On the Spot

After a whopping 109 episodes, this is Jo's final episode as host of the 'On the Spot' podcast! What an incredible achievement.

Last week, Chancellor Jeremy Hunt revealed his Autumn Statement in the House of Commons. He unveiled tax rises and spending cuts worth billions of pounds, intended to fix the UK's struggling finances.

There was some good news for high street retailers with the business rates revaluation. Retailers have long argued that they carry a disproportionate share of the burden of business rates, a tax on commercial property (based on rental value) that penalised high street retailers and advantaged e-commerce companies, as shoppers switched to buying online in recent years.

The UK's unemployment rate rose to 3.6% in the three months leading up to September, up from 3.5% in the previous period, according to figures from the Office for National Statistics. There are 330k people less in work now than in pre-pandemic times, this is largely in part down to an increase in the number of people unable to work due citing long-term health issues.

The Bank of England has warned that unemployment will nearly double by 2025 as the UK goes through a tough recession.

The Office for Budget Responsibility (OBR) also released forecasts warning that real disposable incomes would drop by 7.1% over the next two years, the biggest fall in living memory...

The Bank of England (BoE) Monetary Policy Committee met earlier this week and voted by a majority of 7-2 to increase the Bank Rate by 0.75 percentage points. The increase marks the biggest since 1989 and the eighth time in a row the bank has hiked interest rates. Looking back to November 2021, the base rate was just 0.1%...

Since the MPC’s previous forecast in August, there have been significant developments in fiscal policy. The Bank's overall forecast for the economy looks grim, output has already begun to contract and will go on falling for the next two years, creating the longest recession of modern times. 

The unemployment rate is expected to rise to just under 6.5% by the end of the forecast period (2025) - up from 3.5% in the three months to August, its lowest level since 1974. This would be a considerable rise in unemployment and will affect consumer spending which has multiple adverse impacts on the economy. 

Of course, soaring borrowing costs heap more pressure on indebted UK firms. For companies in need of finance to expand, or to just survive, rising interest rates and inflation make a scary combination (especially as recession looms).

For British businesses which have loans at a variable rate, or need to refinance, rising interest rates will have a marked effect on costs and profits. At Company Watch we have long warned about “zombie firms” being kept alive by debt while paying low-interest rates... well, these firms could soon face a reckoning.

CPI inflation was 10.1% in September and is projected to pick up to around 11% in 2022 Q4.

Prime Minister Liz Truss apologised yesterday for her controversial mini-budget that crashed the country’s currency, rattled financial markets, and led to the sacking of the then Chancellor, Kwasi Kawrteng.

Jeremy Hunt, former foreign and health secretary, has succeeded Kwasi Kwarteng as Chancellor. He is the UK's fourth Chancellor so far this year and faces huge challenges with prices soaring and hikes in interest rates.

Nearly all the original tax cuts announced in the government's mini-budget are being reversed. In a statement on Monday morning, Hunt said the 20p basic tax rate would remain indefinitely and reversed a swathe of other tax measures, including changes to dividend taxes, a VAT-free shopping scheme, and a freeze on some alcohol duties. The stunning reversal would raise £32 billion.

Government bonds, currency, and shares rallied on Monday off the back of the news.

The UK economy unexpectedly declined in August by 0.3%, reinforcing predictions that it will fall into a recession later this year. The surprise drop came as factories and consumer-facing businesses struggled the most. Prices are rising at their fastest rate for 40 years and outpacing growth in pay, so consumer-facing businesses will feel the impact of tightening purse strings the most.

The number of companies filing for administration jumped 50% (265) in Q3 2022, as economic headwinds continued to wreak havoc on businesses up and down the UK. Interpath suggests by the end of Q4 this year insolvency levels will have risen even further. Interest rates are highly likely to be above 5% by April next year, putting increased pressure on cashflows for businesses with high debt levels - so increased numbers of administrations are expected...

The Bank of England (BoE) has defended its intervention in the UK government debt market, saying it stepped in to avoid a £50bn fire sale of gilts that would have taken the UK to the brink of a financial crisis.

In a letter to the chair of parliament’s Treasury committee, Sir Jon Cunliffe (the BoE’s deputy governor for financial stability) said the bank had feared there would have been a “self-reinforcing spiral” that threatened “severe disruption of core funding markets and consequent widespread financial instability”, had the BoE not stepped in.

The letter also shed light on warnings received by the BoE ahead of its intervention. Managers of the liability-driven investment strategies at the centre of a crisis in Britain’s pension fund industry had warned as early as September 23rd that the huge moves in gilt yields would force them to dump large quantities of government debt.

Interest rates - more than 40% of all mortgage products were pulled after chancellor Kwasi Kwarteng's 'mini-Budget announcement and the interest rate on a typical two-year fixed-rate mortgage has now breached 6% for the first time in 14 years.

Last week the new chancellor, Kwasi Kwarteng, delivered his mini-budget. One of the tax cuts announced is a cut in the basic rate of income tax (by 1p in the pound) is to be brought forward by a year to April 2023.

As a result of the sweeping tax cuts announced last week, the pound has hit a record low against the dollar, sparking a currency crisis. Of course, a sudden drop in the pound immediately creates uncertainty, throwing UK businesses that import and export goods into a panic. A weak pound means price rises for UK consumers who buy foreign goods and less money in holidaymakers' pockets.

A key issue is the price of oil, being one of the key goods Britain imports and is priced in dollars. At the beginning of the year, a $100 barrel of oil cost £74. That same $100 barrel now costs £95... an enormous rise and one that will directly hurt consumers at the fuel pump.

There were also 1,933 business failures in England & Wales in August, up 42% from pre-pandemic levels. 87% of failures this year have been CVLs, and the total number of insolvencies in 2022 now stands at 14,484. Annualised, 2022 stands to have the highest number of insolvencies on record, ever.

All this amounts to deeply worrying times for those of us that manage risk.

Liz Truss won the Conservative Party leadership contest yesterday, with 57% of member votes - and has now been formally appointed the 15th British prime minister. However, there's no time for celebration and Liz Truss will need to sharpen her pencil - with a to-do list as challenging, as it is long, standing in front of her. 

The new PM has pledged to cut taxes and 'deliver' on tackling the energy crisis. A plan to help consumers with soaring energy costs is set to be announced this coming Thursday. Business energy fees are a huge problem with no current price cap in place. Pubs, restaurants, shops, and hairdressers, along with all other businesses, are receiving energy bills which, in some cases, show over a 500% increase over previous bills. This is before we even head into winter and temperatures are still mild...

Annual growth in credit card borrowing went up 13% in July – the highest rate since October 2005. The average interest rate on credit card borrowing is currently 21.17%... the highest level since 1998. Many consumers are being forced to turn to credit to pay for essential items, with real wage growth being continuously outpaced by inflation. 

There were also 1,827 company insolvencies in July, up 27% vs. pre-pandemic July 2019 - the vast bulk of these insolvencies still coming from CVLs. The Bank of England MPC will meet once again this Thursday, with another interest rate hike expected to be announced. 

Yesterday, the Bank of England (BoE) lived up to its promise to act “forcefully” to curb surging inflation, by announcing the biggest increase in interest rates in over 25 years (1.25% to 1.75%). The BoE has also warned that Britain will fall into a recession later this year. The interest rate is now at its highest level since 2008, as the bank grapples to control soaring inflation, (currently at 9.4%) which is well above its 2% target and is forecast to pass 13% this year.

The National Institute for Economic and Social Research (NIESR) made a similarly downbeat prediction this week. The NIESR forecast that Britain would now experience a consecutive three quarters of negative growth, with unemployment peaking at 5%. 

Company insolvencies are on the rise too, there was an average 30% increase in the number of company insolvencies (across all industry sectors) in Q2 2022, compared to the pre-pandemic Q2 2019...

'On the Spot' this episode is Kirsten Tompkins, Market Analyst and Content Creator in Turnaround and Restructuring at EY-Parthenon, the strategy consulting arm of EY.

Kirsten is the author of EY thought leadership articles and blog content, providing market and company analysis. She is the coordinating editor and data analyst for EY-Parthenon’s Quarterly Analysis of UK Profit Warnings and joins the show to discuss the latest report, 'The Oncoming Storm' (Q2 2022).

Companies are facing an economic vortex that will challenge even experienced management teams. We're only halfway through 2022 and there have already been a recorded 136 profit warnings, 66% more than at the same point last year.

At the start of 2022, profit warnings were primarily triggered by cost and supply issues, which hit exposed companies extremely hard, but left many others unharmed. As the year progresses, however, demand headwinds amid falling consumer confidence are set to have a much blunter impact, exposing more underlying stresses.

Kirsten also explains the link between profit warnings and insolvency. A twenty-year analysis of EY data, issued in 2019, showed that one in five companies warning three times in a 12-month period delists within a year, mostly due to insolvency. After a brief hiatus during the pandemic, the three-warning rule is well and truly back.

But it’s not just the strength of the headwinds that are making 2022 so challenging. It is their combination and interplay with prevailing disruptive forces that have left governments, central banks, and companies facing difficult, almost impossible, choices. How companies navigate these choices will make a substantial difference between success and failure. Hard choices inevitably lead to hard impacts...

'On the Spot' this week is Marian Berden, Business Expert - Credit & Surety at Schumann International. Schumann specialises in developing credit risk management solutions for corporate and financial institutions. Marian has over 15 years of experience in credit and political risk underwriting and has held various senior risk roles in the London teams of Atradius Special Products, Axis, Equinox, and Nexus Underwriting Ltd.

Nick and Jo discuss with Marian the role of automation in financial risk analysis and explain the key questions that need to be asked in this current period of economic volatility.