Business news 30 September 2022
James Salmon, Operations Director.
The UK just misses recession. Rising borrowing costs add to pressure on SMEs. Kwarteng defends mini-Budget. The BOE and Government undermining each other. Investors lose interest in UK plc? And more business news.
The UK just misses recession
The UK Economy defied initial estimates and avoided a contraction in Q2. According to the Office for National Statistics, the UK economy grew 0.2% in the second quarter, thus avoiding recession. This compares with a previous estimate that had indicated a 0.1% contraction. Consensus had not been expecting any revision to the figures. This follows 0.8% growth in the first quarter from the final quarter of 2021.
Analysts are saying the UK economy is contracting in Q3 and thus would have been in recession when matched with a Q2 contraction. If this had been the case, it would have meant two consecutive quarters of negative growth – the official definition of a recession.
Soaring inflation, which stands at a 40-year high of 9.9%, has hit household and business budgets, forcing spending cuts. This is likely to have pushed the economy into reverse in the current quarter.
KPMG said the UK is set to see a long-period of “stagnation,” with the economy forecast to shrink by 0.2% in 2023. It added that the Government’s £160bn energy bill freeze and tax cut package is likely to result in the recession being “shallower compared to previous downturns.” Yael Selfin, chief economist at KPMG UK, said a prolonged period of high inflation and a weak pound “would make us all worse off even if the global environment turns a corner.”
Rising borrowing costs add to pressure on SMEs
Experts have warned that market turmoil and higher interest rates will hit lending to small businesses and drive up borrowing costs.
With analysis showing that around half of SME borrowers are on variable-rate loans that rise in price in line with higher interest rates, the Federation of Small Businesses (FSB) has voiced concern that rate rises could “pile financial pressure on thousands of small businesses who are mired in debt.” FSB chief of external affairs Craig Beaumont said this includes firms who borrowed via the Business Interruption Loan Scheme during the pandemic, as well as those with commercial mortgages.
Kwarteng defends mini-Budget
Chancellor Kwasi Kwarteng says his controversial mini-Budget was needed to prevent consumer spending collapsing. He told Conservative MPs that the measures, which led to a slump in the pound and prompted turmoil across the markets, had protected the economy.
The Chancellor, who insisted that the Government had needed to “act quickly,” said: “However I totally understand the need to be credible with markets.” He added: “We will show markets our plan is sound, credible and will work to drive growth.” In a WhatsApp message seen by the BBC, he said the Government is ”working at pace” to show the markets there is a ”clear plan.”
Meanwhile, Mel Stride, chairman of the Treasury Select Committee, has written to Mr Kwarteng, arguing that the Government’s plans had “resulted in various significant and concerning reactions in the markets.” Noting that the mini-Budget was not accompanied by an assessment from the independent Office for Budget Responsibility (OBR) despite the OBR saying it could produce one, Mr Stride wrote: “Some may have formed the unfortunate impression that the Government may be seeking to avoid scrutiny.” He has urged Mr Kwarteng to provide an OBR forecast “earlier” than November 23, the date the Government is due to publish its medium term fiscal plan.
The Mail reports that the PM and Chancellor will today hold emergency talks with OBR chairman Richard Hughes, with the spending watchdog set to present the Government with a first draft of its full fiscal forecasts next week.
The BOE and Government undermining each other.
Former Bank of England Governor Mark Caney was critical of the UK government’s mini budget and the multiple market issues in the immediate aftermath saying the government was undercutting UK institutions.
Mark Carney said tax-cutting measures were “working at some cross-purposes” with the Bank in regard to “short-term support for the economy” and questioned the decision not to publish economic forecasts by the Office for Budget Responsibility (OBR) alongside last week’s mini-Budget. Mr Carney told the BBC’s Today programme that while ministers were right to want to boost economic growth, “There is a lag between today and when that growth might come.”
Just before the financial crisis in 2007, Cable – the exchange rate between the US dollar and the British pound stood at over $2. On the night of the Brexit referendum it was $1.50 and is now as the Government sticks to its unfunded tax cuts and the country battles with inflation, the pound is predicted to reach parity with the dollar.
If the UK economy was a car, the Bank of England has his foot on the breaks trying to ease inflation while the Governments presses on the accelerator chasing after growth. Each responding to the other by pressing harder. Its no way to drive a car and its no way to run a developed economy. Currency speculators are predicting the result will be an uncontrolled crash.
Liz Truss did little to change the mood when she finally spoke out intransigently to defend her policies yesterday, with no new arguments to press their case. She ruled out a U-turn as she doesn’t think there’s anything wrong. We’ve just misunderstood her. Labour’s Angela Rayner surmised “Liz Truss has finally broken her long painful silence with a series of short painful silences.”
Stressing the need for economic growth, the Prime Minister said that she was “prepared to do what it takes to make that happen” and said she was prepared to take “controversial and difficult decisions.”
When quizzed on measures set out in the mini-Budget during TV interviews with BBC political editors, Ms Truss defended plans which include scrapping the 45p income tax band for top earners, saying there is “plenty of evidence” that reducing the tax burden would boost economic growth. The PM said the plans set out in the mini-Budget have “put this country on a better trajectory for the long-term”, but admitted that higher growth “will not come overnight.”
The taxes the Chancellor could target next
With Chancellor Kwasi Kwarteng this week telling the BBC’s Sunday with Laura Kuenssberg programme that there is “more to come” in regard to tax cuts, the Telegraph looks at the potential tax cuts which may be an option in next year’s Budget. It notes rumours that ministers are considering reinstating the personal allowance for all taxpayers, with Laura Suter of investment platform AJ Bell saying the tapered personal allowance is the “kind of complexity in the tax system that the current Government says it wants to get rid of.” Rachael Griffin, a tax expert at wealth manager Quilter, suggests IHT could be targeted, saying that as it is proving lucrative for the Government, ministers may “tinker” with the various gifting allowances rather than actively change anything to do with IHT itself.
Treasury minister: Tax cut only benefits wealthy
Chris Philp, the Chief Secretary to the Treasury, has defended the Government’s decision to scrap the 45p top rate of income tax. He told Sky News: “The top rate of now 40%, reducing from 45, makes us internationally competitive, it puts us on a par with a number of other economies.” When it was noted that the 45p decision only benefits the wealthy, he conceded: “Well, that is true, it benefits people who earn more than £150,000 but very often those are people who are internationally mobile, they can choose where to locate.”
More Brits turn to loan sharks as costs climb
Research from the Vulnerability Registration Service (VRS) shows that the number of UK households seeking help from loan sharks has climbed amid rising costs and soaring energy bills. The analysis shows that 1.2m people have reached out to loan sharks in the last 12 months. Separate research from the Money Advice Trust shows that around 21% of Britons are estimated to be behind on at least one household bill, while a Citizen’s Advice poll of 6,000 UK adults in May and June found that a quarter had borrowed money to pay for essential costs in the last six months
Investors lose interest in UK plc?
The Times’ Tom Howard considers the climate for London stocks, saying that while the “bulls in the City” may attribute their declining value to “a global malaise,” it is “hard to shake the feeling that investors are not much interested currently in owning UK plc.” He highlights that some big name British businesses have seen values halve this year, with the 350 biggest companies listed in London down by an average of 11%. Mr Howard says retail is “arguably the least-loved sector of the London stock market this year,” while travel and leisure companies “have also been caught short” by the cost of living crisis and declining consumer confidence
Markets
The US dollar fell overnight as US stocks also tumbled. Cable stands at $1.09 and overnight the DOW dropped -1.54%, the S&P 500 dropped -2.11% and the NASDAQ dropped -2.84% as markets digested the FED’s message that they will continue to tighten.
Apple
Apple will shelve plans to increase iPhone 14 production by 6m units after anticipated demand for its planned 90m units failed to materialise. Apple CEO Tim Cook recognised tougher market conditions and the strong US dollar as impacting consumer demand. Apple shares fell in response.
Meta
Facebook’s parent company announced a hiring freeze and a sweeping reorganisation of the headcount to cut costs and realign priorities as revenue growth slows.
Price drops point to buyers’ market
Data from Zoopla shows that 6% of homes listed for sale have seen the asking price adjusted downwards by 5% or more, with this marking the highest level since before the pandemic. The property platform said this points to a return to more of a buyers’ market, after two years of a market that favoured sellers. The Zoopla report said: “We do not believe that this is a precursor for big price falls but an indication that the rate of price growth will start to slow more rapidly in Q4 and into 2023 as buyers react to the rising cost of borrowing.” Richard Donnell, executive director at Zoopla, said: “A surge in home values over the pandemic and the rise of mortgage rates means we face a sizable hit to household buying power over the rest of 2022 and into 2023.” He went on to welcome recent changes to stamp duty but warned that an increase in mortgage rates “will erode much of the gains.”
Joules mulls CVA
Fashion retailer Joules is working with Interpath Advisory on a company voluntary arrangement (CVA) that could, if approved, see store closures, rent reductions and job cuts. A source said the firm had not yet formally decided to launch a CVA or restructuring plan but was “seriously looking” at the possibility. Joules said in August that it was aiming to secure an equity investment of about £15m, having warned that it would deliver a loss bigger than previous market expectations. It has hired KPMG to assist with efforts to improve “profitability, cash generation and liquidity headroom”.
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