Your Friday round-up

The business news that matters

The image above is Charlie Nunn, the chief executive of Lloyds Banking Group, arriving in Downing Street this morning to talk to Jeremy Hunt, the chancellor, about the soaring cost of mortgages. He was joined by the bosses of other banks and building societies - Dame Alison Rose of Natwest, Mike Regnier of Santander UK, Debbie Crosbie of Nationwide, David Duffy of Virgin Money, Matt Hammerstein from Barclays UK and Ian Stuart from HSBC UK. Nikhil Rathi, head of the Financial Conduct Authority, the City regulator, also attended.

Nunn didn’t give much away after he left the meeting…

The talks were expected to involve the chancellor asking banks to support households struggling to pay their mortgage. This support could include holding off on repossessions and offering borrowers the opportunity to extend the term of their mortgage or switch to interest-only payments.

As previewed on Monday, this was a big week for the UK economy with new inflation data and the Bank of England’s decision on interest rates. Inflation came in at 8.7 per cent for May, higher than the 8.4 per cent expected by economists and the same as April. The Bank of England then announced on Thursday that it was increasing the base rate of interest in the UK from 4.5 per cent to 5 per cent.

There is some brutal criticism of Andrew Bailey, the governor of the Bank of England, in the morning papers. The Sun says that households have been “Spanked by The Plank”…

Bailey may chuckle at that headline but he won’t laugh at the Financial Times’s editorial on the Bank’s failure to get inflation under control. This editorial is meant to reflect the view of the FT as a whole and is highly critical of the Bank. It concludes by saying:

In coming weeks the MPC [Monetary Policy Committee], and particularly the governor, will need to convince markets that the bank is resolute. Further rate rises will need to remain on the table. Its next meeting and quarterly monetary policy report in August will have to show it understands its errors, and has a handle on Britain’s inflation problem. The credibility of the institution is at stake.

You can read the full piece here. The Times also ran a critical editorial about Bailey earlier this week. It said of Bailey: “His failure, and that of his fellow rate-setters, to take timely pre-emptive action in the form of judicious rate rises is resulting in a brutal correction causing real misery.” You can find that piece here

Rishi Sunak, who could push Bailey into resigning by declaring he has lost confidence in the Bank, has given his support to the governor. Whether Sunak has concerns about Bailey or not, criticism of the Bank could provide a useful cover for the Conservatives leading up to the next election…

In terms of other reaction, David Blanchflower, a former member of the MPC, said the Bank should be cutting rates, not increasing them, given that its medium-term forecasts suggest that inflation will quickly fall back to its 2 per cent target. Blanchflower, a long-time critic of the Bank, said:

Of particular note in the statement is also that there is no evidence that inflation expectations are de-anchored.  It remains totally unclear why they raised rates given they said that “CPI inflation had been expected to decline to a little above 1% at the two and three-year horizons, materially below the 2% target.”  That was also what was shown in the inflation forecast in the May Monetary Policy Report.  Both of which are consistent with rate cuts.  Policymakers should not respond to yesterday’s data as monetary policy takes a time to have effects.   Based on their own analysis the MPC should be cutting rates…!

You can read his blog here

The reaction of Lord Jim O’Neill was more straightforward. Lord O’Neill is the former chief economist of Goldman Sachs and chairman of the Northern Powerhouse Partnership and Northern Gritstone. Speaking at The Times CEO Summit he replied “Oh dear” when asked about the state of the UK economy and said the latest inflation figures were “extremely problematic”. You can find a write-up of what else was said at The Times CEO Summit - which attracted an A-list collection of guests including Rishi Sunak and Keir Starmer - here

The problem facing the Bank and the UK economy was articulated by Karen Ward, a chief market strategist for JP Morgan Asset Management and an adviser to the chancellor. In short, one of the reasons that inflation is remaining stubbornly high is that companies are confident that they can push through price rises and customers will still pay for the product or service. Speaking earlier this week she said:

“The difficulty for the Bank is that they need to create a recession to create uncertainty and frailty, as it’s only when companies feel nervous about the future that they think they won’t put through price rises.”

In that context, new data about the economy that has been published today is more complicated than it may seem…

The confidence of UK consumers has improved despite stubborn inflation and rising mortgage costs, according to the latest data from GFK. Confidence improved from -27 in May to -24 in June. That is the highest reading for 17 months. The survey showed that people are feeling more confident about their own personal financial situation over the next 12 months, with that reading growing from -8 to -1, the best since December 2021. However, confidence in the general economy stayed low at -54. Joe Staton, client strategy director at GFK, said: “Consumers are showing remarkable resilience in the face of inflation that is currently refusing to yield.”

Meanwhile, the Office for National Statistics said that retail sales volumes rose by 0.3 per cent in May compared to April. That is better than the 0.2 per cent fall forecast by economists, according to a consensus compiled by Reuters.

So why is demand holding up? The Economist offers an answer in its analysis of inflation in the UK:

Britain stands out for the stimulus it gave to the economy in the pandemic and then, last year, during the energy crisis. One measure of this is to combine an estimate from the International Monetary Fund of covid-era support with one from Bruegel, an eu think-tank, of help for households and firms hit by painful energy bills. Only America doled out a bigger stimulus. Britain heavily outspent other peers: around 23.1 per cent of national income, vastly more, for example, than the 13.3 per cent in France.

You can find that piece here

However, there are signs of a slowdown according to the latest Purchasing Managers’ Index, which tracks activity in the private sector. The flash reading of the S&P Global/CIPS PMI index came in at 52.8 for June, down from 54 in May and a three-month low. Anything about 50 represents growth in the economy, so this is a positive reading. However, Chris Williamson, chief business economist at S&P Global Market Intelligence, said:

“June's flash PMI survey indicates that the UK economy has lost momentum again after a brief growth spurt in the spring, and looks set to weaken further in the months ahead. Most notably, consumer spending on services, which was a core growth driver in the spring, is now showing signs of faltering as the reality of higher interest rates, the increased cost of living and gloom about the outlook sets in and overrides the brief boost to spending enjoyed from the pandemic tailwind. The manufacturing sector meanwhile continues to report recessionary conditions.”

You can find the full report here

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Other stories that matter…

1. The most liveable city in the UK is Manchester. That is according to the latest annual report on the world’s most liveable cities by the Economist Intelligence Unit. Manchester came in at 44 on the list, down 16 places, while London was 46th, down 12, and Edinburgh was 58th, down 23. Edinburgh suffered the biggest drop in rankings this year, with Manchester and London not far behind. The report says: “None of these cities has seen a particularly sharp decline in their index scores, but they have failed to make the gains that many other cities—particularly those in Asia—have made in the past year.” Number one on the list was Vienna, followed by Copenhagen, Melbourne, Sydney and Vancouver. Bottom of the list was Damascus in Syria. New York was 69th. You can find a summary of the report by The Economist here and the full report here. On a similar note, an analysis by Retail Week says the most vibrant retail destination in the UK - ie the best place to go shopping - is London’s West End followed by Covent Garden and then Bicester Village, the outlet centre in Oxfordshire. Manchester city centre and Glasgow city centre are the leading destinations outside the south-east of England. In fact, the north-west features prominently in the top ten, with Liverpool, the Trafford Centre and Cheshire Oaks also on the list. The full report is here

2. Ford is getting a $9.2 billion loan from the US government’s Department of Energy to fund the construction of three factories in Kentucky and Tennessee, which will make electric car batteries. This shows what the UK is competing against as it tries to attract foreign investment. Wall Street Journal story here

3. The Guardian has done a fascinating piece on Looe Island in Cornwall, where only two people live. The island has become a haven for wildlife and an example of what happens without human interference. Piece here

4. Rising rents, business rates, electricity bills and the aftermath of the Covid-19 crisis are threatening the future of small music venues across the UK according to a feature in the Financial Times. Research by the Music Venue Trust has found these venues are operating with tiny margins and 4 closed last year. Musicians such as Fatboy Slim - aka Norman Cook - have held special shows to raise money for struggling venues. Fatboy Slim raised £20,000 for the Old Market in Brighton. Full piece here

5. An example of the changing demographics in the western world: the median age in the US has hit its highest ever - 38.9 years. In 2000 it was 35 and in 1980 it was 30. New York Times story here

6. Saudi Arabia could look to create new super leagues in rugby, boxing, tennis, or athletics, according to a downbeat analysis by Ed Warner, the former head of UK Athletics. It could also look to invest in the International Paralympic Committee and end its reliance on the Olympics. You can find this analysis, and some comments on why there were so many empty seats in the corporate hospitality area at Edgbaston during the first Ashes test, here

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Podcast…

I am delighted to say that Business Studies will be returning with a new season of episodes very shortly. The podcast has taken a break while we work on some exciting plans for Off to Lunch. The new season includes a great collection of guests and stories, including how Richard Harpin built Homeserve into a £4 billion company, the growth of Uber, the revival of Marks & Spencer’s clothing and Google. Here is a sneak preview of what is to come via LinkedIn…

Before these new episodes arrive, a reminder that you can find all our previous episodes of Business Studies by clicking the link below. These episodes are designed to be timeless, so you should find them as interesting and useful now as when they were first released…

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And finally…

Victor Wembanyama has been picked number one overall in the NBA draft by the San Antonio Spurs. Wembanyama is 7ft 5in tall (that is not a typo) and was described by LeBron James as “more like an alien” because of how he combines his height with speed and agility. His arrival in the NBA is also interesting because it highlights the growing European and international influence in basketball in the US. Wembanyama is French. The last five most valuable player awards in the NBA - the award for the best player of the season - have all gone to international players. The award this year went to Joel Embiid, who is from Cameroon, while Nikola Jokic of Serbia won the previous two and Greek star Giannis Antetokounmpo won the two before that…

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Best

Graham