Business news 16 January 2023
James Salmon, Operations Director.
Economy grows by 0.1% in November. Recession looms despite positive data. Data dump coming this week. Inflation has probably peaked. Small firms braced for jump in energy costs and higher costs are here to say says energy chief. And more business news.
Economy grows by 0.1% in November
The UK economy unexpectedly grew in November, with Office for National Statistics (ONS) data showing growth of 0.1%. While the figure shows a slowdown in growth after a 0.5% increase in October, analysts had predicted that the economy would shrink by 0.3% in November. The expansion was driven by the services industry, which saw a boost from football fans heading to pubs and bars to watch the World Cup. Economists have suggested that November’s GDP reading makes it less clear whether the UK will have entered a recession at the end of last year.
Darren Morgan, director of economic statistics at the ONS, said the economy would have to shrink by 0.6% in December to send the UK into a recession – which is defined as two consecutive quarters of shrinking economic output. Pantheon Macroeconomics said whether the UK is already in recession or not is “hanging in the balance.”
Kitty Ussher, chief economist at the Institute of Directors, said: “Given we know the economy also grew in October … it is no longer certain that the economy will meet the technical definition of a recession when the final data for 2022 is in.”
Recession looms despite positive data
Office for National Statistics (ONS) data due this week is expected to show that average earnings, excluding bonuses, increased by 0.2 points to 6.3% in the three months to the end of November, while CPI inflation is forecast to have eased from 10.7% to 10.6% in December. The forecasts follow positive ONS figures showing that the economy unexpectedly grew 0.1% in November.
Saying this week’s data may reveal a dip in inflation, Martin Beck, chief economic adviser to the EY Item Club, said: “It feels like we hit the peak of the squeeze last year. Things are still bad, but they’re looking less bad.”
Capital Economics’ chief UK economist Paul Dales warns that a recession has been delayed, rather than cancelled, noting that the effects of higher inflation and interest rates have not yet fed through into the economy.
Gabriella Dickens, Pantheon Macroeconomics’ senior UK economist, says it is “touch and go whether we are already in recession or not, but the outlook is pretty grim.”
Data dump could reveal recession
Data released this week is set to give a clearer idea whether the economy entered a recession in the final months of last year.
Inflation figures from the Office for National Statistics (ONS) will be published on Wednesday, with a consensus forecast that the rate of price growth will have dropped to 10.5% in December. This would mark a dip on the 10.7% recorded in November and October’s peak of 11.1%. A dip in inflation after last week’s ONS report showing GDP unexpectedly grew 0.1% in November will raise hopes that any recession could be reasonably mild.
The ONS will also publish jobs market data for December this week. With private sector pay growth climbing as workers demand bigger salaries to offset the higher cost-of-living, business costs have increased – driving the likelihood of price hikes.
On Friday, ONS retail sales data will be published, giving insight into consumer spending in December.
As well as the ONS reports, this week will see Bank of England governor Andrew Bailey face MPs on the Treasury Committee, with the meeting likely to offer clues as to Monetary Policy Committee’s future moves in regard to interest rates.
Inflation has probably peaked, say analysts
Experts say inflation has probably peaked and price rises should slow through 2023. With December’s Consumer Price Index (CPI) figures set to be released this week, some forecasts suggest the rate could come in at just over 10%, having hit a peak of 11.1% in October. Analysts say this could encourage the Bank of England’s Monetary Policy Committee (MPC) to temper further increases in the base rate, which currently sits at 3.5%.
Philip Shaw of Investec says: “A continued falling trend should help to convince the MPC that it can begin to move the Bank rate up in smaller increments than December’s half-percentage point.”
Deutsche Bank’s Sanjay Raja suggests inflation “should now be on a gradual but bumpy trajectory down to target, which we think will take at least 18 months,” adding: “The recent fall in gas prices should help get us there a little quicker if market pricing is sustained, or falls further, over the coming quarters.”
BNPL to impact credit scores ahead of FCA regulation
Buy now, pay later (BNPL) payments are to impact credit scores for the first time. BNPL business Zilch, which has 3m users, is to start sharing data on customers’ balances and repayments with credit rating agencies. The move could see people’s ability to borrow restricted if they fall behind on payments. This comes with BNPL firms set to face regulation from the Financial Conduct Authority (FCA).
New rules from the City watchdog are expected to include a requirement to perform credit checks. In a 2021 review of the market, the FCA said companies would need to “properly consider affordability for consumers, particularly as they may not have visibility of missed payments with other providers.” MPs and campaigners have raised concerns that BNPL companies may be encouraging consumers to spend more than they can afford, with Labour MP Stella Creasy having called the issue a “scandal waiting to happen.”
An FCA spokesman said: “We have been consistently calling for a change to the law to bring buy-now-pay-later products under our regulation. As soon as Government and Parliament decides on the scope of that legislative change, we will immediately consult on the rules these firms need to follow.”
Small firms braced for jump in energy costs
Small businesses on fixed rate energy deals face a surge in their bills when the Government’s current Energy Bill Relief Scheme ends. As of April, a cap on the price of gas and electricity will be replaced by a new scheme which offers a much less generous discount on energy bills. The Government has set aside £5.5bn for the new Energy Bills Discount Scheme, which will last 12 months. The current Energy Bill Relief Scheme has cost around £18bn.
Paul Wilson, policy director for the Federation of Small Businesses, warns: “We will definitely see more businesses close, and if energy prices go back up to the high levels we’ve seen before, the number of closures will be much higher.” He added: “We’re moving from a scheme that gives quite a high degree of certainty over the price that businesses are going to have to pay for electricity and gas, to one where you might get a very limited discount, and only in circumstances when the price you are paying goes over a certain threshold.”
Higher bills are here to stay, says energy chief
The boss of Norwegian energy giant Equinor has said he does not expect gas and electricity bills to return to the levels they were before Covid. Anders Opedal told the BBC the transition from fossil fuels towards less damaging sources of energy meant costs would remain high. Mr Opedal also said that windfall taxes on energy firms were affecting investment in projects in the UK.
SME confidence climbs
Confidence among SMEs is rising, according to research from Novuna Business Finance, with a poll showing that 53% want to obtain finance to grow. This marks an increase on the 49% who said the same this time last year. The specialist lender found that hiring staff was the most common reason for wanting to secure additional finance, having been cited by 28% of respondents. This was followed by launching new products or services (28%) and purchasing new equipment or modernising IT systems (24%).
Jo Morris, Novuna’s head of insight, said: “2022 was a tough year for everyone in the business world, with small businesses in particular having to navigate a variety of obstacles. It is encouraging, however, to see growth outlook for the small business community maintaining a steady level throughout the year, with many looking to continue this expansion and growth into 2023.”
FTSE 100 moves toward record high
The FTSE 100 is heading towards a record high, having closed above 7800 for only the third time in its history. The index rose 0.6%, or 50.03 points, to 7844.07 on Friday. This is not far off the record high of 7877 recorded in May 2018. Meanwhile, the FTSE 250 added 0.6% on Friday, with the 111.71 points increase taking it to 19952.84.
£645k pension pot needed for comfortable retirement
A pension pot of £645,000 is required to achieve a comfortable lifestyle in retirement, according to calculations by wealth management company Quilter. A comfortable retirement requires a single person to have an annual income – net of tax – of £26,700 per year on top of the state pension. For a single person looking to achieve what is defined as a moderate retirement lifestyle, they will need to build up a pension pot of approximately £301,000. The figures are based on the Pensions and Lifetime Savings Association’s (PLSA) retirement living standards, which have been updated to account for the cost of living.
Rising mortgage costs hit first-timers
Nationwide has revealed that rising mortgage rates are squeezing first-time buyers. The lender found the average mortgage payment for a first-time buyer with a 20% deposit and a mortgage rate of 5.5% is now equivalent to 39% of take-home pay. This is the highest level since the 46% recorded during the financial crisis in 2007. Andrew Harvey, senior economist at Nationwide, notes that between the start of the pandemic and the end of 2022, house prices increased by 19%, while incomes rose by “a much more modest” 9%. He also highlighted that a 20% deposit on a typical first-time buyer home is now equivalent to 112% of the pre-tax income of a typical full-time employee, adding that this is “only modestly below” the all-time high of 117%.
Half of people concerned about ability to pay rent or mortgage
Some 52% of renters and 49% of people with mortgages are worried about being able to meet their housing costs in 12 months, according to polling for the Centre for Homelessness Impact. Among those in the 16-24 age bracket, 44% were concerned about their ability to pay their rent or mortgage. This figure fell to 31% among participants aged 35-54 and to 14% among those aged 55-75. Half of people in their 50s and younger said housing costs were affecting their mental health, rising to 62% of those aged between 16 and 34.
Banking rules will avoid financial crisis repeat
Analysts say UK banks are better prepared to withstand a jump in home loan defaults amid a surge in mortgage rates, making a repeat of the financial crisis unlikely. Strict affordability rules implemented after 2008’s banking crash have strengthened lenders’ loan books, with Bank of England (BoE) stress tests and capital reserve requirements have shored up the balance sheets of banks such as Barclays, Lloyds and NatWest. The average ratio of capital to risky assets has increased from 4.5% to 14.3%, according to BoE data. Russ Mould, investment director at AJ Bell, said: “While it is tempting to look back to the great financial crisis, the comparisons between now and 2008 might reveal as many differences as there are similarities.” Sophie Lund-Yates, a senior equity analyst at Hargreaves Lansdown, said: “The majority of the UK’s banks are sitting on piles of excess capital.”
HMRC staff could strike
Staff at HMRC are poised to go on strike, with around 30,000 tax office employees who are members of the Public and Commercial Services Union (PCS) set to vote for a walkout. If they vote in favour of a strike, customer services, tax and anti-fraud investigations and work at customs checking centres will be halted. A source at HMRC told the Times that a vote in favour of a strike in is “more than highly likely”, with one in three staff considering resigning. PCS general secretary Mark Serwotka said: “Our hard-working members at HMRC are fed up and angry with the way they’re being treated by a government that takes them for granted.” The PCS has rejected the current offer of a 2% pay rise, saying that if accepted it would leave almost a third of HMRC staff earning the national minimum wage by April. A PCS spokesman said: “We’ve been told 2% is all we can get. Inflation is more than 10% and there’s a cost-of-living crisis so our members are really struggling with that. It’s also over pensions, redundancy terms and job security.”
Treasury set for £11bn windfall
Economists calculate that the Treasury will be £11bn better off thanks to a stronger than expected economy and plunging energy prices. With official data showing that the economy expanded by 0.1% month-on-month in November, having been expected to shrink by 0.2%, Ruth Gregory at Capital Economics, said the stronger outlook is likely to reduce borrowing by around £7bn in the coming financial year. Capital Economics also estimates that a sustained fall in wholesale energy costs will reduce borrowing by around £9.6bn. Taking into account the extension of the £5.5bn business energy price support in 2023/24, Ms Gregory said this suggested the Treasury had “about £11bn to play with.” Describing November’s GDP increase as “cautiously encouraging,” former Levelling-Up Secretary Simon Clarke said it “certainly strengthens the case” that the Chancellor “can be a bit more positive” when it comes to lowering taxes “sooner than expected, which would in turn improve our economic performance.”
Call for new taxes on super-rich
Oxfam has called for immediate action to tackle a post-COVID widening in global inequality after revealing that almost two-thirds of the new wealth amassed since the start of the pandemic has gone to the wealthiest 1%. The charity said for the first time in a quarter of a century the rise in extreme wealth was being accompanied by an increase in extreme poverty and called for new taxes to be levied on the super-rich. The report said that for every $1 of new global wealth earned by a person in the bottom 90% in the past two years, each billionaire gained roughly $1.7m. In a report to coincide with Davos, the charity said the richest had pocketed $26tn (£21tn) in new wealth up to the end of 2021. That represented 63% of the total new wealth, with the rest going to the remaining 99% of people.
New clients turned away by Barclays
Barclays is turning away applications for bank accounts from all but the smallest businesses due to the complexities of checks designed to prevent financial crime. According to the Times, the bank has had limited capacity for opening new business accounts for more than four months and is likely to continue to reject companies with more than one director until at least next month. Barclays is understood to have only limited opening capacity for companies requiring anything beyond very basic “bank mandates”. The Financial Conduct Authority is aware of the activity, but Barclays indicated that the City regulator had not instigated it. It blamed a shortage of staff available to complete the due diligence work.
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The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections.