Business news 20 September 2022
James Salmon, Operations Director.
Company insolvencies climb as costs hit firms. Cost of living crisis hits small businesses. Chancellor and BoE co-operation will be a ‘balancing act’. ‘Turning point’ for labour market. Less than Sterling retail figures. And more business news.
Please bear with me as the writer caught covid, this weekend and is suffering.
Company insolvencies climb as costs hit firms
Insolvency Service data shows that the number of company insolvencies jumped by 72% in the past year, climbing to 20,512 in the year to August 31 from 11,949 a year earlier. There were 1,933 registered company insolvencies in August. This is up 43% on August 2021 and 42% higher than in the same month in 2019, the last pre-pandemic August.
A number of firms have been hit by soaring energy prices and higher interest rates. Mazars partner Adam Harris said: “Small business owners in particular are struggling under the weight of multiple crises, often without the resources or financial cushion to see them through,” noting that the hospitality sector “is facing an unusually challenging environment.”
Christina Fitzgerald, President of insolvency and restructuring trade body R3, said the figures will be a “sobering reminder to government of the scale of the challenge facing the UK economy as we head into the winter months, and reflect the continued toll the sustained economic turbulence is taking.”
If you sell on credit to small businesses, are you taking precautions to make sure you are not exposed? Regularly check their credit worthiness. Stay on top of late payments. The Credit protection association can assist you with both these vital protections.
Cost of living crisis hits small businesses
Small businesses are feeling the impact of the cost of living crisis particularly acutely. A survey by Nucleus Commercial Finance shows that 23% of UK business leaders fear their company will not survive the financial year due to the current cost of living crisis, while 72% feel the cost of living crisis is a cause for concern for the survival of their business.
Government figures show that almost 2,000 registered businesses went bust in England and Wales in August. This is an increase of 6% on July and 43% on the same period last year. The 1,933 insolvencies in 2022 so far take the total number of companies going out of business this year to 20,000.
Chancellor considers blanket discount on business energy bills
Chancellor Kwasi Kwarteng is reportedly considering a blanket discount on business energy bills. The scheme being considered would see companies receive a fixed reduction to the rate they currently pay. This would differ from the mechanism used for households, where the maximum that energy companies can charge is capped. Businesses have individual arrangements with energy suppliers, meaning the price they pay can vary widely depending on their contract. The proposal being considered would not cap these charges. It would instead offer a discount of a set number of pence per kilowatt hour from what the company currently pays. Federation of Small Businesses chairman Martin McTague, who noted that many small firms have October 1 as the start date for new contracts, commented: “If energy help comes into effect next month, or even November with backdating, at least businesses can plan around that.”
Chancellor and BoE co-operation will be a ‘balancing act’
With new Chancellor Kwasi Kwarteng have said that he and Bank of England governor Andrew Bailey, would “co-ordinate” the response to the cost of living crisis.
The problem however is that one is targeting growth while the other’s priority is to tame inflation. The Bank is set to raise interest rates by as much as three-quarters of a percentage point to 2.5% on Thursday, with officials continuing efforts to tackle soaring inflation. A day later, Mr Kwarteng will deliver his mini Budget, with this set to outline support for households and businesses amid the energy crisis – as well as deliver tax cuts.
Working in tandem will be a difficult balancing act with the Chancellor’s fiscal stimulus potentially fueling inflation and forcing the Bank to raise rates even further, while Mr Bailey’s quantitative tightening plans could make it harder for Mr Kwarteng to issue gilts to finance his plans.
‘Turning point’ for labour market as business confidence falls
Declining productivity and fears of a recession have led to a fall in business confidence, according to BDO, which says this has left the labour market at a “turning point.” The firm said concern over a possible recession is expected to put downward pressure on employment. It notes that hiring intentions have started to fall for the first time since August 2020 after a period of strong hiring, low unemployment and rising wages. BDO partner Kaley Crossthwaite said: “Soaring energy costs and inflationary pressures are headwinds we can expect to become more severe, exacerbating the economic and political uncertainty [that businesses] and consumers feel this winter.” BDO’s optimism index, which looks at business sentiment, declined for a fifth consecutive month.
Less than Sterling retail figures
The sell-off in the Pound was the big currency headline on Friday, as it slumped to a 37-year low (1985) against Dollar. The drop came after data showed retail sales contracted in both volume and value term in August, indicating that inflation was already hiting spending. Also analysts were speculating that the UK economy was already in recession.
Figures from the Office for National Statistics (ONS) show that UK retail sales fell sharply in August, slipping 1.6% as rising prices saw households cut back on spending. The ONS said: “All main sectors – food stores, non-food stores, non-store retailing and fuel – fell over the month”.
Olivia Cross, an economist at Capital Economics, said the sales figures back up a view that the economy is “already in recession.” She added that due to the Government’s cap on energy bills, any recession would be “smaller and shorter” than had previously been expected.
Reflecting on the ONS data, Martin Beck, chief economic adviser to the EY Item Club, said: “The recession which retailers currently find themselves in is likely to persist through the rest of this year and into 2023.”
Lisa Hooker, industry leader for consumer markets at PwC, commented: “Shoppers are simply buying less to offset price increases.”
UK business investment lowest in G7
The Institute for Public Policy Research (IPPR) has said previous cuts to corporation tax failed to boost business investment into the UK, which currently has the lowest rate of investment in the G7 group of wealthy nations.
Cutting the headline rate from 30% in 2007 to 19% in 2019 failed to spur growth or higher private investment, the think tank said. “Slashing corporation tax is just a continuation of a failed race to the bottom that hasn’t delivered for the UK economy,” said George Dibb, head of the Centre for Economic Justice at the IPPR. “Tax cuts are not a magic bullet to increase investment and growth – in fact, despite having some of the lowest levels of corporate taxation, business investment in the UK is the lowest in the G7. If the Government were serious about boosting investment, it would be listening to businesses who want a serious economic strategy to support growth, boost innovation, and increase our low productivity.”
The IPPR report comes as Chancellor Kwasi Kwarteng plans to scrap the rise in corporation tax from 19p to 25p next April.
Auditors concerned by ‘perfect storm’ of risks
An annual report published by the Chartered Institute of Internal Auditors warns that cyber security, recruitment and retention, the cost of living crisis, looming recession and climate change are creating a “perfect storm” of global economic risks.
The body’s Risk in Focus 2023 report, which was produced in association with 13 other institutes across Europe, also points to the war in Ukraine, rising global energy prices and soaring inflation, as well as growing tensions between the West and China as threats.
Urging businesses to act quickly to mitigate these risks, chief executive of the Chartered Institute of Internal Auditors John Wood, said: “The research highlights the perfect storm of high-impact interlocking risks now being faced by businesses, throwing many into a permanent state of crisis.”
Prime office rents set to hit a record
Rents for Grade A offices in the City of London are set to hit record highs, with figures from agents Savills showing prices have risen from £77 per sq ft in Q2 2021 to £83 per sq ft. The analysis shows that there have been 65 office lettings in the City achieving a rent of over £70 per sq ft so far this year. This marks a jump on the 16 recorded in the whole of 2021 and 30 in 2020. Cat Owen, director in the Central London office leasing team at Savills, said: “Despite wider economic uncertainty, Prime offices in London are performing well as businesses compete for office design and amenities that will entice employees to use these spaces.”
UK commercial property value expected to drop 15%
UK commercial property values could drop by 15% by the end of next year as rising interest rates make financing deals more expensive and the risk of recession threatens to slow rental growth, an asset manager has warned. The full impact of rising borrowing costs is yet to show up in official data, according to Nick Montgomery, Schroders’ head of UK real estate investment, but transactional evidence shows that investors are becoming more cautious about how much they are willing to pay for some types of property. The value of commercial real estate such as warehouses and central London offices has risen sharply over the past decade, which has compressed the yield generated for institutional investors by owning these assets. Commercial landlords make money when the rental yield outweighs borrowing costs.
Half of households are finding it difficult to cover energy costs
Office for National Statistics (ONS) research shows that 48% of Britons are struggling to pay energy bills, saying they are finding it ‘very or somewhat difficult’ to cover the costs. The ONS said the proportion was three percentage points higher between August 31 and September 11 than a fortnight earlier. The fortnightly ONS cost-of-living survey saw 82% of respondents say they are ‘very or somewhat worried about rising costs of living.’ This marks a slight increase on the 81% recorded the fortnight before and a steeper jump on the 74% who said the same in May. The poll also found that 26% are unable to save as much as usual.
World Bank issues recession warning
The World Bank says interest rate increases rolled out by central banks looking to tackle soaring inflation could trigger a global recession in 2023. The World Bank said central banks have increased rates “with a degree of synchronicity not seen over the past five decades.” Its report pointed to a steep slowdown in the global economy, warning: “Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession.” It has called on central banks to coordinate their actions and “communicate policy decisions clearly” to “reduce the degree of tightening needed.” This comes with the Bank of England and US Federal Reserve both expected to increase key interest rates at upcoming monetary policy meetings.
Sports Direct / Frasers Group
Frasers Group founder Mike Ashley will relinquish his role as a director on the Sports Direct owner’s board. Ashley will not be standing for re-election as a director at the high street giant’s Annual General Meeting, Frasers announced on Tuesday. The former CEO, who handed the reins of his retail empire over to son-in-law Michael Murray last year, will step down from the board after the AGM on 19 October.
Crypto market falls
Two of the world’s biggest cryptocurrencies took a dive yesterday with Bitcoin falling by 7.8% – taking it below the $19,000 mark – while Ether, which is the coin linked to the Ethereum blockchain, dropped by over 8% to hit a two-month low. Crypto investors have been spooked by a grim outlook for global markets and an expected tightening of US fiscal policy.
Inactive worker numbers increase
Office for National Statistics (ONS) data shows that the number of people in the UK who are economically inactive – not in work and not looking for work – exceeded 9m in the three months to July. This means the inactivity rate is at its highest since early 2017. Analysis shows that more than 60% of the rise has been driven by the exit of those aged 50 to 64 from the jobs market, with 386,000 workers in that bracket leaving since the start of the pandemic.
While it is expected that the cost of living crisis will drive many less well-off retirees back into the workforce, 2021 research from insurer Aviva found that two-thirds of early retirees were happier since leaving work, despite almost half reporting that their finances had taken a hit. Meanwhile, the ONS figures also show that an extra 352,000 people were out of work due to long-term sickness in the three months to July 2022, compared with pre-pandemic levels.
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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.