On the Spot

The UK economy unexpectedly returned to growth in May, largely fuelled by a boom in holiday bookings and a significant rise in GP appointments.

The ONS said GDP rose by 0.5% in the month, after a revised 0.2% decline in April. Economists had expected zero growth amid fears over the impact of the cost of living crisis. However, if you take a closer look, it's clear some sectors are struggling - consumer-facing services fell by 0.1% on the month, which would indicate the cost of living crisis is beginning to bite.

Nick and Jo also investigate the June insolvency figures. The number of registered company insolvencies fell 7.2% to 1,691 in June 2022, compared to May 2022.

Although June 2022 insolvency figures were still 40% higher than June 2021, and 15% higher than the number registered three years previously (pre-pandemic; 1,467 in June 2019). There were 1,456 Creditors’ Voluntary Liquidations (CVLs) in June, making up the vast bulk of insolvencies. A Creditors’ Voluntary Liquidation is a process that enables Directors to formally close an insolvent company voluntarily.

The fall in corporate insolvencies matches May’s unexpectedly positive GDP figures – however business owners should not be complacent given the ongoing economic pressures which will start to be felt in insolvency numbers in the next few months...

Is there a light at the end of the tunnel, or is it just the headlights from the speeding train coming straight at us?

Last Wednesday, the European Central Bank (ECB) held a summit in Portugal and is set to trigger its first rate hike in over a decade at its next meeting on July 21, as inflation in the eurozone surges.

'Bringing down high inflation around the world will be painful and could even crash growth but must be done quickly to prevent rapid price growth from becoming entrenched', the world's top central bank chiefs said. The most memorable statement from Wednesday's summit came from Fed Chair, Jerome Powell - "I think we now understand better how little we understand" when speaking about inflation...

Another talking point is productivity. Britain’s productivity growth has lagged the rest of the G7 “throughout much of the post-war period, which seems to indicate a deep structural problem,” according to the National Institute of Economic and Social Research (NIESR). There has been a real stagnation of UK productivity since the recession of 2008/09, so how can this productivity puzzle be solved?

Productivity growth is typically characterized by economists as the key to improving living standards, boosting overall output, and controlling inflation.

Prices are continuing to rise at their fastest rate for 40 years with fuel and energy prices being the biggest drivers of inflation, but the ONS has said food costs have pushed it up even further. 

The UK is currently dealing with labour unrest not seen for decades - this has been very visible in railways, London Underground, and British Airways. Doctors, teachers, and other public sector workers may yet join in.

Inflation is of course, bad... and so is the cure. Inflation will not magically disappear, so the way to end it is through a period of low output and rising unemployment. This creates stagflation (high inflation + weak growth) that lasts for a prolonged period and will likely require more than one tightening before it ends.

The Organisation for Economic Co-operation and Development (OECD) also forecasts that UK headline inflation will still be running at 4.7% at the end of 2023.

Last week the Bank of England (BoE) raised interest rates to 1.25% and warned inflation will exceed 11% this coming autumn...

The UK’s central bank lifted its benchmark rate to 1.25%, from 1%, the fifth rise in as many meetings. Three policymakers wanted a bigger rise to 1.5% but were outvoted by the other six. Interestingly, it was all three of the external members of the board that voted for the higher rise...

Other central banks around the world are taking more forceful measures to combat soaring inflation and are introducing steeper interest rate hikes. The BoE has been accused of being too timid after only raising interest rates by a quarter of a point, despite the UK’s intensifying cost of living crisis and forecasted higher inflation.

Roger Bootle wrote in the Telegraph that the BoE's credibility is now severely compromised and that assessing the economy is like shooting at a constantly moving target... and the Bank keeps missing.

The Bank of England had also previously estimated that consumer price inflation would hit 10%– far over its 2% target. This new forecast of 11% shows that households face even more pain, with real wages already lagging inflation.

The UK economy shrank in April for the second month running. GDP declined by 0.3%, adding to the 0.1% drop in March - with services, production, and construction all shrinking in April. The biggest fall was seen in production (0.6%), driven by a fall in manufacturing of 1% on the month, as businesses continue to report the impact of price increases and supply chain shortages.

The pound also fell against the dollar and UK stock markets tumbled this week after these gloomy April figures have shown the UK is edging closer to a recession.

Regular pay is falling at the fastest rate in more than a decade when taking into account rising prices, the Office for National Statistics has said. Between February and April, pay excluding bonuses was down 2.2% from a year earlier when adjusted for inflation.

Sam Beckett, head of economic statistics at the ONS, said a "high level of bonuses" was continuing to "cushion the effects of rising prices on total earnings for some workers". "But if you exclude bonuses, pay in real terms is falling at its fastest rate in over a decade..."

'On the Spot' this week is profit warnings. A profit warning is an official statement to the stock exchange from a publicly listed company that says that it will report full-year profits materially below management or market expectations.

The number of profit warnings issued by UK-listed companies in Q1 2022 was 72. This is a 44% jump from Q1 2021, with the troubled retail and consumer sectors amongst those worst hit by soaring inflation.

EY-Parthenon has published a Profit Warnings report, which found a record number of cost-driven warnings in Q1, as increased commodity and energy prices have hit listed companies’ bottom lines. EY found that over one-third of FTSE retailers (34%) have now issued a profit warning in the last 12 months, with supply chain disruption, staffing issues, and increased costs hitting the sector.

Adam and Nick pick out a handful of recent profit warnings and discuss how they relate to these ongoing wider issues in the economy. In a time of serious inflation and supply chain disruption, the big question is - what is the extent of the change in consumer spending, and how impactful will this be on the UK's economic recovery?

Businesses need to start thinking about how their operations and wider ecosystem will manage in ongoing turbulent times, and how they can adapt in response to long-term change.

UK unemployment has fallen to its lowest level in nearly 50 years. The ONS stated the unemployment rate at 3.7% in Q1 2022, which is the lowest level since 1974, with there being fewer people out of work than there are job openings for the first time on record. The ONS also said annual growth in regular weekly earnings rose to 4.2% in Q1 2022.

Unsurprisingly, this overall earnings growth masked big disparities between public and private sector wages. Nominal total pay rose 10.7% year on year in finance and business services, but just 1.4% in the public sector. The way we work is changing too, the number of part-time and self-employed in the workforce has risen, whilst the number of full-time employees has fallen. 

No question, the labour market is in far better shape now than ministers or economists could have ever expected... However, unemployment is predicted to rise as a combination of falling living standards, higher taxes and rising interest rates continue to push the economy into recession.

Overall GDP fell by 0.1% in March after no growth in February (revised down from 0.1% growth). Services fell by 0.2% was the main contributor to March’s fall in GDP, and manufacturing also fell in the month by 0.2%; however, these falls were partially offset by construction which grew by 1.7%. Monthly GDP is now 1.2% above its pre-pandemic level (February 2020).

The National Institute of Economic Social Research (NIESR) released a full UK economic outlook last week, forecasting GDP, inflation, incomes, and consumption over 2022 and the medium term. NIESR expects GDP to increase 3.5% in 2022 – declining in Q3 and Q4 – then increase by 0.8% in 2023 and 0.9% in 2024. The medium-term outlook for GDP growth is slow even by the standards of recent history, returning to 1.5% only in 2026. The combination of shocks – Brexit, Covid-19, and the recent shocks to energy prices, is set to leave the incomes of people in the UK permanently lower.

The MPC is battling to steer the UK between runaway inflation and tipping the economy into recession.

The Bank of England just raised interest rates from 0.75% to 1% in an attempt to tackle soaring inflation which has been exacerbated by Russia’s war in Ukraine. With a new rise in home energy bills expected in October, it forecast inflation would creep above 10% this year, the highest level since 1982...

There had been speculation before the meeting that one or two MPC members might opt for a 0.5% increase. But the vote was in fact split 6:3 to raise the Bank Rate by 0.25% with three dissenters favouring a greater rise. The MPC doubled down on its March narrative, setting out the potential for a marked slowdown in activity over the coming months and dramatically cutting its growth forecasts, as the negative impacts from the higher cost of living weighs on household real income.

The question to ask yourself is, what do your risks look like with your customers and suppliers experiencing lower turnover and lower profit margins? Are you modelling and planning for that?..

In a career spanning over 40 years, Philip King has held senior credit management roles across a wide array of sectors. More recently, he held the role of interim Small Business Commissioner between 2020-2021 and, prior to that, was Chief Executive of the Chartered Institute of Credit Management (CICM) for 14 years. Philip is also the architect of the Prompt Payment Code, which the CICM administered on behalf of the Department for Business, Energy and Industrial Strategy (BEIS). 

The BEIS recently published its statutory review of the Reporting on Payment Practices and Performance Regulations 2017. Late payment remains a significant problem for small businesses across the UK. Fast payment allows businesses sufficient cash flow to invest in training and skills, equipment, innovation, and job creation.

Large UK companies and LLPs are required to report on their payment practices, policies, and performance every six months. The Regulations aim to increase transparency and public scrutiny of large businesses’ payment practices and to give small businesses better information so that they can make informed decisions about who to trade with, negotiate fairer terms, and challenge late payments.

Philip joins the podcast to discuss the review and share his thoughts as to whether the objectives have been achieved.