Business news 30 January 2023

James Salmon, Operations Director.

Bank to forecast shallower and shorter recession but rates to rise. Budget unlikely to bring significant tax cuts. Chancellor will boost business to fix economy but lack of strategy hurting. SME’s voice concerns and complain about HMRC. Bosses secretly want staff back in the office.  And more business news.

Bank to forecast shallower and shorter recession
The Bank of England is expected to upgrade its outlook for the economy this week. While its current forecast is for a recession that lasts eight quarters and includes a peak-to-trough fall in GDP of 2.9%, the Bank is now expected to say the downturn will be shorter and shallower than previously forecast. Paul Dales, chief UK economist at Capital Economics, says data for the economy has been more upbeat since the Bank’s November forecasts. The Bank had expected GDP to fall 0.5% in Q3 and 0.3% in Q4. However, GDP actually fell 0.3% in Q3 and may have avoided contraction in the closing quarter of 2022. Sanjay Raja, senior economist at Deutsche Bank, expects the Bank to halve the length of the recession to four quarters, while economists at Barclays expect the extent of the downturn to be halved, to 1.5%.

Central banks set to raise rates
The Bank of England (BoE), the US Federal Reserve and the European Central Bank (ECB) are all expected to hike interest rates this week, with officials set to continue efforts to tame soaring inflation. The BoE is forecast to lift rates 50 basis points to 4% in what will be the tenth successive rise. However, analysts think this may mark the end of steep increases, with Sanjay Raja, senior economist at Deutsche Bank, saying he expects the Bank’s Monetary Policy Committee to “lay out the groundwork for a downshift in the pace of hikes going forward.” In the US, the Fed is expected to add 25 basis points to rates. Investec economist Ellie Henderson believes future increases will be less steep, saying it is “now clear that we are heading into the final stages of that fight, with less aggressive blows needed to coax inflation lower.” Meanwhile, markets predict that the ECB will up rates by 50 points.

Hunt: Budget unlikely to bring significant tax cuts
Chancellor Jeremy Hunt says tax cuts in the next Budget are “unlikely,” arguing that a pledge to halve the rate of inflation “is the best tax cut right now.” Setting out a plan to help boost economic growth, Mr Hunt said this would involve “showing the world, showing the markets that we are a responsible nation, that we can pay our way, that we can balance our books.” He went on to say it is “unlikely that we would have the room for any significant tax cuts” in the Budget in March. Looking ahead, the Chancellor pledged to put “restraint on spending,” suggesting that the Conservatives are the party to “actually deliver that restraint to make a low tax economy possible.” Noting that high taxes “directly affect the incentives” which determine whether entrepreneurs, investors and larger companies “pursue their ambitions in Britain,” Mr Hunt said: “Our ambition should be to have nothing less than the most competitive tax regime of any major country.”

Chancellor will boost business to fix economy
Jeremy Hunt says tax cuts for businesses should be prioritised over those for workers in the interests of Britain’s “long-term prosperity.” The Chancellor, who told the Times that his focus was to reduce the burden of taxation on companies as soon as inflation is under control, said that while cutting business taxes may not be “eye-catching” for voters, people want the Government to have a plan to make the UK “prosperous and successful.”

Lack of Government strategy is hurting businesses – BCC head
Shevaun Haviland, director general of the British Chambers of Commerce, says a lack of Government strategy to raise productivity has left the economy in the “doldrums.” Ms Haviland said the “constant shifting of the sand beneath the feet of businesses as they head into a recession has been a recipe for disaster,” going on to warn that businesses face a “wall of increased costs and taxes.” Her comments come in the wake of Tony Danker, director general of the Confederation of British Industry, telling the World Economic Forum in Davos: “Investors are freezing up and the heart of the problem is that we don’t have a plan.”

SMEs voice cost concerns
Analysis by printing services group VistaPrint shows that almost two-thirds of SMEs fear they may have to shut because of the cost-of-living crisis. While 59% believe high inflation could eventually lead them to close, 83% are struggling to plan beyond 2023 and 45% said it is impossible to plan beyond the end of H1.

Small firms report HMRC delays
Small businesses struggling to pay their tax bills are reporting long waiting times to get through to HMRC before Tuesday’s self-assessment deadline. Martin McTague, national chair of the Federation of Small Businesses, comments: “HMRC must not drop the ball by forcing small business owners to spend time on hold before actually speaking to someone. Admitting you need help with your bills is daunting enough as it is, and long call answer times just add to that burden.”

Bosses secretly want staff back in office
Tony Danker, director-general of the Confederation of British Industry (CBI), says most bosses “secretly” want staff to return to working in offices. With remote and hybrid working patterns far more common post-pandemic, Mr Danker told the BBC’s Political Thinking he had “no idea” where working patterns were “going to land” as “the whole world of work has gone crazy.” He added: “You ask most bosses, everybody secretly wants everyone to come back into the office.” Recent research by LinkedIn shows that a third of companies in the UK are planning to cut back on flexible working in the coming months, with 49% saying they would prefer staff to work more from the office. The poll also saw 34% of workers say they would quit if they were told to return to the office full-time, while 58% said they would be less productive if flexible working policies were scaled back.

Hunt mulls business rates rethink
Chancellor Jeremy Hunt is considering plans that would see councils keep more of the tax paid in their local areas. Mr Hunt is reportedly hoping to move away from the current system of top-ups and tariffs and increase the amount of business rates local areas can keep from the current 50% level. Under the current system, revenues from business rates above a government-set threshold mostly go back by Westminster. Analysis suggests that the Treasury is expected to raise £28.5bn from business rates this year.

Workers needed to fix ‘productivity puzzle’
The Chancellor has pledged to get swathes of workers who retired early during the pandemic back into work. Warning that businesses would struggle to grow if they cannot find enough staff, Jeremy Hunt said the UK will not be able to fix its “productivity puzzle” unless “everyone who can participate, does.” In a direct plea to those who have stepped away from the workforce, he said: “So, to those who retired early after the pandemic, or haven’t found the right role after furlough, I say: Britain needs you.” Mr Hunt added that ministers “will look at the conditions necessary to make work worth your while.” He also called for reforms to help people with long-term conditions or mental illness to find work. Considering ways people could be lured back to work, Whitehall sources have suggested the £1m lifetime allowance on tax-free pension savings could be increased.

Brexit

The Government is reportedly getting close to agreeing a new provisional agreement with the EU over the Northern Ireland question, having found technical solutions to many of the issues.

Business confidence on the up
The latest Lloyds Bank Business Barometer points to increased optimism among British businesses, with confidence hitting its highest level in six months in January. Edging closer to the long-term average of 28%, overall confidence among UK companies increased by five points to 22%. Hann-Ju Ho, a senior economist with Lloyds Bank Commercial Banking, said: “Firms are clearly more optimistic about the wider economy and this is driving the increase, helped by precursory signs and other cost pressures may be easing.” He added that while it is still a tough environment for business as high energy costs remain a concern, there are “precursory signs and other cost pressures may be easing.”

MPs question pay cut claims
MPs have questioned the figures unions are using when highlighting the real-terms pay cuts faced by public sector staff. There is concern over the fact salaries are being compared to the retail price index measure of inflation, which, according to the independent Institute for Fiscal Studies think-tank, is “known to be upwardly biased.” Analysis suggests that, in some cases, the fall in pay is less than half the figure claimed. Doug McWilliams of the Centre for Economic and Business Research said: “Recently, pay hits in the public sector have got bigger, but it’s important for them not to exaggerate their claims as it ruins their validity, and affects their credibility.”

Profit warnings increase as costs climb
With costs increasing and pandemic-related government support coming to an end, the number of listed companies issuing profit warnings rose 50% year-on-year in 2022. According to analysis by EY, public companies issued 305 profit warnings to investors in 2022, compared to 203 the previous year. In the second half of 2022, 169 warnings were issued – the highest H2 total since 2015. Half of the firms who issued warnings in 2022 blamed cost increases – double 2021’s figure. Jo Robinson, restructuring partner at EY, said: “We are starting to see business spending restricted … We are starting to see a bit more of a strain and stress there.” EY found that 31 companies had issued their third profit warning in less than a year, with a fifth of these having breached their banking covenants. The Times notes that a rise in profit warnings is a leading indicator for company insolvencies, which are expected to increase in the year ahead. Kirsten Tompkins, a restructuring analyst at EY, said: “It won’t be that all profit warnings lead to insolvency of course, but if you issue three warnings there is between a 10% and 20% chance of there being a restructuring event within a year of that third warning.”

Flybe ceases trading
Airline Flybe has cancelled all flights after going into administration. A statement on the airline’s website said it had ceased trading and administrators from Interpath confirmed that 277 of the business’ 321 staff are being made redundant. The airline announced it would cease trading in 2020, citing the impact of the pandemic, but was rescued after being bought by Thyme Opco, a firm linked to US hedge fund Cyrus Capital.

Ryanair

Meanwhile Ryanair reported a swing to third-quarter profit, with results boosted by higher prices and stronger demand over the Christmas period. The Dublin-based budget airline posted revenue of EUR2.31 billion in the three months to December 31, up 57% from EUR1.47 billion a year earlier. Ryanair swung to a pretax profit of EUR212.8 million from a EUR132.8 million loss.

UK tech start-ups hasten overseas expansion after R&D tax cuts
A survey by lobby group Coadec shows that 84% of the 267 UK tech start-ups polled may look to expand overseas amid government cuts to research and development tax credits.

Zahawi sacked over tax affairs
Prime Minister Rishi Sunak has sacked Conservative chairman Nadhim Zahawi for serious breaches of the ministerial code. This follows an investigation by Sir Laurie Magnus, the independent adviser on ministers’ interests, who found that the former Chancellor failed to be honest and open about his tax affairs. Mr Zahawi had repeatedly failed to disclose details about an HMRC investigation into his tax affairs. Mr Zahawi breached the ministerial code on at least seven occasions, the independent adviser on ministers’ interests found. These include not telling officials he was under investigation by the tax office when he was appointed Chancellor and failing to officially declare that he paid a settlement to HMRC for tax avoidance. Mr Zahawi reached a £5m settlement with HMRC – which included a seven-figure penalty – in August.

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