WeeklyWatch – Inflation and interest rate directions altered

26^th November 2024

Stock Take

UK battles with inflation

The week began with the revelation that further increases to energy bills saw inflation leap to 2.3% from 1.7% in September, and then reached its highest level in six months in October. This means that the Bank of England (BoE) must remain cautious when it comes to further interest rate cuts. For both policymakers and households, there was an unforeseen clean sweep of higher headline, core and services inflation.

As a result, expectations of a further rate cut next month have been dashed by BoE governor Andrew Bailey. He cited that a gradual approach to easing interest rates was the more sensible path due to the unknown impact on inflation levels after employer National Insurance contributions were increased under the Budget.

It’s forecasted by the BoE that the Budget measures will keep consumer price inflation at 2.7% by the end of 2025, and it’s unlikely that it will fall below the 2% target until mid-2027 – a full year later than the Bank was expecting back in August this year.

Pre-budget anxiety bites back

Inflation wasn’t the only disappointment for the UK. Pre-Budget nerves were highlighted as the reason for the bigger-than-expected drop in UK retail sales in October. Clothing sales were “notably poor” according to the Office for National Statistics, with the mild weather playing a role in delaying purchases of warmer garments.

Borrowing puts pressure on Reeves

Chancellor Rachel Reeves faces a larger-scale challenge than first thought – the news broke last week that the government had borrowed more money than expected in October. The implementation of inflation-linked pay increases in the public sector, one of the government’s initial policy announcements, resulted in a 13.5% rise in staff costs.

The government’s spending ambition is to boost economic growth, but as the week drew to a close, it was revealed that plans to increase taxes on businesses were a contributing factor to the first contraction in UK private sector activity in 13 months. In the same report, it was revealed that for the second successive month, employers made cuts to their staffing levels.

Japan takes purposeful steps forward

Markets were busy at the start of the week, analysing the comments made from the Bank of Japan’s (BoJ) governor, Kazuo Ueda, who stated that Japan’s economy was making positive steps towards its inflation target. His words come after the rise in wages and sturdy profits. But Ueda demonstrated that he was under no illusion concerning the external risks, including US president-elect Trump’s economic policy. He also stated that the BoJ wouldn’t wait for these uncertainties to go before going ahead with raising interest rates.

Investors were somewhat let down by Japan’s unclear direction, and after hearing Ueda’s words, they interpreted this as a sign that a December rate hike is likely to go ahead. This prediction is further supported by the information revealed on Friday that showed that core inflation figures in October stayed above the central bank’s 2% target. The negative interest rate era was ended in March by the BoJ and the last raise in short-term policy rate came in July to 0.25%.

Are rising tensions over Ukraine affecting financial policy?

Escalating tensions between Russia and the US regarding Ukraine caused investors to shy away from riskier investments, and on Tuesday, investors turned to more safe-haven assets.

Russia’s nuclear doctrine was updated by President Putin in response to the US allowing American-made missiles to be fired deep into the country. As a result, European stocks hit a three-month low and there was a sharp retreat in US Treasury yields – after being boosted over the last few weeks by Trump’s tariff plans, stickier inflation readings and lowered rate cut expectations.

Eyes also on US tech giant

The third-quarter earnings report from Nvidia – the world’s most valuable company – was eagerly awaited by investors. They were keen to look for clues ascertaining to the heralding of artificial intelligence (AI) – responsible for driving a large amount of the market’s rally this year – and whether it can be maintained.

However, despite a delivery of exceeded expectations when it came to revenue and profits, Nvidia’s fourth-quarter growth forecast fell below the high-level predictions of investors. The tech giant conveyed that revenue growth would slow down to around 70% from 94% in the third quarter. The figures still reflect strong demand for Nvidia’s AI chips and suggest that the AI tailwind may still be a big driving force in equities in 2025.

How are global stocks faring?

On Thursday, global stocks notched higher regardless of Nvidia’s forecast putting a dampener on the technology sector. These stocks were also affected by the demand from the US Department of Justice that Alphabet must sell Chrome to put an end to Google’s search monopoly – it’s estimated that 90% of all global online searches are attributed to Google.

Increasing geopolitical concerns meant that markets were cautious, but this didn’t stop global stocks finishing the week in positive territory; investors took time to think about president-elect Trump’s likely policies and their subsequent impact on the US economy. One possible outcome is that his policies will be moderated in order to prevent an increase in inflation; high inflation discontent was one of the big reasons as to why Trump won office.

There were also weekly gains for Wall Street’s leading indices, and the FTSE 100 celebrated its best week in six months as a result of a weaker pound boosting exporters. However, Europe’s Stoxx suffered a fourth straight week of losses.

Mark Dowding of BlueBay Asset Management suggested:

“We think that with economic data remaining upbeat, the Fed will probably deliver the last cut in the mini-cycle for the time being, in either December or January, then signal that rates are on hold for a period. This will conveniently allow Powell and colleagues to assess the actions of Trump’s team before taking additional action, as we progress through 2025.”

Wealth Check

Moving forward with care when scaling back your business

Scaling back a business is challenging, but careful planning can protect you and your team.

If your company is going through a rough patch, keeping good data is essential according to Andrew Shepperd, the Co-founder and Director of consultancy Entrepreneurs Hub. He states:

“When times are tough, you’ll get peace of mind just knowing where you are. Your data might show that, with some changes, you can make it through in 12 to 18 months and face the challenges with more confidence.”

What can I do to best support my business?

To avoid the closure of your business, there are many things that you can consider, including:

• Increasing your efficiency through automation
• Cutting non-essential costs
• Improving credit collection
• Striving for better payment terms with customers and suppliers
• Renegotiating bank loans
• Reducing supply-chain risks
• Selling non-essential assets

If you’re at risk of insolvency because of one or two unpaid invoices, you can consider taking out trade credit insurance and protect yourself against non-payments.

Asking the tough questions

Ensure that you conduct thorough checks in each business segment; this will make sure that if you choose to cut back in one area, it doesn’t affect another.

When carrying out your checks, you’ll need to ask yourself some tough questions:

• Have I focused too much on pet projects and ignored more profitable areas?
• Have I kept busy with day-to-day needs but haven’t addressed the core threats to your business’ profits?
• Have I taken on too many low-profit customers? Do I need to be more discerning when it comes to my customer base?
• Do I need to place more focus on improving customer proposition and invest more in marketing and salespeople?

Third-party advice could be the key

Third-party advice can be highly valuable in helping you face up to these issues and set emotional attachment to staff or areas of the business to the side.

Bailey goes on to say:

“Talk to your accountant and financial planner to get a full picture of your standing. Do you have to close, or are there other options? For example, could you sell all or part of your business to a larger firm that could use economies of scale to run it more efficiently and underpin staff employment? Large companies often buy small ones just for ‘team and tech’ – the revenue is so small, it’s inconsequential, but the value of staff and their skills can take years to build, so a larger company may be attracted and, by acquisition, instantly add that skill competency to their business.”

How do I bounce back?

Insolvency is what takes place when a company can no longer pay its debts, whether that’s down to an inability to pay bills and run out of cash or you have more liabilities than assets.

If a new start-up is on the cards, then there are a few things to bear in mind:

• Any new trading name must not have any association with a former limited company.
• Reduce your liabilities early on will help you come back stronger. If you’re a limited company, the owner’s personal liability for business debts is limited to the amount they invested in the firm. You’re not personally responsible for paying the firm’s debts in the event of closure.
• Avoid offering personal guarantees of business loans; this can make you liable. Try and negotiate them out of agreements, and move family members of the business, particularly if they’re inactive.
• Make sure that you understand employee’s rights in insolvency, including redundancy and the Protection of Employment (TUPE) rules, if selling is a concern.
• Get advice on tax implications surrounding solvent liquidation, e.g. any remaining profit in the business could be taxable, but you might be able to use the Business Asset Disposal Relief.
• Always keep good records.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

In The Picture

Head of Economic Research at St James’s Place, Hetal Mehta, says:

“While headline inflation has broadly fallen to the 2% target since the spike in energy prices, core inflation – which excludes volatile items like food and energy – remains close to 3% and wages are growing at around 4%. We expect inflation to remain higher for longer, reinforcing the importance of holding a well-diversified portfolio designed to navigate different economic conditions.”

The Last Word

“Nuclear will play a vital role in our clean energy future. That is why we are working closely with our allies to unleash the potential of cutting-edge nuclear technology. Advanced nuclear technology will help decarbonise industry by providing low-carbon heat and power, supporting new jobs and investment here in the UK.”

– Ed Miliband, Energy Secretary, responding to the new agreement for civil nuclear collaboration signed by the UK and US and COP29 in Baku, helping strengthen energy security.

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SJP approved 25/11/2024