Business news 15 May 2023

James Salmon, Operations Director.

Small Business faces economic damage as interest rates rise. Rises cost UK mortgage holders £12bn in extra payments. New capital rules will stifle SME lending. Cost of living and strikes weigh on growth.  And more business news that we thought would interest our members.

Small Business faces economic damage as interest rates rise

The Bank of England raised interest rates last week to 4.5%, the highest level since 2008, and economists predict another 0.25% interest rate rise next month, causing concern for small businesses. Rising interest rates will cause “economic damage” and “severely curtail” small businesses from growing, according to industry leaders.

The Federation of Small Businesses has accused the Bank of England of being “out of touch” with firms in the UK. UKHospitality chief executive Kate Nicholls warned urgent action is needed for hospitality businesses to avoid closure or passing their costs on to customers. Martin McTague, chair of the Federation of Small Businesses, said that further rate increases will risk entrenching the economic damage to small firms, leaving SME’s struggling to pay back loans and access credit severely curtailing their ability to invest  “We cannot end up in a situation where the cure is adding to the harms caused by the disease.”

Rate rises to cost UK mortgage holders £12bn in extra payments

The Resolution Foundation says the Bank of England’s decision to hike rates to 4.5% will mostly impact young families. The think tank reports that the dozen consecutive rate rises since December 2021 have already cost homeowners £4.2bn, with about £8bn more in extra payments likely over the next couple of years. The wealthier households with large loans will pay the bulk of the extra cost. “However, the scale of the living standards shock will be greatest for those low-and-middle income households who are affected,” the foundation said. Meanwhile, new rules implemented by the Financial Conduct Authority in March mean homeowners are facing more onerous checks when remortgaging. Banks are warning the legislation risks creating a new generation of mortgage prisoners by trapping borrowers who fail the checks. An FCA spokesman said: “Firms will generally only need to assess affordability if borrowers want to switch to a new rate which is materially more expensive than not switching.”

New capital rules will stifle SME lending, BoE warned
UK banks are lobbying the Bank of England to ensure the latest round of Basel rules will not lead to reduced lending to small businesses. New international capital rules would see UK banks forced to hold billions more than their US and EU rivals due to their strict implementation by the Prudential Regulation Authority (PRA). UK finance has led the backlash against the PRA’s approach, in particular regarding a quirk in the Basel framework that means secured lending to small businesses is currently deemed more risky than its unsecured equivalent. The PRA is listening, one banker told the Telegraph, but any change in position unlikely to satisfy those pushing to promote global Britain.

Cost of living and strikes weigh on growth
The UK economy grew by just 0.1% in the first three months of the year, according to figures from the Office for National Statistics (ONS), with strikes, cost of living pressures and wet weather all dragging on growth. The figures showed that while the economy grew slightly over the first three months of 2023, in March it contracted by 0.3%, with car sales and the retail sector having a bad month. The economy is still 0.5% smaller than pre-pandemic levels, the ONS said. KPMG economist Yael Selfin said the contraction seen during March “underscores its fragility”, despite lower energy prices, improvements to the supply of goods, and a pick-up in consumer confidence. While recession is probably no longer on the cards, vulnerabilities resulting from higher borrowing costs… are likely to dampen business and household activity this year.”

Bank lending to rise in 2023
Lending is expected to rise this year, with total bank loans expected to increase by 1.2% in 2023, reflecting an extra £29bn in lending. The EY Item Club predicts that bank lending will rise by a further 2.1% in 2024 as confidence among businesses and consumers continues to improve. The combination of stronger economic growth, falling inflation, and the sharp drop in wholesale gas prices has boosted optimism among businesses that conditions will continue to improve this year. The Item Club also expects mortgage lending to rise by 1.2% this year, climbing to 1.8% in 2024 and to 2.7% in 2025. Anna Anthony, UK financial services managing partner at EY, said enthusiasm about the economic outlook “should be measured, in the short term at least. UK banks continue to face a tough environment, with historically low lending growth rates. However, the sector is in a strong capital position and continues to provide support to customers, businesses and the wider economy.”

Quarter of small firms unprepared for net zero target
More than a quarter of small businesses are not prepared to meet the UK Government’s 2050 net zero carbon target, according to research by BSI. Of 500 SME decision-makers surveyed, 29% said they would rather face penalties than meet the target due to immediate cost pressures. While 78% were aware of the target, they said it was not their main concern. Sebastiaan Van Dort, associate director of energy and sustainability at BSI, said that while sustainability was on the radar, there was a risk of it being pushed aside due to the cost-of-living crisis. Despite this, 67% of businesses were committed to becoming net zero.

UK ‘will have to raise retirement age after election’
Ministers will need to bring forward the rise in the state pension age to 68 in the first couple of years of the next parliament, the work and pensions secretary has suggested. After delaying the decision because of stalling life expectancy, Mel Stride said it would still have to be taken, but it would probably be one for his successor in the job and that people would still get 10 years of notice. He also said there were “no plans currently” to change the triple lock on raising pensions in the next Conservative manifesto but stopped short of guaranteeing it would be retained.

UK could become clean energy superpower, generating £70bn annually
The UK could become a clean energy superpower by generating enough clean electricity to become a major exporter of energy to Europe, according to a report drawn up for the UK Business Council for Sustainable Development by former government economist Chris Walker. By increasing Britain’s clean electricity generation 50% above its current projections for 2050, it could export £17bn of green electricity a year, creating an additional 279,000 British jobs and supporting a total of 654,000 British jobs. The report found that the UK could transform from a net importer of energy to an exporter of green electricity by taking a lead in the global race to decarbonise. However, the UK could miss this opportunity unless policymakers remove the barriers holding back the UK’s green energy ambitions. The report also warned that National Grid was struggling to cope with the number of new clean energy projects applying to connect to the grid, which had surged to 50 a month from 50 a year over the last decade, leaving many projects with a 10 to 15-year wait to provide the UK energy system with clean electricity.

UK Labour party plans ‘right to switch off’ for exhausted workers
The Labour party is expected to introduce “right to switch off” rules if elected, restricting employers from contacting their staff by phone, WhatsApp or email outside working hours.

Labour leader pledges to keep taxes for workers ‘as low as we can’
Sir Keir Starmer has demanded a general election and criticized the lack of growth under the Tory party. He also said that struggling families can’t afford for Rishi Sunak to cling to power. Asked whether he wanted to cut taxes for those on the lowest incomes, the Labour leader said: “I want to keep the burden on working people as low as we can.”

Hubs to link small firms to latest AI technology
Three hubs attached to the universities of Cardiff, Newcastle and Ulster are to provide around 250 small companies with access to the latest artificial intelligence and supercomputer technologies to help them to innovate and solve business challenges. The three-year £4.5m government-funded initiative will link the hubs with the supercomputing, data analytics, visual computing and AI expertise of the Hartree National Centre for Digital Innovation, based near to Warrington. George Freeman, minister of state at the Department for Science, Innovation and Technology, said: “These new hubs will allow us to target support at a local level while laying the foundations for a larger support ecosystem connecting companies right across the UK.”

UK and Switzerland to discuss new post-Brexit trade deal
The UK’s business and trade secretary, Kemi Badenoch, will meet with her Swiss counterpart, Guy Parmelin on Monday to discuss a new post-Brexit trade deal. The two countries are described as “natural trading partners” and the talks will focus on a “modern” UK-Switzerland free trade agreement that would boost trade between two “services superpowers”. The current FTA is based on an EU-Swiss deal brokered more than 50 years ago and does not cover services, investment, digital or data. The UK runs a trade surplus with Switzerland, with exports totalling £33.3bn and imports of £19.5bn. “There’s a huge prize on offer to both the UK and Switzerland by updating our trading relationship to reflect the strength of our companies working in areas ranging from finance and legal, to accountancy and architecture,” said Badenoch ahead of the talks at the Federal Palace of Switzerland.

Twitter

Elon Musk named Linda Yaccarino as Twitter’s new chief executive. Her previous role as the advertising chief at NBC Universal, may hint at her remit. Musk will continue as Technology Officer.

Autonomy founder extradited to US
Mike Lynch has been extradited to the United States to face fraud allegations over Hewlett-Packard’s $11bn acquisition of Autonomy, the software company Lynch co-founded in 1996. Lynch faces allegations that he inflated the company’s value before it was sold in 2011 for £7.4bn. The Home Office confirmed the extradition after Lynch’s appeal to High Court was rejected last month. Dr Lynch’s case has raised concerns over UK sovereignty and whether those who are accused are likely to receive justice in the US. Maggie Pagano says in the Mail that “Lynch’s hijacking sets a dangerous precedent whereby any British businessman or woman who finds themselves up against a powerful US corporation can be bullied through the UK courts and ensnared as a victim.”

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The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections.

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The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections.