Introduction: IMF forecasts UK recession this year
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
Growth, or the lack of it, is the main issue today after the International Monetary Fund released its latest economic forecasts overnight … and as we await eurozone GDP figures this morning.
The IMF’s message for Britain was grim – the UK is the only advanced economy expected to fall into recession this year.
UK GDP is forecast to shrink by 0.6% this year, the worst forecast for any G7 country this year, which is a 0.9 percentage point downward revision from October’s forecasts.
The IMF blamed the downgrade on tighter government spending policies and higher interest rates (which may be raised again on Thursday), and the burden from still-high energy retail prices on household budgets.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, said 2023 would be “quite challenging” for the UK as it slipped from top to bottom of the G7 league table.
He added:
“There is a sharp correction.”
The move piles more pressure on UK chancellor Jeremy Hunt, who’s facing calls from business groups for a more ambitious growth strategy, and demands from some Conservative MPs for tax cuts.
This contraction would follow 4.1% growth in 2022, the IMF says, one of the fastest growth rates among advanced economies last year.
The broader economic picture has brightened a little, though, the IMF says, citing “signs of resilience and China reopening”.
The IMF has lifted its forecast for the world economy this year: global growth will slow from 3.4% in 2022 to 2.9% in 2023 – an upgrade on its previous forecast of 2.7%.
The IMF’s Gourinchas says China’s sudden reopening paves the way for a rapid rebound in activity.
Gourinchas writes:
The global economy is poised to slow this year, before rebounding next year. Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity.
Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining.
Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe. Inflation, too, showed improvement, with overall measures now decreasing in most countries – even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.
Also coming up….
We find out today how the French, Portuguese, Italian and the wider eurozone economy fared in the final quarter of last year.
Yesterday we learned that Germany’s GDP shrank unexpectedly in Q4, by 0.2%, putting Europe’s largest economy at risk of a winter recession.
The agenda
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6.30am GMT: French Q4 2022 GDP report
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8.55am GMT: German unemployment report for January
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9.30am GMT: Portugal’s Q4 2022 GDP report
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9.30am GMT: UK mortgage approvals and consumer credit data for December
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10am GMT: Italy’s Q4 2022 GDP report
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10am GMT: Eurozone Q4 2022 GDP report
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1.30pm GMT: Canadian December and Q4 2022 GDP report
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2pm GMT: US house price index
Key events
Filters BETA
2022 was a rough year for Norway’s sovereign wealth fund, which this morning reported a record loss of 1.64 trillion Norwegian kroner, or £132bn, for last year.
The so-called Government Pension Fund Global cited “very unusual” market conditions for its return of -14.1% last year.
Norges Bank Investment Management CEO Nicolai Tangen said in a statement.
“The market was impacted by war in Europe, high inflation, and rising interest rates. This negatively impacted both the equity market and bond market at the same time, which is very unusual,”
“All the sectors in the equity market had negative returns, with the exception of energy.
Global stock markets fell by around 20% last year, while the UK’s FTSE 100 index managed a small rise (lifted by oil companies).
As the IMF reports that the UK is the only major advanced economy set to slide into recession this year with growth forecast for other leading economies, it comes as no surprise that corporate insolvencies continue to rise.
So says Inga West, restructuring and insolvency counsel at law firm Ashurst, who warns UK firms are suffering a ‘particular toxic cocktail of economic pressures’.
West explains:
This trend is evident in both the latest quarterly insolvency statistics (which reveal a 30% increase on the previous quarter and the highest quarterly total since Q4 2008) and in the annual statistics for 2022 (which show that levels of corporate insolvencies are the highest they have been since 2009).
In line with the pattern we have seen over the past few months, the increase in corporate insolvencies has been driven by the large number of creditors’ voluntary liquidations in the last quarter (comprising 85% of all corporate insolvencies). This is a process typically favoured by the SME market. There is little doubt, however, that greater numbers of large corporate insolvencies are on the cards: the increase in the number of administrations in Q4 2022 indicates that larger corporates are also succumbing to the prevailing macroeconomic conditions and I expect to see these numbers continuing to climb over the next quarter.
Recent high profile failures have included Joules, Byron, BritishVolt and Flybe – demonstrating that this recession will impact a lot of sectors. There are very few sectors that are immune to the particular toxic cocktail of economic pressures currently facing UK business.”
KPMG partner pay climbs
Anna Isaac
Average pay for partners at big four audit firm KPMG topped £717,000 in 2022, despite fines and higher operating costs, my colleague Anna Isaac reports.
The rise, of around 4%, is set against a backdrop of a surge in dealmaking which has also benefited the company’s competitors.
Companies have spent large sums with management consultancies as they struggled to adapt to the impact of the Covid-19 pandemic. The pandemic-triggered slump in some parts of the economy also spurred mergers and acquisitions.
KPMG’s revenue rose 12% to £2.72bn with a 24% increase in advice on deals and a 22% increase in consultancy. Its profit rose 3% to £449m before tax.
With a paypacket of more than £700,000, KPMG partners still earn less than rivals on average. The earnings for an equivalent role at Deloitte is more than £1m, and PwC partners’ pay also rose above £1m last year due to a one off-pay out of £100,000. EY partners’ pay was around £800,000 in 2022.
The firm is also set to increase its audit fees as higher costs and regulatory pressures mount.
“The price of audit will have to increase this year,” the company’s CEO Jon Holt said in an interview with Bloomberg, adding:
“The sector is facing a number of upward cost drivers, from new audit and accounting standards to inflationary pressures.”
Partners would have been paid more, were it not for the risk of future regulatory fines. Last year, the company was fined more than £14m after former staff forged documents and misled the regulator over audits for companies including the collapsed outsourcer Carillion.
The company reported a median gender pay gap of 20.9% in April last year and a mean gap of 32.1%. The gap for bonuses – even excluding partners – was around 40% by both median and mean measures.
The surge in energy prices has helped US oil giant Exxon to smash profit records last year.
Exxon has reported it made an adusted profit of around $59bn in 2022, or around $6.7m per hour. That is not only a company record, but a historic high for the Western oil industry, Reuters says.
Reuters’ Sabrina Valle explains:
Exxon’s results far exceeded the then-record $45.2 billion net profit it reported in 2008, when oil hit $142 per barrel, 30% above last year’s average price. Deep cost cuts during the pandemic helped supercharge last year’s earnings.
“Overall earnings and cashflow were up pretty significantly year on year,” Exxon Chief Financial Officer Kathryn Mikells told Reuters. “So that came really from a combination of strong markets, strong throughput, strong production, and really good cost control.”
Exxon said it incurred a $1.3 billion hit to its fourth quarter earnings from a European Union windfall tax that began in the final quarter and from asset impairments. The company is suing the EU, arguing the levy exceeds its legal authority.
Energy news: National Grid has completed the sale of a majority stake in its gas transmission and metering business.
National Grid has sold a 60% equity interest in the business to a consortium comprised of Australia’s Macquarie Asset Management and Canada’s British Columbia Investment Management Corporation.
Back in March last year, National Grid agreed to sell the unit for an enterprise value of about £9.6bn. But in August, Britain reportedly launched an investigation into the deal under new national security rules.
Bloomberg: Brexit is costing the UK £100bn a year in lost output
Brexit is costing the UK economy £100bn a year, new analysis by Bloomberg Economics shows.
The analysis highlights how Britain’s exit from the European Union three yeas ago has caused wide-ranging damage, from business investment to the ability of companies to hire workers.
Bloomberg reports:
Economists Ana Andrade and Dan Hanson reckon the economy is 4% smaller than it might have been, with business investment lagging significantly and the shortfall in EU workers widening.
“Did the UK commit an act of economic self-harm when it voted to leave the EU in 2016? The evidence so far still suggests it did,” Andrade and Hanson wrote in a note published Tuesday. “The main takeaway is that the rupture from the single market may have impacted the British economy faster than we, or most other forecasters, expected.”
At 11pm tonight the UK will mark the third anniversary of the moment that it left the European Union.
As my colleague Andrew Sparrow points out, increasingly, by a margin of around 60% to 40%, Britons are saying that this was a mistake.
But ministers are marking the anniversary by talking up the supposed benefits, with prime minister Rishi Sunak insisting the UK has made “huge strides” in harnessing the freedoms unlocked by Brexit to tackle generational challenges.
Sunak says:
And in my first 100 days as prime minister, that momentum hasn’t slowed – we’re cutting red tape for businesses, levelling up through our freeports, and designing our own, fairer farming system to protect the British countryside.
Here’s the latest:
The surge in company insolvencies across England and Wales last year should serve as a warning to business owners bracing for a recession to act early, according to Robert Young, R&I director at accountancy firm Azets.
Young says:
The IMF predicts that the UK will be the worst performing of the big economies in 2023. The alarming statistics and gloomy outlook are driven by a perfect storm of working capital and supply chain pressures, as well as rising interest rates and reducing consumer confidence. Business leaders must remain alive to the pressures and must manage their finances – and their stakeholders – very closely.
“In times of economic decline, we expect to see the number of insolvencies increasing. However, it is the number of liquidations that is of particular concern as this highlights the high number of businesses ceasing to trade. Liquidation is an end-of-life process and should be avoided at all costs, as this is very rarely of benefit to the creditors and employees.
“Spotting the warning signs and seeking early advice is absolutely crucial as this will ensure that the widest range of options is available and will maximise the chances of survival.”
England and Wales see most company insolvencies since 2009
The number of companies collapsing into insolvency in England and Wales has hit its highest level since shortly after the financial crisis, after jumping over 50% last year.
There were 22,109 company insolvencies registered in 2022, official figures show, which is the highest number since 2009 and 57% higher than in 2021.
The Insolvency Service, which released the data, says:
The increase compared to 2021 was driven by the highest annual number of Creditors’ Voluntary Liquidations (CVLs) since the start of the series in 1960.
The number of CVLs in 2022 was approximately 21% higher than if the pre-pandemic trend had continued.
In a CVL, a company’s directors decide to voluntarily shut down the company because it has become insolvent and unable to continue to trade.
Gareth Harris, partner at RSM UK Restructuring Advisory, fears that the next six months will be very tough for companies, given the UK’s economic weakness:
‘These Q4 insolvency numbers have confirmed that the “excess insolvencies” which have been put off by the Government Covid support packages are now in free flow. We expect these high liquidation numbers to continue for a couple more quarters before slowly tailing off as the recession softens.
‘But, the next 6 months may be the toughest for UK business since the early 1990s as almost all economic indicators paint a gloomy picture and survival will represent success for many. This will however create opportunity for those strong businesses who may be able to capitalise if they can move quickly.’
Sarah Rayment, managing director at Kroll, fears there will more insolvences, particularly in sectors reliant on consumer spending.
Rayment says:
“Business failures have been suppressed in recent years as many businesses took on Government backed Covid loans through the pandemic in addition to wider support measures.
This year, in a tough macroeconomic environment, we are beginning to see a significant uptick in insolvencies as the support measures unwind, cashflows become tighter together with the wider economic headwinds
The Bank of England has also reported a sharp slowdown in borrowing last month.
Consumers borrowed an additional £0.5 billion in consumer credit, on net, compared with £1.5 billion borrowed in November, today’s data shows.
It’s a sign that consumer spending may have weakened at the end of the year, says Thomas Pugh, economist at audit, tax and consulting firm RSM UK.
Pugh says this raises the chances that the economy contracted in Q4 and fell into recession.
‘Admittedly, the slowdown in credit growth could reflect timing around Christmas spending. The overall fall in consumer credit was driven by £0.5 billion of repayments on credit cards, the first net repayment since December 2021, after a large jump in November.
But we already know retail sales volumes were especially weak in December and the drop in borrowing suggests overall spending also dropped.
There is now probably a 50:50 chance that GDP in December fell by the 0.4% needed to drag Q4 as a whole into the negative.
Eurozone shrugs off recession fears with small pick-up in GDP
The eurozone grew by 0.1% in the last quarter of 2022, according to preliminary data just released by Eurostat.
That’s a slowdown on the third quarter of last year, when the euro area expanded by 0.3%, but it beats forecasts of a 0.1% contraction.
Ireland (+3.5%) recorded the highest quarterly increase in GDP, followed by Latvia (+0.3%), and Spain and Portugal (both +0.2%), while we learned earlier that France grew by just 0.1%.
The highest declines were recorded in Lithuania (-1.7%) as well as in Austria (-0.7%) and Sweden (-0.6%). Germany’s economy shrank by 0.2%.
This means Europe lagged behind the United States at the end of last year. US GDP expanded at a 2.9% annualized pace in the fourth quarter, or by around 0.7% quarter-on-quarter.
UK mortgage approvals slump: what the experts say
The slump in mortgage approvals in December show that higher interest rates and the cost of living squeeze dampened economic activity at the end of last year, City economists say.
Ashley Webb, UK economist at Capital Economics, explains:
Mortgage approvals fell for the fourth consecutive month, falling from 46,200 in November to 35,600 in December, the lowest level since May 2020. That leaves approvals around 45% below their pre-pandemic levels and we expect elevated mortgage rates to keep approvals suppressed in the coming months. This weakness is likely to reflect the fact that the effective interest rate on newly drawn mortgages has continued to increase – by 32bps in December to 3.67%.
However, with 75% of all outstanding mortgages on fixed interest rates, many existing borrowers have yet to feel the full effects of higher interest rates. That’s one reason why we expect the drag on activity from higher interest rates to intensify in the next six months.
The housing market is now in the midst of “a significant slowdown”, says Karen Noye, mortgage expert at Quilter:
“Over the past few months, we have witnessed a sizeable fall in the level of demand in the market. While mortgage rates have dipped somewhat since the highs seen towards the end of last year, monthly costs remain far higher than many people had become accustomed to in recent years.
When coupled with rising energy bills – particularly now the winter has truly set in and people are becoming more reliant on their heating – we may be entering a time where more people begin to consider putting their properties up for sale in favour of a cheaper home. House prices have started to fall in recent months, and should the level of demand continue to decrease at the same time more people put their homes on the market, we will likely see this trend continue and a switch from the seller’s market to a buyer’s market could materialise.
Simon Gammon, managing partner at Knight Frank Finance, says activity picked up in January, though.
“The traditional property market Christmas slowdown came early in 2022 as prospective buyers opted not to act during the chaotic weeks after the mini-budget. Mortgage approvals for house purchase reveal just how poor sentiment was during the period.
“January has been much more active, which will show in next month’s data. It is clear now that many buyers’ merely postponed house moves rather than cancelled them altogether.