Business news 28 March 2023
James Salmon, Operations Director.
Unleveling up. Recession still possible. Early retirement and inflation, Household debt hits new milestone. Energy bills, four day week, Brexit & GDP, interest rates, pension investments, factory homes and more business news.
Unleveling up
Nigel Wilson, CEO of Legal & General says the UK has “gone backwards” in its effort to level up the regions and spread prosperity outside of London.
The flagship policy of successive Tory governments has been undermined by Brexit, Covid political drama record inflation and a lack of investment which have caused much of the UK to suffer a historic fall in living standards.
His comments came as L&G, the UK’s largest investor, published its quarterly Rebuilding Britain Index, which showed that the prosperity gap between London and the poorest parts of the country was not contracting but widening.
“Leveling up hasn’t really started, has it?” Wilson said. “It’s gone backwards. When we launched the index we thought going forward we’d be calibrating the progress that’s been made. But it turns out it’s been negative.” The rich are getting richer and the poor, poorer. Wilson said. “We’ve got exclusive capitalism, not inclusive capitalism.”
The cost-of-living crisis has hit the poorest households hardest, deepening existing economic inequalities. 95% of working UK households have experienced a real terms pay cut over the last 12-months. For households with an income under £20,000, this jumped to 99%. It was found that one in two households are concerned about being able to keep up with rent and mortgage payments over the next 12-months. While 54% have reduced day-to-day spending, 51% expect their spending to decrease over the next year. The survey saw just 5% of respondents say their household income has risen in line with or above inflation over the last 12-months. While 19% said it had increased below inflation, 21% experienced a decline in income over the period.
Recession remains possible
Despite the economy performing better than had been forecast, analysis by KPMG suggests higher interest rates and reduced consumer spending could push the UK into recession this year. KPMG expects GDP to fall 0.3% this year, with the report warning that “although the likelihood of a UK recession has fallen, it has not dissipated entirely.” In analysis that came alongside the Budget, the Office for Budget Responsibility raised its GDP forecasts for this year, while Bank of England officials have scrapped their recession warning, having previously projected that the UK was on course for the longest recession in a century.
Household debt hits £2trn milestone
Analysis of Office for National Statistics (ONS) data by PwC shows that household debt has hit the £2trn mark for the first time. Household debt is now nearly the same size as the entire UK economy, which stands at £2.2trn. Around £8 in every £10 of outstanding debt is tied to home purchases at more than £1.6trn, while unsecured lending has climbed more than 7% over the last year to around £400bn.
Retail Inflation
UK Shop Price Inflation intensified in March, figures showed, with food costs jumping at record pace. According to the latest British Retail Consortium-NielsenIQ tracker, UK shop price inflation accelerated to 8.9% in March, from 8.4% in February. It takes the inflation rate to a new high, the BRC said. Non-food price inflation quickened to 5.9% in March, from 5.3% last month. Food price inflation picked up to 15% in March from 14.5% in February
Early retirement has forced up inflation
Bank of England governor Andrew Bailey says an increase in early retirement has played a part in driving up interest rates and inflation. He said that a sharp decline in the number of people in the workforce was “part of the reason why we have had to raise Bank Rate by as much as we have.” He said the rise in inactivity of people aged 50 to 64 was “particularly striking,” noting that the workforce has shrunk by 0.4% compared with pre-pandemic levels – having been increasingly steadily in the years before the Covid outbreak. With Chancellor Jeremy Hunt using his Budget to outline measures designed to address the shrinking workforce, Mr Bailey welcomed the move, saying the measures are “really addressing the right things.” He added: “I’m pleased we’re having more of a national debate on the labour supply because it’s very important.”
Energy bills could be high for a decade
KPMG has warned that the race to hit net zero and inflated gas prices mean households face a decade of higher energy bills. The report says energy bills were likely to remain around 93% higher over the next decade compared to the two years before Russia’s invasion of Ukraine which fuelled a surge in wholesale gas prices. Yael Selfin, chief economist at KPMG, said bills will remain elevated for the next five to 10 years because the “transition to net zero is going to add cost one way or another to our energy bills.” She expects energy bills to drop in July and remain at that level for the next five to 10 years. Ms Selfin said: “There could be other energy shocks, but on average that may be more of the equilibrium price.”
Employers keen on four-day week
Many employers would consider offering a four-day week if staff spent the whole time in the office, according to a survey by recruitment firm Hays. A poll of almost 12,000 employers and employees found almost two-thirds of workers would prefer to change to an office-based four-day week, while a third of employers would be more likely to make the switch if staff spent all four days in the workplace. The poll also saw just under two-thirds of employees say they would consider moving to another company if it was offering a shorter week. A recent trial of a four-day week saw a third of the firms involved make the change permanent. The research suggested almost two-thirds of workers would like to switch a four-day week.
UK Economy 4% Smaller Because of Brexit, OBR’s Hughes Says
Leaving the EU was as bad for the UK economy as the covid pandemic and likely reduced output by 4%, the chairman of the Office for Budget Responsibility told the BBC.
BoE will keep hiking rates if inflation persists
Governor Andrew Bailey says the Bank of England will be forced to increase interest rates again if inflation does not fall fast enough in response to previous rate rises. Speaking at an event hosted by the London School of Economics, Mr Bailey said the Bank is still “very alert to any signs of persistent inflationary pressures,” adding: “If they become evident, further monetary tightening would be required.” Suggesting that future hikes in interest rates will be in response to higher-than-expected inflation figures, Mr Bailey said any future rate rises “will be firmly anchored in the emerging evidence.” Pointing to concerns over the global banking system after the failure of Credit Suisse and Silicon Valley Bank, he said the Bank believes “the UK banking system is resilient, with robust capital and liquidity positions, and well placed to support the economy.”
Small firms call for capital rules rethink
The Bank of England could reconsider an overhaul of capital rules that critics warn will undermine growth by cutting off funding to SMEs. It has been suggested that the Prudential Regulation Authority could rethink planned reforms to the capital treatment of small business loans, acting on concerns that the proposals could reduce the availability of credit and make loans more expensive. Oxera, a consultancy commissioned by Allica Bank, has warned that the plans could reduce small business lending by up to £44bn and may increase capital requirements for small banks by a third. The Federation of Small Businesses said the reforms – which come as part of a broader package intended to improve the resilience of banks – could “compromise the ability of SMEs to scale up and create jobs.” The British Chambers of Commerce and the Institute of Directors have also expressed concerns about the plans.
Treasury urged to unlock pension investments
Lord Mayor of London Nicholas Lyons has urged the Treasury to use post-Brexit freedoms to unlock £50bn in investment. A report by the City of London Corporation, EY and fintech industry body Innovate Finance says ministers should scrap red tape preventing private pensions from plugging a £15bn per year funding gap backing British business. Mr Lyons has called for rule changes that will allow smaller defined contribution (DC) pension schemes to be consolidated. He said: “The UK has the second largest pension fund pot in the world, but UK pension funds invest less in private equity and infrastructure than our competitors.” He added: “We’re missing a trick here – which is leading to the majority of UK pension funds and their scheme members not benefiting from these high growth investment opportunities.” Axe Ali, UK Private Equity and Venture Capital Partner at EY, said unlocking DC pension funds could be a “game changer” for high-growth tech firms.
£300m bill for business rates paperwork
A requirement that will see firms update the Government on changes that could affect their business rates valuation could cost around £150 a year, according to real-estate advisory company Gerald Eve. This is four times higher than the £35 the Government said the paperwork would cost business every year and would cost a total of around £300m a year. Business rates, which are based on the rental value of the property, are revaluated every five years. Under plans that would see rates recalculated every three years, companies would have to report within 60 days of them making any changes to the property. They would also be required to submit annual reports.
Factory homes
Trade body Make UK Modular is calling for a radical shake-up in home-building to combat the lack of shilled labour. The government has a target of building 300,000 homes a year by 2025 and Make UK modular says that will be impossible without pivoting to factory-built houses. Modular can build homes quickly with 50% less workers, but also homes which are efficient to heat and run,” said Steve Cole, director of Make UK Modular. “Factories could operate at maximum productivity to deliver the homes Britain so desperately needs.”
Silicon Valley Bank bought
First Citizens Bank has agreed to buy Silicon Valley Bank. The North Carolina-based bank entered into a purchase agreement for all deposits and loans of SVB. The deal includes the purchase of about $72 billion SVB assets at a discount of $16.5 billion with a remaining $90billion in assets remaining with the receivers.
North Sea oil producers invest less after windfall tax
Industry group Offshore Energies UK (OEUK) estimates that nine in 10 North Sea oil and gas drillers are investing less as the windfall tax has cut into their revenues. North Sea drillers have paid a tax rate of 65% from May 2022 and 75% from January 1, compared with 40% previously. An investment allowance means they can save 91% in tax for every £1 invested. However, firms says the taxes not only dent their revenues but also make it more difficult to finance new projects. OEUK said the taxes are likely to result in reduced investment of between £3bn to £5bn over the next decade or so. David Whitehouse, chief executive of OEUK, said: “We have companies who are already in action and ready to invest more. But to make this happen, we need enduring and serious political support.”
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