Business news 19 August 2022
James Salmon, Operations Director.
Small businesses fear the worst. Interest rates must hit 6% to tame inflation. Consumer confidence hits a new low. Job listings offer a silver lining. Markets. Retail, Government spending. And more business news.
Small businesses fear the worst
Many small firms fear the worst and are worried for their survival amid massive hikes in their energy bills, with some firms set to see their bills increase five-fold from October, according to research by consultancy Cornwall Insight.
While households are subject to a price cap, there is no limit to how high prices can rise for firms. Robert Buckley, head of relationship development at Cornwall Insight, says: “Logic dictates that there can only be so long that so many businesses can pay so much more for their energy without knock-on consequences for themselves, their suppliers, and the wider economy.”
A poll for the SME Insights Report shows that more than half of all UK SMEs surveyed are concerned that high energy bills could force them out of business this year. Tina McKenzie, policy and advocacy chair at the Federation of Small Businesses, has told ministers that “any cost of living plan worth the name needs to tackle the mounting energy bills small firms face,” warning that small businesses and the self-employed “need the right public policy supporting them to survive and thrive.”
Interest rates must hit 6% to tame inflation, says former rate-setter
Willem Buiter, a founding member of the Monetary Policy Committee (MPC), has warned that the Bank of England will be forced to raise interest rates to 6% to tackle soaring inflation. Mr Buiter said policy will need to be “seriously restrictive” to bring inflation down to the Bank’s 2% target, warning: “It won’t be pretty. There will be a recession.” He also criticised the pace of MPC action, saying: “The Bank was, and continues to be, too slow in responding to rising inflation.”
Fellow founding committee member Charles Goodhart believes the Bank will stop raising short-term rates slightly above 4%, “but that will not be enough to bring inflation back to target, because the damage to output and unemployment will be felt to be too high.”
Dame DeAnne Julius, who was also on the MPC when it was established in 1997, commented: “My best guess is for the Bank rate to peak between 4% and 5% before coming down again, but this may take several years.”
Consumer confidence hits a new low
Consumer confidence has fallen to a record low, according to research from data provider GfK. The consumer confidence index for August dropped three points to -44 from -41 in July, its lowest since records started in 1974.
Joe Staton, a director at GfK, said: “A sense of exasperation about the UK’s economy is the biggest driver of these findings.” He added: “With headline after headline revealing record inflation eroding household buying power, the strain on the personal finances of many is alarming.”
KPMG’s UK head of consumer markets, Linda Ellett, has warned that the dip in confidence could soon be reflected in weaker retail sales, saying: “A widespread reduction in spending ability will lead to drops in demand and changing buying behaviour, both of which will impact the high street and wider economy.” She added that people “are either already struggling with rising costs, or are fearing what’s looming on the horizon.”
Job listings offer a silver lining for those without a degree
With A-level results released yesterday, the Telegraph’s Tom Haynes says there is a silver lining for those who missed the grades for the university of their choice, highlighting a range of entry-level jobs with salaries over £30,000 that are not out of reach for applicants without a degree. Analysis of roles on job site Indeed shows that the most well-paid job listed was as a fibre network installer, with this paying £34,000 a year, while junior roles in software engineering and traditional engineering offered £31,600 and £26,700 respectively. Mr Haynes notes that PwC has scrapped its requirement for applicants to have at least a 2:1 degree, saying the move would help diversify its graduate intake. Ian Elliott, chief people officer at PwC, said: “Talent and potential is determined by more than academic grades.”
Markets
Investor sentiment has been boosted by expectations of slower monetary tightening on signs that high inflation is cooling. The ftse100 ended Thursday slightly (0.2%) higher remaining above 7500. US markets rose slightly higher Thursday as traders fought to resurrect the recent market rally that slowed earlier this week. Overnight DOW rose 0.06%. S&P 500 rose 0.23% NASDAQ rose 0.21%.
Energy price crisis
The Labour Party has demanded an early recall of Parliament to tackle soaring household energy prices and mitigate the worst effects of the cost-of-living crisis
Retail
UK Retail Sales volumes, adjusted for inflation and the time of year, rose 0.3% on the month in July after a downwardly revised drop of 0.2% in June, the Office for National Statistics said. Sales have fallen by 1.2% over the past three months and were 3.4% lower than a year ago. Economists polled by Reuters had forecast a 0.2% monthly drop in sales volumes and a 3.3% annual fall.
Government Spending
Government Spending hit £76.5bn last month, some £3.4bn more than July last year, according to official figures today. Despite rampant inflation, public sector borrowing shrank by £800m to £4.9bn in the 12-month period, the Office for National Statistics found. However, the figure remains far higher than July 2019. Net debt in the public sector has swelled to nearly 83 per cent of the UK’s GDP, standing at an eyewatering £2,069.6bn.
Truss’ plans to merge City regulators draws criticism
Conservative leadership frontrunner Liz Truss is said to be considering a plan to merge financial regulators that would see the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Payments Systems Regulator become a single body. However, former Business Secretary Vince Cable has warned that it would be a mistake and “dangerous” to reverse reforms that saw the PRA and FCA created as part of a post-financial crisis overhaul. An FT editorial questions the impact the reform could have, saying “rearranging deckchairs achieves little other than uncertainty and cost, for both regulators and the regulated.” Meanwhile, the paper’s Cat Rutter Pooley says that while there are arguments in favour of a catch-all regulator, “any shake-up would be hugely diverting and consuming.” Ms Truss’ merger plan has won the support of former Lloyds chairman Lord Blackwell, however. He said in the current format, the watchdogs frequently “conflict or pull in different directions” and “leave it to the big institutions they’re regulating to sort out the conflict.”
Truss warned of ‘black hole’ in tax plan
With the Office for Budget Responsibility (OBR) set to issue an updated forecast of Britain’s economy and public finances next month, experts expect the Budget watchdog to say Government borrowing will increase because of high inflation and a potential recession. This could hit Conservative leadership candidate Liz Truss’ plan to cut taxes, with the Foreign Secretary basing her plans on the assumption that there is £30bn of headroom in public finances. Economists say this headroom is likely to be cut by half or more, meaning Ms Truss would have to scale back her tax policies or borrow more. Gemma Tetlow of the Institute for Government said that while Ms Truss and leadership rival Rishi Sunak have been pointing to the £30bn of headroom in the last forecast, “it seems very likely that given what we have learned since then, a good chunk of that headroom would have gone.” The Institute for Fiscal Studies has also calculated that borrowing this year will be £16bn higher than forecast, and £23bn higher next year. However, it also suggested that with inflation driving higher tax revenues, the headroom for 2024/25 may be roughly the same as the OBR’s last forecast.
Buyers warned over Bank of Mum and Dad loans
Homebuyers who receive financial assistance from their parents risk limiting their borrowing options and could face a massive tax bill as a result. Last year, more than half of under-35s received a gift or loan from their parents, according to insurer Legal & General, with total gifts reaching nearly £10bn. Meanwhile, YouGov data shows that 24% of people buying their first property since 2020 have help from their family, up from 10% a decade earlier.
However, a growing number of parents are reluctant hand over their savings without having a financial agreement in place. A poll from mortgage lender Generation Home shows that parents are twice as likely to help their children if the cash is structured as a loan as opposed to a gift. Experts warn that this may hinder the buyer as many lenders would typically require that the deposit is a gift, not a loan. With very few lenders accepting loan agreements, people who take this route risk limiting their options. Tax also becomes an issue, with lending money for a deposit as opposed to gifting it meaning it would remain in the parent’s estate and thus subject to inheritance tax.
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The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections.