Business news 19 April 2022

James Salmon, Operations Director.

Firms say cost-cutting is the priority. Lenders expect loan default increase. Finance chiefs warn of business challenges. Business growth hit by cost of living crisis. Cost of living increases WFH switch.  Recession can be avoided but growth will be subdued. And more business news.

Firms say cost-cutting is the priority
Addressing rising costs is the number-one priority for private companies, according to KPMG. The firm says that with producer price inflation seeing annual growth hit a two-decade high of 19.2% in the year to March, firms are looking to where they can make savings. KPMG’s Phil Murden revealed that 11 of the firm’s 12 regional heads across the UK said clients are prioritising tackling cost pressures. He added that as costs such as energy prices are outside their control, leaders are looking at other options, including redundancies, renegotiating supply contracts, pushing out payment terms, and mergers and acquisitions. Mr Murden notes the impact of the 1.25% rise in employers’ National Insurance, the 6.6% rise in the national minimum wage, raw material price rises, shipping disruption and skills shortages – adding that many business leaders were also looking ahead to a planned rise in corporation tax that will see the rate rise from 19% to 25% for companies with annual profits of more than £250,000 as of next April. Mr Murden says that for cost saving initiatives to work long-term they cannot be seen as a one-time exercise, commenting “When we do cost work, it is one thing to help reduce costs but it’s also about instilling a long-term culture to focus on costs, from the CEO down.”

Lenders expect loan default increase
The latest Bank of England credit conditions survey shows that lenders expect to see loan defaults rise in the coming months. Amid the ongoing cost of living crisis, banks predict that mortgages, unsecured lending and business loans will see an increase in defaults over the three months to May. Banking firms and credit providers also said they saw a decrease in defaults for both secured and unsecured loans in the quarter to February. Lenders saw demand for unsecured lending increase in the three months to February, with this forecast to rise further in the current quarter. The report also shows that lenders plan to rein in mortgage lending, with the availability of secured credit set to decrease over the next three months to May. Demand for unsecured lending is expected to climb, having increased in the three months to February, with this driven by increased demand for credit cards and loans. Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said climbing inflation and “eye-watering” price rises for many essentials has forced more people to “borrow to make ends meet,” noting that credit card borrowing grew faster than any other month on record in February.

Finance chiefs warn of business challenges
Deloitte’s quarterly survey of finance chiefs suggests the UK’s biggest companies are facing the toughest “external challenges” in years. Finance bosses reported a record level of risk, with 98% expecting operating costs to rise this year, the highest figure since Deloitte’s poll started in 2011. It was also shown that 46% are braced for “significant” cost increases, while 71% expect a drop company operating margins over the next 12 months, up from 44% in the previous quarter. More than a quarter of finance leaders pointed to “significant or severe” levels of disruption. Close to eight in ten (78%) believe inflation will still be above 2.5% in two years’ time and a quarter expect it will remain above 3.5%. On average, they expect interest rates to double to 1.5% in 12 months’ time. Ian Stewart, Deloitte’s chief economist, said the risks from surging inflation and Russia’s invasion of Ukraine “far eclipse Brexit and the pandemic.” Richard Houston, chief executive of Deloitte, commented: “It’s clear that businesses are operating in an increasingly uncertain and challenging economic and geopolitical environment.” Deloitte polled 89 finance leaders, including 22 from FTSE 100 companies and 34 from the FTSE 250.

Business growth hit by cost of living crisis
Rising costs are the biggest challenge facing almost half of UK businesses in the next six months, a survey by BDO has found. Almost a third are seeking additional finance as a direct result of pressure brought about by inflation, with 24% taking on higher debt to ensure survival. The BDO report says a majority of businesses planned for inflation to stay between 3% and 5% this year, with this far short of official modelling which predicts inflation will reach 9% in 2022. The poll shows that a third of businesses plan to pass higher costs onto customers by increasing  the price of goods and services. While 30% plan to reduce their offering as certain products have become less profitable, a similar number plan to switch to cheaper suppliers to cut costs. The survey also points to the impact of skills shortages, with more than a quarter of firms saying that finding staff with the right skills is the biggest challenge they face. Reflecting on the findings, Ed Dwan, a partner at BDO said: “This is a deeply concerning time for the UK businesses, with inflation and global uncertainty all threatening to stifle the post-pandemic recovery.” He added that the hike in National Insurance “could prove a tipping point for many in the midst of the cost-of-living crisis.”

Cost of living increases WFH switch
A survey by recruiter Randstad shows that many workers are looking to work from home because of rising fuel prices, with nine in 10 trying to work remotely more often amid the cost-of-living crisis. Randstad chief executive Victoria Short said a rise in fuel prices is “a much bigger blow” to workers in Northern Ireland and Wales than to those in London, with those in the capital having public transport options “that aren’t available in other parts of the country.” “For people who have to drive, being hit by massive fuel bills to travel to work, while seemingly subsidising London’s transport infrastructure must feel pretty painful,” she commented. Office for National Statistics analysis shows that 86% of home-based workers spent more on energy, while a quarter reporting increased broadband bills. However, this was balanced out by savings on petrol, food, parking and public transport.

Food price inflation could double
Experts have warned that food price inflation could more than double in the coming months, with Russia’s invasion of Ukraine, labour shortages and soaring energy costs likely to push prices up. While Office for National Statistics data shows food inflation hit a decade high of 5.9% last month, forecasters believe the rate will hit 7% in the coming months. Clive Black of Shore Capital believes that the rate could climb as high as 12% over the summer, warning that the Government has been “utterly complacent when it comes to food security”.

Recession can be avoided but growth will be subdued
David Smith in the Sunday Times said the cost of living crisis and the economy having “slowed to a crawl” in February – with GDP up just 0.1% – has prompted concerns that a recession could be on the horizon. Ruth Gregory of Capital Economics said the data “increases the risk of a contraction in GDP in the coming months as the squeeze on household real incomes intensifies.” Samuel Tombs of Pantheon Macroeconomics predicts a 0.4% fall in GDP in Q2 with Mr Smith saying this “would take us halfway to a recession.” Thomas Pugh of RSM comments that it would not take much more of a rise in oil prices or disruption to supply chains to push the economy into recession. Despite these concerns, Mr Smith says the GDP data was “distorted” and the economy would have seen “robust” growth of 1.2% on the month but for the impact of NHS Test and Trace and the vaccination programme being wound down, with these having lifted growth in previous months. On the economic outlook, he goes on to reflect: “We can avoid recession and should do so — but it won’t feel very much like the sunlit uplands,” with growth likely to be “subdued.”

Aliss Higham in the Sunday Express considered the likelihood of the UK economy seeing a recession in 2022, weighing the possible impact of the cost of living crisis and soaring inflation. She warns that consumers are “being plagued” by higher than ever prices at supermarket checkouts and petrol stations while household energy bills are climbing. This comes with Office for National Statistics data showing that inflation is currently running at 7% – up from 6.2% in February and exceeding analyst forecasts of 6.7%. Ms Higham says that although the economy is recovering from the pandemic-induced recession last year, “this isn’t built to last due to current circumstances.” Noting that GDP shrank by 0.2% in December but was up 1% quarter-on-quarter in Q4, she says a recession is unlikely “in the immediate term.” However, she notes that analysts believe a recession “could be on the cards later in the year.”

Experts warn of recession risk
The UK economy is at an increasing risk of falling into recession as soaring inflation hits consumer spending power, experts have warned, saying slowing post-lockdown growth and rising living costs could see GDP fall for two consecutive quarters. Analysts say GDP is on track to grow by about 1% in Q1 before slipping into reverse. Dutch bank ING forecasts a 0.3% contraction in Q2, followed by growth of just 0.2% in the third quarter. James Smith, an economist at ING, warns: “It’ll be pretty close to a technical recession.” Neil Shearing, group chief economist at Capital Economics, commented: “With the economy already close to flat-lining, it clearly would not take much to produce a month or two of falling output.” RSM UK economist Thomas Pugh says households will probably need to dip into savings or take on debt to protect themselves from rising inflation, commenting: “This is a key reason why we think the UK will avoid a recession this year.” With RSM forecasts suggesting GDP growth will average just 0.1% in each of the remaining three quarters of this year, Mr Pugh notes that it “would not take much of a rise in oil prices or a disruption in supply chains to push the UK into recession.”

Easter staycations to boost economy
The first restriction free Easter weekend for two years is expected to result in a £2bn staycation boost to the economy, with almost 8m families expected to take a break in the UK. Julian Jessop of the Institute of Economic Affairs said the easing of coronavirus-related restrictions is providing a “much-needed boost to spending on a wide range of goods and services,” adding: “There are signs more of this money is being spent in the domestic economy.” VisitBritain deputy chief executive Patricia Yates said: “This is the first Easter since 2019 that the industry has been able to fully trade and the long weekend will be critical in providing businesses and destinations with much needed cash-flow.” Tourism experts predict that British tourists will add at least £1.8bn to the economy this weekend

Port problems prompt supply chain concerns
Analysis shows that 12% of goods being shipped globally are stuck at ports, with Chinese lockdowns raising concerns over a new supply chain crisis. Liberum and Fleetmon data shows a surge in the number of ships waiting outside ports in Shanghai, Hong Kong and the North Sea, with blockages in global trade hitting the highest since the serious disruption seen last September when 14% of goods were blocked in ports. In addition to problems at ports, BCA Research analyst Roukaya Ibrahim has warned that supply problems are being worsened by Covid restrictions on lorry drivers, saying: “Travel restrictions, quarantines, and policies that require truck drivers to take Covid tests before crossing municipal borders are delaying the inland transportation of goods between factories and ports.” Deutsche Bank has warned that global supply chain problems could be part of a “very strong cocktail” causing inflation in the UK to surge above 8% until next year

9 in 10 retailers and landlords back online sales tax
Retailers and landlords have backed renewed calls for an online sales tax, with a poll from Colliers showing that 89% would be in favour of such a levy being rolled out. This comes after the Government launched a consultation on an online sales tax policy. Landlords and property-related firms are particularly supportive of an online sales tax, while 71% of retailers, who could be impacted by its introduction, back the measure, John Webber, head of business rates at Colliers, said: “It certainly seems there is overwhelming support to bring in some sort of online sales tax to try and level the playing field and take the full burden of business rates off bricks and mortar retailers.” He added that while an online sales tax will not solve all the issues facing the high street, “it is only right that we should try and rebalance the system and create a fairer playing field for all.” He added that it is “essential any monies raised by an online tax is used directly to alleviate the high business rates burden and does not go into a government black hole.” Industry leaders including Sports Direct boss Mike Ashley and Next CEO Lord Wolfson have called for significant tax reform across the sector, voicing concern that business rates have increased for firms despite waning property valuations.

IMF chief: Ukraine crisis and inflation threaten global economy
International Monetary Fund (IMF) managing director Kristalina Georgieva has warned that high inflation is “a clear and present danger” to the global economy, while Russia’s attack on Ukraine is weakening the economic prospects for many countries. Ms Georgieva said high inflation, which is forcing central banks to raise interest rates and probably slow economic growth in the process, amounts to “a massive setback for the global recovery.” She also noted that the consequences of Russia’s invasion are contributing to economic downgrades for 143 countries. Ms Georgieva called on the world to support Ukraine and noted that the IMF has delivered $1.4bn in emergency financing to help the country meet its immediate spending needs.

Inflation surges but ECB holds firm on rates
With prices up 7.5% across the eurozone in March, European Central Bank (ECB) president Christine Lagarde says inflation will remain high over the coming months but has refused to increase interest rates. She has also warned that the war in Ukraine is driving up costs while undermining economic growth. While the ECB plans to stop buying bonds under its quantitative easing programme in Q3, economists believe it could start to raise interest rates by the end of the year. Anna Stupnytska, economist at Fidelity International, comments: “Recession in Europe is already our base case, but its magnitude and duration crucially depend on the nature of further sanctions on Russia.”

Euro zone faces slower growth and higher prices
A European Central Bank (ECB) poll of economists suggests that the euro zone economy faces slower economic growth and higher inflation on the back of Russia’s invasion of Ukraine. The Survey of Professional Forecasters saw experts say inflation will hit 6% this year, twice as high as the economists predicted two months ago and well above the ECB’s target of 2%. Growth is forecast to slow to 2.9% this year, with this down from a previous estimate of 4.2%.

Civil servants embrace hybrid working switch
An investigation by the Daily Mail has found that tens of thousands of civil servants are being allowed to carry on working from home indefinitely, with a permanent switch to a hybrid working model requiring some staff to spend just 40% of their working hours in the office. At least 20 Government agencies and Whitehall departments have policies that mean staff are expected to be at their desks for only two days a week. The probe found that on Monday, March 14, many civil service offices had less than 10% of their staff in work. Some had under 5% and one had no staff on site. Across Whitehall departments, some saw fewer than half of staff at their office desks. Former Conservative leader Iain Duncan Smith believes civil servants “need to stop being selfish and to get back to the office.” Warning that those working from home are not as productive, he added: “Ministers need to start insisting because there is now no need for them to not be back. Everyone else is back.”

Firms turn to bonuses to lure and keep staff
With some employers looking to attract new recruits and retain existing staff amid a backdrop of record job vacancies, Richard Partington in the Observer considers the impact this has had on bonuses. Figures from the Office for National Statistics show that the value of bonuses jumped by almost a quarter in the year to February, the highest level of one-off awards relative to basic wages since 2013. Tony Wilson of the Institute for Employment Studies think-tank notes that with bonuses “a lot higher this year than last,” this is adding about a percentage point to pay growth. He says: “It’s being dragged up by large bonuses in finance, but there are proportionate big increases in other industries too.” Data for February shows that earnings growth, including bonuses, of 5.4% failed to keep pace with a 6.2% increase in inflation. The consumer price index rose to 7% March and for those who did not get a bonus, average pay was up just 4%. Mr Partington says firms may opt for joining bonuses for new hires as “these can be more eye-catching than headline pay rates.” He also notes that employers may believe the impact of soaring inflation will fade next year and paying one-off bonuses avoids permanently higher wage bills. Union leaders, Mr Partington notes, have warned that bonuses, which do not usually count towards a worker’s pension, typically fail to make up for lower pay. Beyond bonuses, he says some employers are trying “more creative retention techniques”, with the number of vacancies offering perks such as wellbeing programmes up 1,719% on pre-pandemic levels. There has also been an increase in firms offering gym memberships, subsidised travel and financial advice.

House listings increase, say surveyors
The number of new homes being listed for sale has risen for the first time in a year, according to surveyors. The latest Royal Institution of Chartered Surveyors residential market survey said an increase in listings has helped drive a “modest” rise in sales last month. A net balance of 8% of property professionals witnessed a rise in the volume of fresh listings. The new figures also showed a net balance of 9% of respondents reporting a rise in new buyer enquiries for the month. Experts at the trade body said it was the first time since the pandemic that supply of properties and demand from potential buyers had been so closely aligned. In March, a balance of 74% of respondents saw a rise in house prices, almost identical to the average seen over the past 12 months, with the steepest increases in Wales, northern Ireland and the north of England. A net 54% of respondents said rents had also risen.

First-time buyer deposits up more than 50%
The average deposit for first-time buyers has jumped by more than 50% over the last 10 years – even after adjusting for inflation. Those trying to get on the property ladder must now have a deposit of more than £45,500, compared to around £23,000 to £29,000 a decade ago, data from platform Stipendium shows. “While this increase will have been felt by homebuyers at all levels of the market, it’s been particularly hard on first-time buyers who won’t have the financial backing of a previous property in order to cover their mortgage deposit costs,” Stipendium CEO Christina Melling said.

World Bank plans $170bn financing to ease ‘multiple crises’
The World Bank is preparing a $170bn package of financial help in response to a combination of economic factors which are hitting the poorest countries particularly hard. President David Malpass said there is a need for swift support as Russia’s invasion of Ukraine and coronavirus-related shutdowns in China have added to pressures caused by the pandemic, soaring inflation and probable interest rate rises, warning that he is “deeply concerned about developing countries.” Under proposals set to be discussed by World Bank member states, $50bn would be spent over the next three months, with a further $120bn of financing provided over the following year. The World Bank said the global economy is now expected to grow by 3.2% this year, compared with the 4.1% it had predicted in January.

Investor nerves see cash savings climb
Investors have become nervous about deploying their savings, with concern over investments immediately falling in value. Analysis shows that 37% of savers who deposited money with broker Hargreaves Lansdown last month left it completely in cash, up from 31% in 2021 and 29% in 2020. Interactive Investor also found that more investors remained in cash in March. Almost a quarter did not invest their new contributions, compared with 22% in 2021 and 21% in 2020. Sarah Coles of Hargreaves Lansdown has warned against staying outside the stock market for too long, saying those who do “may struggle to find the ideal moment to buy and will miss out on market gains in the interim.”

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