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Brexit prep has cut productivity of UK business, says Bank of England

The Brexit process has cut the productivity of UK companies by between two and five per cent, research by the Bank of England has found.

Much of this drop since the vote to leave the European Union in 2016 is due to falls in businesses’ productivity as managers dedicate several hours per week to Brexit planning, researchers said.

“But we also find evidence for a smaller negative between-firm effect too as more productive internationally exposed firms have shrunk relative to less productive domestic firms,” they added.

The anticipation of Brexit has also “gradually reduced” investment by 11 per cent since the referendum, with the vote generating “a large, broad and long-lasting increase in uncertainty.”

This fall investment was gradual, taking three years to materialise, researchers said. This slow fall contrasted with predictions that it would “fall sharply” in the year after the referendum “and then recover”.

“This delay suggests firms may not respond as rapidly to large shocks that cause persistent uncertainty rather than short-term uncertainty, possibly because uncertainty leads firms to act cautiously,” the researchers said.

The scale and duration of the uncertainty generated by the decision to leave the EU marked it out as unique, the report said.

“Compared to previous uncertainty shocks Brexit is notable for its persistently high level of uncertainty, which sets it apart from other measures of uncertainty which capture immediate responses to shocks that quickly die away.”

By Anna Menin

Source: City AM

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Worries mount for UK businesses and consumers as Brexit crisis builds – surveys

Confidence drained away from UK businesses and consumers in August as the Brexit crisis deepened, according to surveys that suggested the political ructions were taking an increasing toll on the economy.

The Lloyds Bank Business Barometer slid to 1% from 13% in July, its lowest level since December 2011, when Britain was struggling to recover from the global financial crisis.

Separately, a survey of consumer confidence from market research company GfK was its joint weakest since mid-2013, driven lower by deepening pessimism about the economy.

The signs of a wilting economy – similar to elsewhere in Europe – raise the stakes for Prime Minister Boris Johnson.

If his gambit of suspending parliament to deliver Brexit on Oct. 31 fails, he may have to fight a national election while the world’s fifth-biggest economy falls deeper into malaise.

“(The surveys) do seem to indicate that the rebound in the third quarter that many of us anticipated on the back of a weak second quarter might be somewhat muted,” Peter Dixon said.

Britain’s economy shrank in the second quarter, a hangover from the stockpiling boom in advance of the original March Brexit deadline. Another contraction in the current quarter would officially herald a recession.

“It’s a fairly weakish environment, what with global problems and of course our own domestic issues to worry about,” Dixon added.

Business confidence declined in every region of the United Kingdom, Lloyds said, although the fall was steepest in the manufacturing-heavy East Midlands region of England.

British manufacturers, who account for about 10% of the economy, are facing the possibility of a no-deal Brexit which is likely to hurt their supply chains, plus a slowdown in the global economy.

Separate data added to signs the housing market, which slowed sharply after the 2016 Brexit vote, is stabilising.

British banks approved the greatest number of mortgages in two years during July, the Bank of England said, while mortgage lender Nationwide reported house prices increased at the fastest annual pace in three months.

At -14, the GfK survey was the weakest since January, before which it had been lower only in mid-2013. All the survey’s components, including the outlook for personal finances and the economy, declined in August.

“Until Brexit leaves the front pages – whenever that will be – consumers can be forgiven for feeling nervous not just about the wider economy but also about their financial situation,” Joe Staton, client strategy director at GfK, said.

Another poll of consumers from U.S. bank Citi and pollsters YouGov showed inflation expectations among consumers for year ahead rose to their highest level since 2013.

“The increase could be driven by rising chances of a rupture with the EU on Oct. 31, which could lead to higher consumer prices via tariffs, supply disruptions and weaker sterling,” Citi economists said in a note.

By Andy Bruce

Source: UK Reuters

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Boardroom survey finds fears over UK economy

A majority of business boardrooms are predicting a downturn in the UK economy over the coming year, as Brexit uncertainty and trade war troubles take a toll on corporate confidence.

Almost 70 per cent of respondents from FTSE 350 companies believe that the UK economy will decline in the next 12 months, improving from 81 per cent at the end of 2018 but still remaining significantly below the spring reading in 2016 before Britain voted to leave the EU.

Forecasts about the outlook for companies’ own industries have rallied slightly with 43 per cent predicting a decline, down from 50 per cent last winter, according to the findings from the ‘Boardroom Bellwether’ survey published by The Chartered Governance Institute in association with the FT.

Publicly-listed companies in the UK are on the fence about the effect of no-deal Brexit, today’s report found, with 40 per cent believing it would be damaging, 40 per cent believing it would not and 20 per cent unsure.

“The continuing uncertainty about what a post-Brexit Britain might look like, muddled even further at the time of the survey by the Conservative party leadership contest and differing views with regard to a no-deal Brexit, has undoubtedly contributed to the pessimism that people are feeling,” said Peter Swabey, policy and research director at The Chartered Governance Institute.

Meanwhile, the perception of the UK government as business-friendly has fallen from 29 per cent in summer 2018 to 15 per cent this summer, while the number of respondents viewing the government as not business-friendly has risen sharply from 13 per cent in winter 2018 to 42 per cent.

Despite this, the opposition has not benefited with 81 per cent of respondents viewing Labour as not business-friendly and not one respondent considering that it is, the lowest result since winter 2015 when two per cent believed them to be business-friendly.

“The survey was carried out before Boris Johnson was chosen as the Conservative leader, but it does seem that the business-bashing of recent times has taken its toll. The government must remember that business plays a key part in creating wealth and employment,” said Swabey.

By Sebastian McCarthy

Source: City AM

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UK economy on course to stagnate in third quarter, says Bank of England governor

Bank of England governor Mark Carney has said that the UK’s economy is on course to stagnate in the third quarter.

He also said that underlying growth looked muted even with Brexit volatility stripped out.

Carney said Britain’s economy was “currently close to equilibrium, operating just below potential” in a speech at the Jackson Hole gathering of global central bankers.

The economy shrank in the second quarter for the first time since the global financial crisis a decade ago, due in part to companies preparing for the original Brexit deadline of end of March.

Earlier this month, the Bank of England forecast 0.3 per cent growth for the current quarter, but August business surveys have painted a bleaker image.

“The UK economy contracted slightly last quarter and surveys point to stagnation in this one,” Carney said. “Looking through Brexit-related volatility, it is likely that underlying growth is positive but muted.”

Despite this, the job market is still going strong with the fastest wage growth in 11 years and unemployment at near record-lows.

Meanwhile, Carney also said that weak business investment was an obvious result of Brexit uncertainty in the lead up to the 31 October leave date.

“There is overwhelming evidence that this is a direct result of uncertainties over the UK’s future trading relationship with the EU, and it serves as a warning to others of the potential impact of persistent trade tensions on global business confidence and activity,” Carney said.

The governor reiterated that the Bank of England may have to ease monetary policy to help the economy in the event of a no-deal Brexit, but added that there were limits to how much it could tolerate a rise in inflation caused by a falling pound.

Carney maintained that a no-deal Brexit was “not a given” despite its increased likeliness just two months out.

By Michael Searles

Source: City AM

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New figures show UK economy a little larger than thought

Britain’s economy is slightly larger than previously thought, according to new official estimates published on Tuesday that take into account new methodology and data.

The Office for National Statistics added around 26 billion pounds to the size of the world’s fifth-biggest economy in 2016, a rise equivalent to around 1.3% of gross domestic product and bringing total output to just under 2 trillion pounds.

The ONS regularly updates its methods for measuring the economy, which usually results in slight increases to its size.

The latest estimates used new surveys on costs faced by businesses and “significant” changes to the way capital assets such as buildings and machinery are measured.

Average annual growth in the economy between 1997 to 2016 is now estimated at 2.1%, up from 2.0% previously.

“These new figures are produced using new sources and methods, giving significantly improved estimates of how money moves around the UK economy,” Rob Kent-Smith, head of GDP at the ONS, said.

“While these figures are calculated using more and better information than was previously available, overall, they paint a very similar picture about the size and growth in the economy to our current estimates.”

The new figures showed the economy contracted by 6.0% during the financial crisis, a smaller drop than the 6.3% estimated previously. The economy also returned to its pre-crisis peak in early 2013, slightly sooner than thought beforehand.

Reporting by Andy Bruce; Editing by William Schomberg

Source: UK Reuters

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Economy on red alert with yield curve close to inversion

The yield curve has been a reliable predictor of US recessions over the last four decades, less so in the UK. With only one exception, each time the yield curve has inverted, the US economy has entered a downturn within 18 months.

What is the yield curve?
The yield curve is the difference between the interest rate on a longer-dated bond (debt issued by a corporation or country) and a shorter-dated bond.

For instance, typically it should cost less to borrow money for two years than for 10 years. This is because the economy is expected to grow over time and experience inflation. A healthy yield curve should therefore slope upwards.

What happens when it doesn’t?

When it costs more to borrow money in the short term than it does in the long term, the yield curve inverts or slopes downwards.

At best, an inversion suggests that investors expect the economy to slow, at worst it signals a recession could be on the way.

Why does the yield curve matter?
Keith Wade, Chief Economist said: “The curve is moving around at the moment, but we are close to if not inverted in both the US and UK.

“The US curve is a reliable indicator of recession, the UK curve less so.

“Nonetheless, if the US goes into recession it is hard for others not to go the same way given its importance as a driver of the world economy. So the double signal is important.

“There is normally a lag of about one year from inversion to recession so the curves are signalling problems for 2020.

“That said the UK has enough troubles in the near term having already experienced one quarter of contraction in the economy in Q2 2019 and facing the prospect of a hard Brexit in Q4 2019.

“The yield curve is saying that any post Brexit bounce in growth is likely to be short lived in the UK – food for thought for the government’s general election strategy and the Bank of England which continues to hint at raising rates.”

The chart below shows the difference between 2 and 10 year government bond yields in the US and UK which creates the yield curve. The figures shown are as at the end of the day. The UK yield curve inverted during the day on 14 August 2019.

By David Brett

Source: City AM

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UK wage growth hits 11-year high despite shrinking economy

Britons’ wages grew faster than at any time since the financial crisis in the three months to June, official figures showed today, despite the UK economy shrinking over the same period.

Meanwhile, the number of UK workers without a job rose slightly in the three months to June, although it stayed close to record lows, the Office for National Statistics (ONS) said.

The figures are the latest sign that the UK jobs market remains robust despite an economy stalling under the weight of Brexit and a global slowdown. Official figures last week showed British GDP shrank by 0.2 per cent in the second quarter of the year.

Wage growth reached an annual rate of 3.9 per cent in the second quarter of the year, higher than the 3.6 per cent growth in May. It also beat economists’ expectations of a 3.8 per cent rise.

The rise means real wages – with inflation taken into account – climbed at an annual rate 1.9 per cent in the second quarter excluding bonuses.

Yet unemployment rose slightly to 3.9 per cent of the working age population between April and June, figures from the Office for National Statistics (ONS) showed.

The score was above the 3.8 per cent seen in May and above predictions of the same figure again. It was lower than the four per cent unemployment rate of a year earlier, however.

Work and pensions secretary Amber Rudd said: “Households across the UK are earning a regular income, and millions more receiving a pay boost thanks to wages rising at their fastest in a decade – outstripping inflation for a 17th month in a row.”

“Our workforce increasingly reflects our vibrant society, with a record number of women in employment while the number out of work falls to an all-time low.”

She said young people were “entering a workforce that is flourishing and full of opportunity”.

ONS deputy head of labour market statistics Matt Hughes said that although “employment continues to increase” the “number of vacancies has been falling for six months, with fewer now than there were this time last year”.

“Excluding bonuses, real wages are growing at their fastest in nearly four years, but pay levels still have not returned to their pre-downturn peak.”

The ONS said average regular pay before tax and other deductions was estimated at £469 per week in real terms in June 2019. This was lower than the pre-recession peak of £473 per week.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “The UK’s labour market is still the bright spot in the British economy.”

“Many households will feel they are enjoying a more comfortable standard of living at the moment. More people are in work than at any time since 1971.”

Tej Parikh, chief economist at the Institute of Directors, said the rise in unemployment shows the jobs market “may now be reaching its peak”.

“With investment in machinery and technology often deemed too risky right now, businesses have sought to bring on board more staff to help lift output,” he said. But this has meant “firms have found it harder to fill their openings”.

PwC chief economist John Hawksworth said that “productivity growth remains very weak”, with output per hour down by 0.6 per cent in the second quarter of 2019 compared to a year earlier.

“Weak productivity growth reflects subdued corporate investment growth over the past three years as businesses wait for greater clarity on Brexit.”

By Harry Robertson

Source: City AM

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Expectations for UK economy fall to lowest level since 2011

Public expectations for how the UK economy will fare over the next 12 months are at their lowest level in more than seven years, according to a new report released today.

The Office for National Statistics (ONS) has said the outlook for the general economic situation for the year ahead is worse than at any point since the final quarter of 2011.

Expectations for higher unemployment for the year ahead have also been climbing and are now higher than at any point for the past five-and-a-half years.

The data, sourced from a Eurobarometer consumer survey, comes days after the ONS found that the British economy shrank for the first time in nearly seven years during the second quarter of 2019.

Over the three months to June, output fell 0.2 per cent, missing expectations of a flat performance and dropping 0.5 per cent compared with the previous year.

Amanda Mackenzie, chief executive of charity Business in the Community, said: “If this latest survey is anything to go by, the British public has got its finger firmly on the pulse of the UK economy.

“Prescient Brits have been expecting higher unemployment and for the general economic situation to deteriorate, and following last week’s negative GDP number they may well be proved right.”

She added: “With a no-deal Brexit looming, the UK economy is arguably at its most crucial juncture for a decade and it’s no surprise people feel less secure about their jobs and the broader economic picture.

“Staff anxiety levels will almost certainly increase if we enter a turbulent period for the UK economy and businesses have a key role to play in their employees’ wellbeing, not just economic but personal.”

Today’s report, which was focused on personal and economic well-being in the UK, also found that net financial wealth per head increased by three per cent for the quarter ending March 2019 compared to the same quarter a year ago, led by increases in equity and investment fund shares.

By Sebastian McCarthy

Source: City AM

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How can the UK solve its productivity crisis?

The latest Office for National Statistics (ONS) findings for labour output for January to March show that productivity has decreased for the third consecutive quarter in the UK; amounting to over £5,000 in lost wages for workers. In fact, according to the ONS, productivity over the last decade is lower than at any time during the 20th century. The UK has a productivity crisis on its hands, that fact is unavoidable – but who is being impacted the most and what is causing it?

The UK’s engine room is stalling

The ONS statistics on labour productivity confirmed what we already knew: The UK is working inefficiently. That is a useful top-level summary but it doesn’t examine the minutiae of the problem. And if the UK is to put an end to this cycle of wasteful work, we need to delve deeper into which segments of the business world are having the toughest time.

Our own research has found that managers in mid-market organisations are wasting over a fifth of their year on non-core activities. In other words, UK mid-market managers might as well not be working for two months of the year. And with mid-market businesses making up two thirds of the UK’s private sector workers, it’s easy to see why the UK has a productivity puzzle to solve. If people in management roles are spending valuable time on admin that could be automated rather than on the day-to-day tasks that need to get done, that’s going to have a knock-on effect on the people they manage and the customers they serve.

Unsurprisingly, the outlook doesn’t look much brighter further down the pecking order. While managers are increasingly spending time on non-core tasks, the picture is only marginally less serious for employees as a whole, with 16 per cent of their time also being spent on tasks not central to their role. Across the board, organisations are not getting the most out of their employees, owing to staff having to spend valuable time dealing with non-essential tasks.

Scaling is making productivity even tougher

Companies are suffering even more with the productivity challenge as the business grows. For example, small business employees are spending an average of 26 days a year on non-core tasks; this jumps up the bigger the business, as growing SMEs (with between 300-500 employees) spend nearly twice as much time on unproductive tasks, at 43 days a year. Organisations want to grow to increase their output, but the reality is, if the underlying issues and causes aren’t addressed, they’re building on unstable foundations.

The fact that productivity challenges expand as businesses scale, appears to be a symptom of the growing complexity in teams and the need to share more information within and between them. As businesses get larger, they’re more likely to request data more frequently (for example, daily as opposed to weekly). The problem is that just a third of mid-market employees said they have access to the information they need directly from a shared folder or system, with nearly half instead having to request the documents and information they need from others.

Is technology the solution?

While technology should provide a solution to this challenge, having a vast number of systems in growing businesses appear to actually be contributing to the problem. Over two thirds of mid-level firms are using more than five software systems, and a fifth are using over ten. Worryingly, the majority of software systems used by mid-sized organisations are on separate platforms, and 30 per cent aren’t integrated at all, meaning information is not easily shared. With employees losing valuable time solving problems that are not directly related to their job, finding time-savings wherever possible is crucial to addressing the productivity crisis. Technology should be the answer, but it won’t have the desired impact if the infrastructure in place is inherently inefficient.

It’s evident Britain needs a new way of thinking about productivity. This means casting aside siloed initiatives, and adopting a more holistic, people plus technology approach. Businesses must solve current problems and empower workers with integrated, intelligent solutions that give them the freedom to do more of the work that creates value – whether that’s spending more time in the classroom in education, creating greater emphasis on patient care in health, or increased output in manufacturing. That’s how the UK will start to see real, tangible improvement in labour performance.

Source: Business Chief

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Sterling revisits two-year lows as UK economy shrinks

Sterling skidded again on Friday, hitting its lowest in more than two years, after an unexpected second quarter contraction in the economy alarmed investors already fretting that Britain is headed for a no-deal Brexit.

The pound, which has lost 3.7% of its value against the dollar since arch-Brexiteer Prime Minister Boris Johnson’s arrival in office in late July, sank to $1.2056, the weakest it has been since January 2017, and was last down by 0.5% at $1.2072.

GRAPHIC: Sterling at new 31-month low –

Against the euro, the pound slid to a new two-year low of 92.885 pence and was last down by 0.7% on the day.

The British currency has been close to being the worst performing in the developed world these past couple of weeks since Johnson became prime minister on July 24.

Britain’s economy shrank at a quarterly rate of 0.2%, the first contraction since 2012 and below all forecasts in a Reuters poll.

Year-on-year economic growth slid to 1.2% from 1.8% in the first quarter, Britain’s Office for National Statistics said, its weakest showing since the start of 2018.

British government bond yields fell as investors sought safety in fixed income assets.

UK domestic stocks weakened, although London’s export-heavy blue chip FTSE 100 index clawed its way back into positive territory as sterling plunged.

Some investors now expect Britain to enter a technical recession, which represents two consecutive quarters of negative growth, if the economic situation continues to worsen.

“Overall, these are clearly a disappointing set of figures which have significantly raised the likelihood of a technical recession,” said Azad Zangana, senior European economist and strategist at Schroders.

The pound has suffered a torrid few weeks as investors priced in the growing risk of Britain exiting the European Union under Johnson on Oct. 31 without a deal to smooth the transition.

BNP Paribas raised on Friday the probability of a no-deal Brexit to 50% from 40%. Some analysts say there could be more pain to come.

“As the political risk premium rose, sterling was the worst-performing major currency in each of May, June and July, but the negative risk premium can still rise further,” RBC Capital Markets analyst Adam Cole said.

Johnson is planning to hold a parliamentary election in the days after Brexit if lawmakers sink the government with a no-confidence vote, British media have reported, further unnerving currency traders.

It is growing increasingly likely that Johnson will face a vote of no confidence soon after Sept. 3, when parliament returns from its summer recess, analysts say.

Johnson says Britain, which voted for Brexit in 2016 by a 52%-48% margin, must leave the EU on schedule on Oct. 31, with or without a divorce deal with the bloc. Delaying an election until after Brexit could be a tactic to ensure that happens even if parliament withdraws support for his government.

Vasileios Gkionakis, global head of forex strategy at Lombard Odier, said he was worried about an election, but was also ready to unload some sterling short positions he had accumulated since a lot of bad news had been already priced in.

“If no-deal (Brexit) increases in probability, then of course sterling would be a sell, but until then I’m becoming a bit more neutral,” Gkionakis said, adding that he expects sterling to “settle around $1.20” before market participants reassess their expectations of that outcome.

Others in the market mirrored Gkionakis’ views on Friday.

Paul Hollingsworth, senior European economist at BNP Paribas, said he was “reluctant to enter short sterling positions” and that he found “risk-reward more attractive to consider entering structural long sterling positions as we get closer to September”.

The shrinking economic growth in the second quarter did not make investors more confident that the Bank of England will cut interest rates in September. Some economists expect the central bank to embark on more easing soon, however.

“As uncertainty continues to loom over the UK economy, the difficult run of data is expected to continue and the BoE will need to consider its next step carefully as its global peers embark on further rate cuts,” said Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management.

Money markets are pricing in a 25 basis point cut by January 2020.

Reporting by Olga Cotaga with; additional reporting by Tommy Wilkes; Editing by Mark Heinrich

Source: UK Reuters