we have the right tools in place to attract investment and deliver growth.”
Ofgem’s quarterly review of energy bills criticised
Ofgem has confirmed plans to reset the price cap on British household energy bills every three months instead of every six months. The regulator said the changes were necessary to reduce “the risk of further large-scale supplier failures which cause huge disruption and push up costs for consumers”, but the move has sparked anger from consumer groups who say it will expose customers to price increases in the depths of winter.
The End Fuel Poverty Coalition said that introducing quarterly updates was “simply inhumane” and would force more people into fuel poverty in winter, risking more excess deaths. The view was echoed by Caroline Abrahams, charity director at Age UK, who urged Ofgem to rethink its decision. Meanwhile, analysts at Investec on Thursday increased their forecasts for the annual price cap, predicting it will hit £3,523 in October before rising to £4,210 in January. That compares to a cap of £1,977 in place today and £1,271 in October last year.
Banned Russian oligarchs exploited UK secrecy loophole
Sanctioned Russian oligarchs from President Vladimir Putin’s inner circle exploited a UK secrecy loophole left open by the Government, reports the BBC. Arkady Rotenberg and Boris Rotenberg used a type of company that was not required to identify its real owners. Government ministers have acknowledged concerns that these companies, known as English Limited Partnerships (ELPs), have also been abused by criminals.
A joint investigation by the BBC and Finance Uncovered has discovered evidence linking a number of ELPs to fraud, terrorism and money laundering. In 2016 and 2017, the Government introduced measures that forced almost all UK companies to identify their real owners. ELPs were not covered by these new transparency laws. Since then, more than 4,500 of them have been set up.
Batgirl movie may have been cancelled for tax write-off
Warner Bros. may have cancelled the Batgirl movie so that the studio could use the DC Extended Universe film as a tax write-down. According to Variety, several sources say Warner Bros. Discovery will take a tax write-down on Batgirl, and also the recently shelved Scoob! Holiday Haunt movie, which is “seen internally as the most financially sound way to recoup the costs (at least, on an accountant’s ledger).” If Warner Bros. chooses this strategy, it would be unable to monetize Batgirl in the future. Warner Bros. would be prevented from releasing it on streaming or in theatres, or selling the film to another studio.
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