Business news 21 October 2022
James Salmon, Operations Director.
Liz Truss throws in the towel after 44 days. Cautious consumers put festive sales at risk. Brexit’s impact on trade with EU revealed. Scrapping energy price cap will bring surge in inflation. Bank attempts to calm fears of severe rate increases. And more business news.
Liz Truss throws in the towel after 44 days
Liz Truss won the title of Britain’s shortest-serving prime Minister after she quit on Thursday after just 44 days in power. The pound rose slightly following Truss’s resignation while borrowing costs fell briefly, but most of the gains for sterling were short-lived as markets contemplated another tumultuous Tory leadership contest. Meanwhile, the contenders for Tory leader have been identified as Rishi Sunak, Penny Mordaunt and Boris Johnson, who some believe could achieve a remarkable comeback as PM. The leader of the Labour party, Sir Keir Starmer has called for an immediate general election following Ms Truss’s resignation arguing that the Conservative Party “no longer has a mandate to govern.”
Cautious consumers put festive sales at risk
UK Retail Sales suffered a bigger-than-expected decline in September, according to figures from the Office of National Statistics (ONS) on Friday. Retail sales fell 6.9% annually in September, with the decline accelerating from a 5.6% fall in August. It also was worse than market consensus, which had expected a fall of just 5%.
A new study from GfK reveals consumers are eschewing large purchases such as televisions and sofas in the run-up to Christmas period as households battered by rising inflation face the prospect of higher taxes and possible spending cuts. Overall consumer confidence edged up from minus 49 to minus 47 but the major purchases indicator slumped from minus 38 to minus 41 this month. Linda Ellett, of KPMG, said: “Mortgage rates and rents, and energy price uncertainty after the winter, are significant cost concerns that will play on the minds of many consumers. Shoppers are altering what they buy and where they buy it. Eating out is also a common spend reduction target.”
Brexit’s impact on trade with EU revealed
Trade from the EU to the UK fell by a fifth relative to if Brexit had not occurred, according to new analysis. Research by the Economic & Social Research Institute (ESRI) shows UK to EU goods trade fell by 16% and trade from the EU to UK dropped by 20% compared with the levels anticipated had Brexit not happened. The report found the impact of Brexit on EU-UK trade does not appear that large if compared to UK trade with the rest of the world, but when the UK’s trade with the rest of the world was compared with the EU’s faster-growing performance, the picture showed a marked difference.
Government borrowing
Government Borrowing rose in September compared to last year. Borrowing was £20 billion last month, up £2.2 billion from a year earlier, the Office for National Statistics (ONS) said. Government borrowing last month was the second highest September borrowing since monthly records began in 1993, the ONS said.
Scrapping energy price cap will bring surge in inflation
Economists have said the Chancellor’s decision to scrap the Government’s energy price cap next April would put inflation on course to rise at the fastest rate since 1980. Jeremy Hunt is to end a guarantee that caps average annual energy costs at £2,500 early, instead of continuing it for two years as initially planned. The move could cause inflation to surge to 15%, according to analysts at Abrdn, unless another subsidy is introduced. Separately, the Financial Conduct Authority has found that almost 12m adults have money troubles or could find themselves in difficulty if they had a financial shock, two million more than in a 2020 survey. Finally, researchers from the universities of Exeter, Sheffield and Bournemouth have suggested rising energy prices and the impact of climate change could add £407 to the average food shop this year.
Bank attempts to calm fears of severe rate increases
Ben Broadbent, the deputy governor of the Bank of England, has suggested that although there could be a steep increase in interest rates next month, they may not rise to the high of 5.25% next year, as predicted by traders. The Bank’s modelling suggests that a peak of 5.25% would reduce GDP by 5%, he said – an impact that many economists would likely consider to be unacceptably severe. Meanwhile, the average rate for a two-year fixed mortgage is now 6.5%, the highest rate since before the financial crisis, according to Moneyfacts, and up from 4.74% on the day before the mini-Budget. Analysts say that if mortgage rates climb in line with a predicted 0.75 percentage point interest rate rise by the Bank in November, the average two-year fix could hit 7% this year.
Veto on City rules would be ‘serious concern’, Cunliffe says
Sir Jon Cunliffe, deputy governor of the Bank of England, told lawmakers on Wednesday that powers giving government ministers the right to block or change the actions of regulators could undermine City watchdogs and consequently harm the competitiveness of the UK’s financial services industry. The power would be included in the Treasury’s proposed financial services and markets bill which aims to overhaul UK financial regulation post-Brexit to boost its global competitiveness. But Cunliffe said although Brexit has given the UK the opportunity to redraft its laws to create a more “nimble and flexible” regime, he did not accept that the central bank’s culture is “anti-innovation” as some have claimed.
Brady issues Budget assurance
Sir Graham Brady, the chair of the Tory backbench 1922 committee, has suggested the Tory leadership race can be completed by Friday, October 28th, ensuring that the Chancellor’s fiscal statement can go ahead on October 31st. Liz Truss’s resignation threw the Halloween Budget in to doubt and John Hawksworth, formerly chief economist at PwC, pointed out that if the budget were delayed it would come too late for the next crucial decision on interest rates, to be made by the Bank of England just a few days later on November 3rd.
High taxes are hitting competition, say midsized UK banks
Mid-sized UK lenders have told City minister Andrew Griffith that the bank levy, an additional 8% on top of the corporation tax rate, was dissuading them from growing and preventing them from lending more. Corporation tax is due to rise to 25% next year bringing the total tax burden on banks to 33%. UK banking shares struggled on Thursday amid fears they could be hit by a new windfall tax on top of the banking levy. Mid-sized banks have also written to the Treasury to complain that rules that set out the amount of equity and debt a lender must hold to absorb losses if it fails (MREL regulations) disproportionately affect smaller banks and could prevent them from lending up to £62bn over the next five years. Meanwhile, Jamie Dimon, the chief executive officer of JPMorgan Chase is set to call Chancellor Jeremy Hunt next week to express his concerns over rising taxes on banks in the UK, according to Bloomberg.
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