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Bank of England deputy governor flags concerns over ‘low for long’ interest rates

Economic downturns are at risk of becoming more severe as a result of prolonged low interest rates, the deputy governor of the Bank of England has warned.

The current environment of ‘low for long’ interest rates will make “demand management of the economy more difficult in downturns”, according to Jon Cunliffe.

The Threadneedle Street official flagged a series of challenges for financial stability in the wake of recent monetary policy shifts.

Cunliffe said that a “slow or an unwilling adjustment” to weaker returns from lower interest rates could lead to both greater risk taking and less resilience among companies in the financial sector.

“In short, the adjustment to a low for long world is likely to lead to upward pressure on financial sector risk taking and downward pressure on resilience. We have started to see evidence of these effects in some sectors. One would expect such pressures to continue,” Cunliffe said in a speech to the Society of Professional Economists in London.

He added: “A low for long world is likely to be a more challenging environment for financial stability. The first and, in my view, most important policy conclusion to draw from this is the need for active and powerful macro-prudential institutions and policy.”

European economies have been adjusting to a downward push in interest rates, as central bankers attempt to rejuvenate markets that have been slowing down in the last 12 months.

Last month the European Central Bank (ECB) embarked on fresh stimulus measures to boost the eurozone, including cutting a key interest rate.

Cunliffe, who is among the contenders to replace Mark Carney as the next BoE governor, did not address Brexit or the BoE’s near-term policy plans in his speech.

However, he added that “releasing buffers can have a powerful effect in a downturn by reducing the pressure on banks to cut back on lending and so avoid a credit crunch amplifying the macro-economic shock.”

“The question perhaps is whether that buffer needs to be made more powerful in a low for long world given the greater risk of severe downturns.”

By Sebastian McCarthy

Source: City AM

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Brexit deal hysteria sparks dramatic gains for UK stocks

London-listed companies with exposure to the domestic economy soared on Friday for their best day in nearly a decade as hopes that Britain can seal a Brexit deal triggered explosive gains and a major reversal of fortunes for the much-shunned UK market.

Investors pounced on everything from banks like RBS (RBS.L) to housebuilders and retailers such as Kingfisher (KGF.L), which owns DIY chain B&Q, after British Prime Minister Boris Johnson and his Irish counterpart, Leo Varadkar, said they had found “a pathway” to a possible Brexit deal.

The buying spree targeted some of the market’s most beaten-down stocks and those considered most vulnerable to a downturn in consumer spending if the country crashes out of the European Union without a deal.

The FTSE 250 .FTMC surged 4.2%, while the Dublin bourse .ISEQ, often considered a barometer of Brexit sentiment, jumped 3.7% to its highest since May.

Source: UK Reuters

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UK economy starts to show cracks under Brexit and global strains

UK economy is increasingly showing signs of strain as the Brexit crisis and the global slowdown intensify, with the loss of momentum appearing to spread to areas which have hitherto been sources of growth.

Confidence among businesses has ebbed to its lowest levels since the global financial crisis.

The labour market, which has long been a silver lining for the economy, is also starting to show signs of slowing, raising questions about the strength of consumer spending.

The different Brexit scenarios for the world’s fifth-largest economy make it hard to gauge the outlook for the year ahead, not least for the Bank of England, and some investors fear Britain is already flirting with recession.

Economists polled by Reuters last month put the probability of a recession within a year at 35%.

Below are some indicators of the British economy and how they have changed since the June 2016 Brexit vote.

BUSINESSES STRUGGLE
Pessimism among businesses has reached the highest levels in years.

The gauges of future activity in the Lloyds Business Barometer, CBI Growth Indicator and IHS Markit/CIPS surveys have all turned weakened recently.

The closely watched IHS Markit/CIPS survey last week showed Britain’s dominant services sector contracted unexpectedly in September — and marked the worst reading in a major developed economy.

HOUSEHOLDS STILL SPENDING

Household spending has supported Britain’s economy since the Brexit vote, although there are signs that households have spent more on non-discretionary goods such as food, while spending in restaurants and hotels has weakened.

As of the second quarter, spending on the latter was about 1.5% lower than in mid-2016, but nearly 7% higher for food and non-alcoholic drinks, according to official data.

Figures from the British Retail Consortium and payment card company Barclaycard published on Monday showed shop chains had their worst September since records started in 1995, although spending on entertainment increased.

LABOUR MARKET

The labour market is the strong point of Britain’s economy but some cracks have appeared recently. Employment fell in annualised terms in the six months to July 2019 to the greatest extent since early 2012.

Wage growth is at a decade-high although the BoE has said it may have peaked and there has been no pickup in productivity.

A measure that BoE policymakers like to look at — the three-month annualised growth rate of private sector earnings, excluding bonuses — slowed in July from an almost five-year high of 5.9% in June.

INVESTMENT

Although the Office for National Statistics has revised up the level of business investment in Britain’s economy lately, the figures still show capital expenditure has stagnated since the Brexit vote.

Business investment is running about 5 billion pounds lower than it would have been had it followed its pre-Brexit vote trend since the financial crisis, according to the latest data.

Reporting by Andy Bruce; Editing by William Schomberg

Source: UK Reuters

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UK business morale slides, especially in manufacturing

UK business activity wilted in the third quarter, especially in manufacturing, according to a survey on Friday that boded poorly for the country’s economy in late 2019 as it faces the Brexit crisis and a global slowdown.

The British Chambers of Commerce’s (BCC) survey of 6,600 companies showed domestic manufacturing sales fell at the fastest pace since late 2011. Growth in the much larger services sector also slowed.

Overall, the survey chimed with other signs of a sharp deterioration in business confidence in Britain as the Oct. 31 Brexit deadline nears with little clarity on how or if the country will leave the European Union.

The BCC survey also pointed to the biggest drop in manufacturing export orders in 10 years.

“Our findings point to a worrying drop-off in UK economic activity, with unrelenting uncertainty over Brexit and a notable slowing in global growth prospects dragging down almost all the key indicators in the quarter,” BCC head of economics Suren Thiru said.

“Looking forward, weakening orders, confidence and investment intentions suggest that unless action is taken the UK’s current weak growth trajectory could drift markedly lower over the near term.”

Consumer spending, boosted by the fastest wage growth in 11 years and low unemployment, has helped to offset the economic slowdown although there have recently been some signs of a weakening in job creation.

The BCC said more manufacturers reported a worsening of cash-flow than those reporting an improvement. The difference was the widest since late 2011.

A renewed drive to stockpile to avoid disruption after the Oct. 31 Brexit deadline – shown in an IHS Markit/CIPS survey on Monday – is likely to put more pressure on manufacturers’ finances.

Expectations for profits declined particularly sharply in the manufacturing sector, falling to their lowest level since late 2011, the BCC said.

The BCC survey was conducted between Aug. 26 and Sept. 16.

Reporting by Andy Bruce; Editing by William Schomberg

Source: UK Reuters

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UK still an attractive place to invest despite Brexit uncertainty, report finds

The UK has retained its position as one of the world’s leading hubs for business, according to a new report which suggest investors have taken a ‘wait-and-see’ approach towards Brexit.

In a comprehensive global index released this morning, the UK was ranked as one of the best global hubs for business, scoring highly for its low start-up costs and attractiveness for foreign investment.

Business advisory group Eight Advisory, which produced the report, suggested the long-term cost of Brexit has yet to emerge across a wide range of economic and wellbeing indicators.

“While Brexit creates considerable uncertainty the foundations of the UK’s economy are particularly strong, and it remains an attractive place to invest and do business,” said Alexis Karklins-Marchay, a partner at Eight Advisory and prominent figure within the French business community.

He told City A.M.: “Confidence has plummeted in the last 3 years, but Britain should have confidence in its own ability. This is one of the most competitive countries.”

Despite scoring highly in areas such as human freedom, higher education and happiness levels, the UK’s productivity was found to be “an ongoing and long-running concern”.

Eight Advisory also said that Brexit was proving a “distraction from the issues facing the UK economy”, such as productivity and standards of primary education.

The report comes weeks after consultancy Z/Yen showed that London has clung onto its second place in a ranking of the world’s top financial centres, but its position in the top tier is under threat amid Brexit chaos and other geopolitical shifts.

“There are fundamental issues that need to be addressed if the UK’s hard-earned reputation as an international leader is to be protected in the long term,” Karklins-Marchay added.

By Sebastian McCarthy

Source: City AM

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UK can take advantage of low interest rates to invest in infrastructure – Javid

British finance minister Sajid Javid said on Monday the country could take advantage of record low interest rates to borrow to invest in infrastructure.

Javid will later use his speech at the governing Conservative Party’s annual conference to set out an investment package to improve Britain’s roads, broadband coverage and bus services.

“Record low interest rates – you can take advantage of that as a government when you can borrow at negative interest rates for 30 years and put it into economic infrastructure,” Javid told Sky News when asked about where the money was coming from.

Reporting by William James

Source: UK Reuters

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Brexit crisis pushes UK business expectations to weakest since 2011

Pessimism in British businesses rose in the three months to September to the highest level in almost eight years, as the escalating Brexit crisis weighed heavily on companies, a survey showed on Sunday.

The Confederation of British Industry’s (CBI) gauge of private sector activity held steady at -6% in the three months to September, the same as in the period to August.

But business expectations for the coming three months dropped to their lowest since December 2011, across the spectrum of manufacturing, services and distribution, according to the survey of 567 companies.

Business investment has stagnated since the 2016 Brexit vote, leaving the economy more reliant on household spending for its growth.

After more than three years of crisis since a majority of Britons voted to leave the European Union, it remains unclear how, when or even whether the country will leave the bloc it joined in 1973.

Prime Minister Boris Johnson has promised Britain will leave the EU on Oct. 31 with or without a deal and has said he would not seek an extension even if the conditions of a recently passed bill were met, forcing him to do so.

“Decision-makers in boardrooms across the country have been watching politics this week with a heavy heart. Despite all the noise, what must not be forgotten is the importance of getting the UK economy back on track,” said CBI chief economist Rain Newton-Smith.

Closely-watched business surveys from IHS Markit covering the performance of the manufacturing, construction and services sectors in September are due on Tuesday, Wednesday and Thursday.

Reporting by Andy Bruce

Source: UK Reuters

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UK consumer sentiment falls to six-year low – YouGov/Cebr

UK consumer sentiment has fallen to a six-year low due to increased worries about job security and the impact trade tensions and political uncertainty will have on individuals’ finances, a survey showed on Thursday.

Market research company YouGov said its monthly consumer sentiment indicator, compiled with economic consultancy Cebr, dropped to 103.4 in September from 104.0 in August, its lowest level since May 2013.

“It is clear now that the UK has shifted into a slower growth mode due to a combination of ongoing domestic political uncertainty and global economic headwinds,” said Kay Neufeld, head of macroeconomics at Cebr.

Britain’s economy unexpectedly contracted in the three months to June and the Bank of England and other economists predict only modest growth in the three months to September, with Britain still at risk of a disruptive Brexit on Oct. 31.

Uncertainty about the terms and timing on which Britain will leave the EU has depressed business investment, but consumer demand has proved resilient so far, according to official data.

There are tentative signs this may be starting to crack.

A separate survey by IHS Markit on Monday showed households’ concerns about the outlook for their personal finances was the highest in nearly six years, and on Wednesday the Confederation of British Industry reported a fall in retail sales.

But in the short term British households are benefiting from record-low unemployment, as well as wages that are rising at the fastest rate in more than 10 years.

Figures from pay analysis company XpertHR, also released on Thursday, showed that the average basic pay settlement at large employers remained at a 10-year high of 2.5% in the three months to the end of August, unchanged since the start of the year.

Official measures of wage growth tend to run somewhat higher, as they also factor in pay rises achieved through promotions and job changes.

Reporting by David Milliken

Source: UK Reuters

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UK financial sector optimism falls as bosses brace for economic slowdown

The majority of top executives at UK financial institutions are less optimistic about the country’s economic outlook than they were a year ago.

Almost 60 per cent of organisations said they expected UK economic growth to slow in the next 12 months, roughly twice as many as held that view last year, according to a survey published today by Lloyds Bank.

Two-thirds of companies surveyed said they expected domestic growth in the coming year to be weaker than in other G7 countries, in a stark indicator of faltering confidence.

The gloomy outlook was reflected in attitudes towards the financial services sector, with 55 per cent forecasting that growth would deteriorate in the year ahead, up from 27 per cent in 2018.

Despite these concerns, 40 per cent of firms said they expected their own revenue to increase over the next year. However, this figure was down from 64 per cent in 2018.

“Against a backdrop of ongoing global economic turbulence, it is unsurprising that sentiment among financial institutions towards the sector and the wider economy is lower than in previous years,” said Robina Barker Bennett, head of financial institutions at Lloyds.

“That said, the responses to this survey show the sector’s resilience during difficult times and it is especially encouraging to see that firms plan to continue investing in the UK.”

While the survey laid bare the impact of uncertainty in the run up to Brexit, it revealed more than half of firms feel they are prepared for the UK’s departure from the EU.

Just under 60 per cent of companies surveyed also said they were ready for a no-deal Brexit with little or no dependency on a transition period and no further extension.

Aside from Brexit, the figures showed executives are increasingly concerned about the risk of cyber crime, with 70 per cent saying they are now prioritising it as an area for investment.

By James Warrington

Source: City AM

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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