Business news 22 February 2023
James Salmon, Operations Director.
Private sector activity rises in February. UK says mark-to-market rule is holding back investment. UK factories record a fall in output and orders in February. UK public sector posts unexpected budget surplus in January. And more business news.
Private sector activity rises in February
The latest PMI survey from financial data company S&P Global show UK private sector activity rose for the first time in seven months in February. The S&P Global flash PMI, which takes a snapshot of activity in services and manufacturing, stood at 53 in February. This is well above the 50 mark that divides growth from contraction and up from 48.5 in January. Chris Williamson, chief business economist at S&P Global Market Intelligence, said the figures suggested “near-term recession odds have fallen considerably”. But economists say the strength of the survey increase the chance of further rate increases from the Bank of England to tamp inflation. The PMI for the services sector rose to 53.3 in February from January’s 48.7, its highest since June last year. However, manufacturing activity continued to contract, albeit less severely, with its PMI increasing to 49.2 from 47.0.
UK says mark-to-market rule is holding back investment
The City Minister Andrew Griffith told the insurance industry on Tuesday that he and the Chancellor were determined to help Britain become “a start-up and scale-up superpower.” The financial services reforms already mapped out will help drive investment by unlocking “currently unproductive capital” Griffith said, pointing to proposed changes to Solvency II rules. Mr Griffith also said mark-to-market accounting standards mean far too much UK capital is trapped in short term, low yielding investments and that the “resulting ‘performance penalty’ is not serving the needs of British investors and pensioners.”
Reuters explains that critics say mark-to-market or “fair value” accounting creates balance sheet volatility in assets which are held for the longer term. Proponents say it gives investors a more accurate picture of current values of assets. The outlet notes that Griffith’s comments follow calls from a House of Lords committee earlier this month which recommended that accounting rules should take a longer-term view of pension investments. “The Government and the UK Endorsement Board should review whether the current system of accounting for pension scheme finances in company accounts is appropriate and whether to introduce a system that does not drive short-termism in pensions investment,” the House of Lords committee said.
UK factories record a fall in output and orders in February
A Confederation of British Industry survey published on Tuesday shows UK manufacturing output and orders fell in February and price pressures cooled again. Factory output for the past three months fell to -16 from -1, the lowest reading since September 2020. While its balance of new orders rose slightly to -16 from -17, it remained firmly in negative territory. “Conditions in manufacturing remain challenging, with output disappointing and order books having thinned out since late last year,” said Anna Leach, deputy chief economist at the CBI. “However, if growth is going to return to the sector on a sustainable basis, then manufacturers need more than the boost some will receive from lower energy prices over the winter season.”
UK public sector posts unexpected budget surplus in January
Public sector finances improved in January with the Office for National Statistics (ONS) registering a £5.4bn surplus for the month, much better than the £7.8bn deficit predicted by economists. The public sector also borrowed £30.6bn less than forecast. Total borrowing came in at £116.9bn in the financial year to January. The improved figures are largely a result of stronger than expected tax receipts while the fall in wholesale energy prices brought down the cost of the Government’s energy price subsidies. However, spending on central government debt interest reached £6.7bn, the highest January figure since monthly records began in April 1997. Despite the positive figures, the Treasury said that “with debt at the highest level since the 1960s, it is vital we stick to our plan to reduce debt over the medium term.”
Pay rise of 3.5% recommended for public sector workers
The Government has recommended offering millions of public sector workers a 3.5% pay increase with the package now set to be considered by independent pay review bodies, covering areas including the NHS, armed forces, police and prison staff. The FT reports that the Treasury is considering increasing this by 1.5% to 5% after official figures showed public borrowing was likely to be £30bn lower than expected. Meanwhile, the Royal College of Nursing (RCN) says it will pause strike action as it grows more confident of agreeing to a pay deal during intensive talks with ministers. The RCN was originally calling for an above-inflation pay rise of 19.2% as nurses said they have had a real terms pay cut of 20% since 2010, but RCN leader Pat Cullen said she is willing to meet the government halfway at around 10%.
Hunt’s plans to cut R&D relief will hammer innovation – FSB
Government plans to slash research and development (R&D) tax relief will leave Britain an “innovation wasteland” the Federation of Small Businesses (FSB) has warned. In November, Chancellor Jeremy Hunt announced plans to scale back the rebate to reduce fraud while offering more credits to bigger companies. Research from the FSB reveals the equivalent to 50,000 small firms will now rein in their innovation investment in light of the changes. “The UK risks being left in an innovation wasteland if Jeremy Hunt does not take control of Treasury innovation policy and restore the single most successful industrial policy of the last decade,” FSB chief Martin McTague said. “Our findings are a reminder to the Chancellor that the Government still has time to do the right thing – delay or scrap the plan to cut R&D tax credits for small businesses from April.”
Sterling & Markets
Sterling rose broadly against its peers yesterday as stronger than expected PMI data indicate that near-term recession odds have fallen considerably. Overnight, the S&P 500 suffered its worst day since mid-December as it dropped -2.00%. and the NASDAQ dropped -2.50% as hawkish sentiment regararding the FED hits sentiment and as the pound hovers just under $1.21 against the dollar. Oil Prices fell on expectations the US Federal Reserve will indicate later in the day that interest rates are set to rise more, stoking concerns of lower global economic growth and demand for fuel.
Some 900 jobs go at Paperchase
The gift and stationery chain Paperchase is to close the last of its stores after administrators failed to find a buyer for its remaining assets. The move will see the closure of 106 high-street shops, resulting in 900 redundancies. A spokesperson for Begbies Traynor said: “The joint administrators are continuing to trade the majority of paperchase stores for the purpose of realising the stock held. It is anticipated that a gradual reduction in the number of stores operated will occur over the coming weeks as stock levels are reduced. Due to the prior sale of the intellectual property and attendant goodwill of Paperchase, it is not anticipated that there will be any further material sale of all or part of the remaining Paperchase business.”
E-money groups need ‘significant shift in culture’, UK regulator says
The Financial Conduct Authority has said the UK’s 250 non-bank e-money businesses will need to undertake “a significant shift in culture and behaviour” if they are to be compliant with new consumer protection rules that come into force from June. Separately, the Times reports that one in ten e-money firms have failed to file their latest accounts on time, including Revolut and a payments service owned by eToro. Dan Neidle, founder of Tax Policy Associates, the tax and transparency think tank that first reported on Revolut’s overdue accounts, said: “There seems to be a trend of businesses treating filing their accounts as optional. It isn’t. It’s a legal requirement.”
Prepayment meters
Ofgem has announced a “comprehensive, independent and wide-ranging review” into Centrica’s British Gas after its subcontractors were revealed to be breaking into homes to fit prepayment meters. The investigation into British Gas will examine whether the firm had taken all steps required under its licence to help domestic customers with debt before installing a prepayment meter or disconnecting them.
Hunt to resist tax cuts despite windfall
Despite receiving record tax receipts across income, capital gains and inheritance taxes over the past year, the Chancellor is unlikely to let this shift his view that maintain a high tax burden is necessary to lower inflation. Christopher Thorpe at the Chartered Institute of Taxation, said the higher than expected tax receipts would give Jeremy Hunt “a bit more money to play with” in next month’s Budget, but added: “We’re still not expecting to see significant net tax cuts given the overall fiscal picture.” Also commenting, Nimesh Shah, chief executive of Blick Rothenberg, said: “The key target appears to be reducing inflation and any suggestion of reducing taxes may derail that approach.” The CGT annual exemption is set to be halved to £6,000 in April l and again to £3,000 in 2024. Tim Stovold, head of tax at Moore Kingston Smith, doubts Hunt will reverse course on this or change the rates of income tax either.
Lloyds
Lloyds Banking said net interest income rose 49% to £13.96 billion in 2022. Total income, net of insurance claims and changes in contract liabilities, rose 12% to £18.21 billion. Pretax profit was little changed at £6.93 billion, compared to £6.90 billion. Lloyds said “higher net income and lower total costs were offset by impairment charges as a result of the revised economic outlook (versus a significant write-back in 2021)”.
Frozen thresholds squeezing taxpayers
HMRC collected £5.9bn in inheritance tax (IHT) for the 2022-23 Financial Year to date – £900m more than through the same period last year. A combination of rising property values and frozen thresholds has driven the increase. Experts believe IHT revenues for 2022/23 will beat the £6.7bn forecast by the Office for Budget Responsibility. Stephen Lowe, director at retirement advisor Just Group, said: “The Chancellor has struck a seam of gold with recent inheritance tax receipts as he looks set to receive another record haul this financial year – and with more to come. IHT receipts are likely to race past official predictions for the next few years.” Self-assessed income tax receipts were £21.9bn in January – the highest monthly figure since records began in 1999 – while capital gains taxes stood at £13.2bn, another record high.
JP Morgan places restrictions on chatbots over data security fears
Investment banks including JP Morgan and the consultancy Accenture are warning staff against exposing client information to artificial intelligence tools like ChatGPT after a flood of interest in OpenAI’s chatbot. Microsoft has also adopted the technology, revamping its Bing Search engine using tools built by OpenAI. But security experts warn that using private or proprietary data with OpenAI tools could result in it being viewed later by a human annotator or incorporated into AI responses in the future. Jon Baines, a data protection expert at the law firm Mishcon de Reya, adds that using ChatGPT could risk breaking data laws if the software churned out inaccurate information. “Where that output involves the processing of personal data, questions then arise about the extent to which the inevitably inaccurate processing might be an infringement of the requirement, under the GDPR, to process personal data accurately,” Mr Baines said.
House sales suffer weakest start to the year since 2015
Property sales fell 11% in January compared with the same month last year, according to HMRC. The figure was also down 3% on December’s sales, marking the weakest start for the year since 2015. Meanwhile, data from Hamptons showed half of homes are now taking more than two months to sell. The past month has been the slowest February since 2013, with sales taking 72 days on average, the estate agency said.
UK urged to curb pension freedoms to boost workforce
A Labour-leaning think-tank has proposed cutting tax breaks and pension freedoms to discourage people from early retirement. The Resolution Foundation suggested in a report on Tuesday that the Chancellor raise the age at which people can access tax-free private pension wealth or slow the rate at which money can be withdrawn before the state pension age. The Foundation also proposes capping the amount people can take from their pensions as a tax-free lump sum. Sir Steve Webb, a former pensions minister, said the recommendations followed the “wrong logic” and prevented people using their own money in the way that benefits them the best.
Surging house prices and gold-plated pensions prompted wave of early retirement
The wave of early retirement experienced in Britain since the pandemic has been driven by a steep rise in house prices and gold-plated pensions, according to the Institute for Employment Studies. Over 800,000 people have dropped out of the workforce since COVID-19 hit, with 76% of them aged over 50. The institute’s director Tony Wilson told MPs on Tuesday that long-term health conditions and poor access to childcare were also factors, as many over-50s often step in to look after their grandchildren. “One of the benefits of improving access to childcare will be to free up older people who want to go back to work but can’t because of informal care responsibilities,” he said.
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