18 February 2016
Week in Brief:Business and the City
INFLATED EXPECTATIONS: Inflation is rising – but not enough to worry the Chancellor or the Bank of England. The Bank’s task is to manage the economy so as to keep inflation at or just below 2%; in this it is failing as the annualised rate is now 0.3%. This is a rise on recent months which have shown negative rates, or the dreaded deflation; though the true picture is that the rate continues to hover around neutral.
Eonomists tend to prefer a low but positive rate which is good for growth expectations. Most commentators had expected a higher rate by now, especially in what is essentially a growth economy, but intense competition in retailing, especially food retail, low oil prices which affect almost all aspects of economic activity directly or indirectly, and most surprising of all, very low wage rises, have all kept the inflation rate down. What is more, economists do not see any reason why any of these factors should change this year. There are some wild cards out there – the oil price is always one – but more subtly, economists are concerned that low inflation, creating a sense of lack of growth especially on the wage side, turmoil in international markets, and the Chancellor’s further attack on tax efficiency of pension savings, may create an atmosphere where shopping gives way to savings, as people fear an under-funded future. That would be bad news for Britain’s strongly retail led economy. Against this, the Chancellor may well soon move to lower overall income tax rates, which when coupled with the increases soon due in the minimum wage will give some, especially low earners, extra disposable income.
BRUSSELS STEELS ITSELF: 5000 UK steel workers, many made redundant in the large scale cuts that have recently hit their industry, travelled to Brussels this week to protest outside the offices of the European Commission. The steel industry of South Wales and Teesside has seen most of its capacity shut down as it faced intense competition from much cheaper imported steel, coming, not from the EC, but mostly from China. Nevertheless the steel workers – who were joined by some senior managers from the businesses they used to work for – called on the EC to take stronger measures to stop dumping of cheap imports by creating what they described as “a level playing field” for the industry.
They have already lobbied the British government for help to save jobs and plants, with very limited results, though a package was shuffled together to save the strategically important (nuclear submarines) Sheffield Forgemasters. The Teesside and South Wales production is much more generic and thus much more price sensitive. The Chinese President, Xi Jinping, has on more than one occasion said that China is not dumping its steel output, but has similar problems of over-capacity and low demand as exist in the west, and has to find markets wherever it can to keep its own plants running and workers in jobs. The British delegation in Brussels though is hoping that the EC may have some bargaining influence – or create tariffs to increase the cost of steel originating outside the European Community.
BANK TO STAY PUT: HSBC, one of the world’s largest banks, finally reached a decision on where to locate its international headquarters, a topic we have followed for some time. It is staying in the UK, in its glass tower in London’s Docklands, a special board meeting on Sunday finally decided. This has not been an easy decision for the banking giant which has had to balance the costs of operating in the UK – high wage, property, and regulatory costs; against the friendliness and political stability of the regimes where it might locate – Hong Kong, Shanghai, Singapore, the USA, and even Australia were all mentioned ; and temper all that with the bank’s need to keep its investors and shareholder happy by operating in a location which gives long term low capital costs and easy fundraising capabilities. This is good news for the Bank of England which is anxious to show that Britain continues to be the natural centre for world banks and banking markets, and for the Chancellor of the Exchequer who has worked with the Bank to streamline and simplify the burden of banking regulation, whilst keeping it stringent enough to satisfy other central banks that it is robustly world class.
A-FORD-ABILITY: With all the recent emphasis in the car industry on the problems of Volkswagen, Europe’s biggest car maker, which is struggling to recover from the tweaked emissions date scandal, it is often overlooked that Ford is Europe’s second biggest vehicle manufacturer. It too has had problems, but in its case financial, with high costs and over capacity spread across too many manufacturing plants – it says it is producing at 80% of capacity. The problems are certainly not sales – it saw growth in European car sales of 8.65% in 2015, almost hitting the one million car sales mark. But profits have been more elusive, with the company only just breaking even at the operating level. New boss of Ford Europe (and also of Middle East and Africa), Jim Farley, who was appointed a year ago, has now produced a programme to rapidly deal with costs – he wants to save £130m a year by trimming the workforce which technological advance is making too large, even with the growth in production and sales.
The need to reduce the workforce hits every area from senior management to the shop floor, and will be dealt with, as far as possible, by early retirements and voluntary redundancy. Farley also intends to cut down the range of cars which Ford produces, which it has done successfully in the USA, thus cutting production and tooling costs, and sees the future, perhaps not surprisingly, in smaller and more efficient cars.
BIG BROTHER MOVES TO ITV: ITV, the independent television producer, now second biggest in Europe, has appointed Sir Peter Bazalgette as its new chairman, to succeed Archie Norman, former supermarket chief and Tory MP. Norman will be a hard act to follow – he has sorted out the problems of falling advertising revenues, now comfortably reversed, addressed cost control by bringing production in-house, and improved syndication revenues; the share price has quadrupled under his leadership. Sir Peter, who was also been tipped recently to be next chairman of the BBC, and is widely known and liked in the arts world is also chairman of the Arts Council. He will take over at ITV in May. This is a further step in an illustrious media career, starting as a journalist with the BBC and moving through his role as the producer and part owner of the TV show “Big Brother”. The company that made that show, Endemol, was built up by Bazelgette to be the biggest producer of reality TV shows – and is now ahead of ITV as the largest TV production company in Europe. Sir Peter is a direct descendant of Sir Joseph Bazalgette, the great Victorian engineer who built London’s sewage network, so networking and distribution obviously runs in the family.
KEY MARKET INDICES: (at 16th February 2016; comments refer to changes on one week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (unchanged); 5 year 0.89% (rising).
Euro€: 1 mth -0.20% (falling); 3 mth-0.12% (steady); 5 year -0.06% (steady)
US$: 1 mth -0.01% (falling); 3 mth 0.70% (steady); 5 year 1.15% (rising)
Currency Exchanges:
£/Euro: 1.29, £ steady
£/$: 1.45, £ steady
Euro/$: 1.12, € steady
Gold, oz: $1,233, rising
Aluminium, tonne: $1,505, slight rise
Copper, tonne: $4,561, slight fall
Oil, Brent Crude barrel: $32.60, slight rise
Wheat, tonne: £105, steady
London Stock Exchange: FTSE 100: 5,824 (slight rise). FTSE Allshare: 3,102 (slight rise)
Briefly: The London stock market continues to slowly recover from the steep falls experienced a week ago, but remains nervous, especially in the FTSE100. Oil now seems established in a new trading band of around US$32 a barrel. The real excitement seems to be about gold, where the slow price rises of recent months have accelerated quite markedly, with a theory that gold is once again seen as a safe haven away from the turmoil of the stock market.
