Business news 22 May 2023
James Salmon, Operations Director.
Productivity falls. Inflation and energy bills forecast to fall. Government rules out further energy bill support. Long-term sick rate poses a risk to the economy. Peers back right to flexible working . And more business news that we thought would interest our members.
Productivity falls
Official data shows that productivity, measured by GDP per hour worked, dropped by 1.4% in Q1 and was down 0.6% year-on-year. The other main productivity measure, output per worker, dropped 0.4% in the first quarter and was down 0.9% on a year earlier. Both measures of productivity show no growth compared to Q4 2019, the last quarter before the pandemic. The productivity figures are based on employment and hours worked outlined in the Office for National Statistics’ Labour Force Survey (LFS). However, some economists question the accuracy of the LFS figures. Another official measure, workforce in employment, shows employment is up 2% since before the pandemic, pointing to even weaker output per worker. Meanwhile, PAYE data from HMRC shows a higher employment rate than the LFS figures, which would also suggest lower productivity. David Smith in the Sunday Times says that while many businesses fear that remote and hybrid working reduces productivity, surveys of workers tend to find that employees think their productivity has gone up because of home working, citing fewer distractions and less wasted time.
Inflation and energy bills forecast to fall
UK households could be in line for a financial boost this week, with analysts expecting inflation to fall and a reduction in energy prices. The Consumer Prices Index is expected to fall significantly from its current rate of 10.1% when the Office of National Statistics delivers its latest inflation data on Wednesday. Economists expect the rate to have fallen to between 8% and 8.5%, while the Bank of England has forecast that inflation will hit 8.2% over Q2. A dip in inflation could reduce the chances of a further rise in interest rates, spelling good news for mortgage holders. Lower inflation could also make tax cuts more affordable for the Government. Meanwhile, Thursday will see Ofgem announce the latest energy price cap, with Neil Kenward, the watchdog’s director for strategy, saying the cap would come “down considerably” from the current level. While a typical household is paying £2,500 per year for their gas and electricity under the existing cap, Cornwall Insight analysts suggest this could fall to £2,053, a dip of around 18%.
Food set to be the main driver of inflation
Calculations by the Resolution Foundation think-tank suggest that surging food and drink prices will mean an £1,000 increase to annual shopping bills by July, when compared to 2020 prices. With energy bills expected to come down in the coming months as gas prices fall and Ofgem’s price cap is lowered, the cost of food is set to replace energy as the biggest driver of inflation. Official figures show that food prices increased by a fifth in the year to March, with this the steepest rise in 45 years.
While analysts have welcomed the projected dip in inflation, economists have voiced concern over the soaring cost of groceries, which were up 19.1% in March. Analysis from the Institute of Grocery Distribution trade group suggests food inflation will stay above 10% for the rest of the year, while Lalitha Try, an economist at the Resolution Foundation think-tank, says the “food price shock to family finances is set to overtake that from energy bills.”
Government rules out further energy bill support
The Government has ruled out extra help for energy bills. The Energy Price Guarantee Scheme, which limits bills to £2,500, is set to finish at the end of June. Ofgem is expected to this week announce a reduction in the price cap and as this is expected to be below the Energy Price Guarantee scheme, bills will no longer be subsidised. Consultancy group Cornwall Insight predicts that the typical household energy bill will fall to £2,054 between July and September. When the price cap was introduced in January 2019, the typical household gas and electricity bill was £1,137.
Long-term sick rate poses a risk to the economy
A record two and a half million people are not working due to health problems, with one person long-term sick for every 13 people currently working. Economists have warned that their absence from the workforce is hurting productivity and could start to have an impact long-term growth. Office for National Statistics data shows that 15.4% of 16 to 64-year-olds reported work-limiting health problems in 2016. This rose to 16.4% in 2019 and increased further in 2022, hitting 18.1% – or around 7.5m people. Analysis shows that there are currently 400,000 more people not in employment or looking for employment than there were before the pandemic. While the number of people too ill to work has risen, the inactivity rate – the key measure of people not in work – has fallen to 21%, the lowest level in three years. This has partly been driven by retired people rejoining the workforce.
Peers back right to flexible working
The Employment Relations (Flexible Working) Bill, which would give all employees the right to request flexible working, has received an unopposed second reading in the House of Lords. Under the current rules, workers with 26 weeks of continuous service can request a change to their working hours, times or location. They can only make one request in a 12-month period and are required to explain the effect of the change on their employer. The proposed changes would allow employees to make two requests per 12 months and remove the need to explain the impact on their employer. There would also be a consultation before an application is refused. Baroness Blake of Leeds said flexible working should not be considered a “job perk” but an employment right. The Earl of Minto noted that the reform would provide the right to request flexible working for all employees “from the very first day of their employment.”
HMRC under pressure as backlog mounts
Accountants have warned of chronic delays at the tax office, with taxpayers waiting for up to a year for help from HMRC. Analysis shows that waiting times on the self-assessment helpline went from an average of five minutes in 2017 to almost 20 minutes in October 2022, with one in five callers giving up. Caroline Miskin from the ICAEW said: “We are not seeing any significant improvement with the performance issues at HMRC and we understand that it is tackling a backlog of late filing penalties.” She added: “I can’t see any immediate prospect of things getting better without serious additional funding.” Chris Etherington of RSM UK, said: “In many instances HMRC will not accept correspondence by email and it is necessary to write. It is not uncommon for general correspondence, such as to claim a repayment of tax or disclose an error, to take over a year to be dealt with.” Warning that delays in securing support could see late payment penalties, Mr Etherington said: “Many taxpayers are concerned about getting higher bills simply because of the time it can take to settle enquiries.”
Mortgage bills to rise as fixed terms end
Around 116,000 households will soon see the cost of their mortgage jump, with Financial Conduct Authority data showing that their fixed-rate deals will come to an end this month. If they do not secure a new deal and move on to their lender’s standard variable rate, they could face an interest rate of 7.49% or more. Moneyfacts data shows that the average two-year fixed rate mortgage in June 2021 was 2.59%, but now stands at 5.26%. For five-year fixes, the average was 2.92% in 2018 but is now 4.97%. UK Finance figures show that more than 76,600 borrowers missed payments worth at least 2.5% of their outstanding balance by March, while 750 properties were repossessed in Q1 – 50% more than in the previous quarter. More than 1.4m people are coming to the end of fixed-rate mortgages this year.
Consumer confidence
GfK’s consumer confidence index is now at its highest level since February 2022, before Russia’s invasion of Ukraine caused food and energy prices to soar. British households are growing more optimistic as the energy price crunch recedes.
Tesco
Tesco Chairman John Allan is stepping down after 8 years in the post in relation to improper behaviour allegations. He will be replaced by Byron Grote formerly of BP who will chair the Tesco AGM.
US Debt Ceiling
The world markets are focused on the scheduled meeting between US President Joe Biden and Republican House Speaker Kevin McCarthy who is demanding spending cuts in exchange for lifting the borrowing limit, on negotiations around raising the debt ceiling. Talks stalled on Friday after Kevin McCarthy left a meeting saying it was “time to press pause”. Treasury Secretary Janet Yellen warned on Sunday that the “hard deadline” of 1st June remains in place for augmenting the debt limit. Yellen expressed concern about the looming deadline, stating, “my assessment is that the odds of reaching June 15 while being able to pay all of our bills is quite low.” While in Japan Mr Biden said that he remained optimistic that America could avoid defaulting on its debts, but that he would not give in to “extreme” demands. Any updates regarding this matter are expected to significantly sway the market.
Switzerland
Talks begin in London today on another post-Brexit free-trade agreement, this time with Switzerland. Switzerland is Britain’s fourth-biggest market, after the EU, America and China. Last year it was the recipient of £33bn-worth, or 4.1%, of British goods and services. With most goods already passing between Britain and Switzerland without tariffs, focus will be mainly on services—especially finance, which is a specialty of both nations.
Semiconductors
The government has said it will invest £1bn in the domestic semiconductor industry, boosting a sector that is exposed to geopolitical tensions and supply-chain disruptions. With Arm, Britain already leads in chip design. The long-awaited strategy prioritizes research and design over manufacturing. It is however, dwarfed by US inflation act that introduced over $52bn in subsidies and incentives, as well as by state aid in the EU, currently worth €43bn.
Natwest
UK Government Investments said it sold shares in NatWest Group for a total of £1.26 billion. It said it sold 469.2 million shares, priced at 268.4p each, back to the company as part of a buyback agreement first put in place with NatWest back in 2019. As a result of the sale, the UK taxpayer’s stake in NatWest will fall to 38.6% from 41.4%.
UK-EU MOU seeks to boost co-operation on financial regulation
The UK Treasury and the European Commission have published a memorandum of understanding (MoU) designed to improve post-Brexit co-operation on regulation of financial services. Arrangements set out in the MOU will allow for bilateral talks on regulatory developments, transparency, market developments and financial stability, and “enhanced co-operation” when appropriate. The agreement has seen the creation of the Joint EU-UK Financial Regulatory Forum, which will represent the joint views of the UK and EU commission. The draft notes that the MOU “does not create rights or obligations.” City Minister Andrew Griffith said the MOU marks a “significant step” toward a more constructive relationship between the UK and Brussels, “one that is built upon mutual benefit and in the spirit of co-operation.” Mairead McGuinness, the EU’s financial services commissioner, said: “The Windsor Framework allowed the EU and the UK to open a new chapter in our partnership. I am confident our relationship and future engagement in financial services will be built on a shared commitment to preserve financial stability, market integrity and the protection of consumers and investors.”
EIS and SEIS investment hits record levels
Investments into enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) have soared, with the amount raised hitting a record high last year. In the 2021/22 tax year, 4,480 companies raised £2.3bn under the EIS scheme, a 39% year-on-year increase in funding. Of these, 1,755 were new companies, with these raising £584m between them. Seed enterprise investment schemes, which cover companies with under 25 employees and £350,000 in net assets, raised £205m, with this representing a 16% increase on 2020/21. The data shows that 1,815 companies raised funds under the SEIS for the first time last year, accounting for £179m of investment. EIS and SEIS provide income tax relief for investors who commit their capital for a number of years. Investors also qualify for some capital gains tax reliefs.
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The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections.