Business news 19 May 2022
James Salmon, Operations Director.
UK insolvencies set to climb 37%. Inflation hits 40-year high of 9%. Sunak urged to cut taxes after cost of living ‘tsunami’ warning. calls for emergency budget. And more business news.
UK insolvencies set to climb 37%.
Business insolvencies will rise by 37% this year, credit insurer Allianz Trade has predicted, saying the UK is set to become the first big European economy to reach pre-pandemic levels of corporate insolvencies.
The research suggests the surge in insolvencies will be driven by the withdrawal of Covid support schemes, rising commodity prices, supply chain disruption, Russia’s invasion of Ukraine and the “lagging effects” of Brexit.
Allianz noted a “massive bounce back” in corporate failures in the UK at the end of last year and the start of this year, particularly in sectors such as utilities, construction and business services. Allianz said 17% of UK businesses are classed as “fragile” based on metrics including profitability and capitalisation, while in France the proportion is 12% and in Germany it stands at 6%. The firm expects the UK to “outpace its European peers for business failures,” predicting that insolvencies will remain artificially low in Germany, France and Italy due to state support.
Inflation hits 40-year high of 9%.
As briefly reported yesterday, UK inflation has hit its highest level for more than 40 years, with the consumer prices index rising from 7% in March to 9% in April.
The Office for National Statistics said April’s 54% increase in the energy price cap was the main reason for the jump, accounting for around three-quarters of the increase.
Figures from the Resolution Foundation show that the poorest 10% of households faced an inflation rate of 10.2% in April, compared to 8.7% for the top 10% of earners, while the Institute for Fiscal Studies estimates that the inflation rate experienced by the poorest households could be closer to 11%.
Noting that the energy price cap rise has been driven by higher global energy prices, Chancellor Rishi Sunak said: “We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action.”
The Bank of England has warned that inflation is likely to climb above 10% later this year, far exceeding its 2% target.
Yael Selfin, chief economist at KPMG UK, believes inflation will stay close to the current level until the end of the year. Rain Newton-Smith, the CBI’s chief economist, commented: “It is critical the Government explores options to help people facing real hardship now, and support cashflow for vulnerable firms.”
Sunak urged to cut taxes after cost of living ‘tsunami’ warning.
Chancellor Rishi Sunak is under pressure to cut taxes amid the cost of living crisis, with cabinet ministers among those suggesting tax cuts could have a positive impact. Foreign Secretary Liz Truss said that a “low-tax economy” was the best way to help people with the cost of living. She also told Sky News of her misgivings about a windfall tax on oil and gas firms, saying such a levy “makes it difficult to attract future investment into our country — so there is a cost in imposing a tax like that.”
Meanwhile, Scottish Secretary Alister Jack said cutting taxes is “how you get money into people’s pockets.” Elsewhere, Jake Berry, chairman of the northern research group of Tory MPs, has called for the Government to consider cutting VAT. Amid calls for support, Robert Halfon, chairman of the Education Select Committee, voiced concern that the cost of living crisis is only going to get worse, saying: “There’s a tsunami coming.” The Chancellor yesterday warned business leaders that the next few months “will be tough,” telling the CBI that he “cannot pretend” that it will be easy to reduce the cost of living but pledged to cut taxes for businesses.
Labour calls for emergency budget
Labour will urge the Government to commit to an emergency budget addressing the cost of living crisis and has called for a VAT cut on energy bills and extra help on energy costs for the lowest paid.
Meanwhile, Liberal Democrat leader Ed Davey has called for a VAT cut, arguing that the “warning lights are all flashing red and Boris Johnson hasn’t a second to lose”.
The British Chambers of Commerce has also called for the Chancellor to hold an emergency mini-budget, with Suren Thiru, its head of economics, saying: “The scale at which inflation is damaging key drivers of UK output, including consumer spending and business investment, is unprecedented.” He added that there is “a real chance” that the UK will be in recession by Q3.
Bank of England could accelerate rate hikes
A City economist believes the Bank of England (BoE) will have to launch a cycle of steeper and quicker interest rate hikes to tackle soaring inflation. With inflation hitting 9% in April, Investec economist Sandra Horsfield said high price rises “up the ante even further for the Bank of England to respond,” adding that “the case for frontloading monetary tightening looks stronger by the day.”
Meanwhile, analysts believe there will be at least four more interest rate rises this year. Bank of America has told clients to expect interest rates to double from 1%, suggesting that the BoE will raise rates by 0.25 percentage points in June, August, September and November. Meanwhile, ING has suggested April’s 9% inflation rate “will mark the peak,” adding that it could fall back to the BoE’s 2% target by the end of 2023.
Cost of living a bigger worry than climate for Millennials and Gen Z
A poll by Deloitte shows that the cost of living crisis has overtaken climate change as the leading concern of Millennials and Gen Z for the first time.
Deloitte’s survey saw 38% of Millennials and 31% of Gen Zs say they feel more anxious about the impact of surging prices than anything else. Will Gosling, partner and human capital lead at Deloitte, said: “For the first time in the history of Deloitte’s Gen Z and Millennial Survey, now in its eleventh year, cost of living has emerged as the top concern.”
Rise in UK minimum wage helped narrow inequality but failed to lift productivity
An independent review by the Low Pay Commission says that while rapid increases in the minimum wage helped to narrow inequality, it did little to increase productivity.
Markets
US markets crashed overnight and moved into risk-off mode and UK & Europeans markets are following suite and dropping this morning as investors turned bearish on inflation woes. Shares started falling after US Fed chairman Jay Powell said the US central bank will keep ‘pushing interest rates higher’ until US inflation is under control. The S&P 500 index fell by 4%, its biggest drop since June 2020. Target, a large US retailer, complained of higher costs, and lost around about 25% of its stock market value, more than at any time since the Black Monday of 1987.
EU & Oil
The European Commission announced a €210bn plan to end Europe’s dependence on Russian oil and gas imports by 2027. The plan involves importing gas from other producers, accelerating the transition towards renewable energy and reducing energy consumption by more than the EU had originally planned. Europe currently gets 40% of its gas and 27% of its imported oil from Russia.
Royal Mail
Royal Mail reported FY22 results with pre-tax profits of £662m down 8.8% and said UK parcel volumes were down 7% a weak result after last year’s 31% growth. Total revenues were almost flat at £12.71bn up 0.5%. Royal Mail shares fell heavily in early trading.
National Grid
National Grid said pre-tax profit rose 107% to £3.4bn due to higher UK transmissions revenues and gains on investments in National Grid Partners which invests in companies providing solutions for the energy transition.
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