News

The British economy: a down-beat start to the New Year

In this perspective Ruth Lea, economic adviser to the Arbuthnot Banking Group, discusses the latest British economic data.

The main points to note are:

– The ONS unexpectedly revised GDP growth for 2015Q3 down from 0.5% to 0.4%. Moreover, growth for 2015Q2 was revised down from 0.7% to 0.5%.
– November’s public borrowing data were worse than expected. The PSNB was £14.2bn compared with £12.9bn a year earlier. Moreover, the progress in deficit reduction so far in FY2015, compared with FY2014, has been disappointing. If the OBR’s November forecast for FY2015 is to be met, the public finances will have to improve sharply in the final four months of the financial year.
– The current account deficit remained at £17.5bn (3.7% of GDP) in 2015Q3.
In addition:

– On a trend basis the UK’s external deficit seems to be widening as Germany’s external surplus increases.
– Germany’s large surpluses reflect the success of its export-oriented economic growth model (as well as the weak euro), whereas the UK can be said to have a consumption-led model.
– As world trade slows, especially trade relating to the Emerging Markets, Germany is likely to be more adversely affected than the UK. The shares of German exports going to the slowing EM economies are higher than the equivalent UK ones. And the German economy is more dependent on exports than the UK’s.
Ruth Lea said:

“The British economic data released before Christmas were disappointing, though the gloom should not be overdone. Growth should continue and the public finances continue to improve. And the British economy’s relatively small exposure to the slowing emerging market economies works in its favour.”

For full story:http://www.arbuthnotgroup.com/economic_perspectives_group.html

Bibby Financial Services boosts SME funding in Scotland by a quarter

SME financier, Bibby Financial Services (BFS), has increased its funding to Scottish businesses by a quarter, as it looks to bolster its funding in the country.

BFS is the largest independent invoice finance provider in the UK, with offices in Glasgow and Edinburgh. From November 2014 to November 2015, the specialist funder increased funding to businesses in Scotland from £22.7m to £28.5m.

Alan Anderson, head of sales for BFS Scotland, said:

“SMEs in Scotland tell us that they’re looking for funding to grow and many of them are now looking beyond traditional lending-channels. I’m delighted that we have been able to increase our support to SMEs throughout the country and look forward to helping more businesses in 2016.

“In addition to an increase in our traditional invoice finance offerings, in 2015 we have also seen significant growth in our specialist products, including export and trade finance and construction finance.”

BFS opened a new office on St Vincent Street, Glasgow, in December 2014.

In November, the funder announced that it is to commit upwards of £770m in funding to UK SMEs, following a successful refinancing deal.

Alan concluded:

“We are committing funds of over £770m to UK PLC. This is fantastic news for all SMEs, including those in Scotland.”

FAMR must cut costs to close Advice Gap

Slashing the cost of providing financial advice must be a top priority to emerge from the Financial Advice Market Review (FAMR) to help close the Advice Gap, research has found.

Analysis by True Potential points to a dramatic reduction in the number of advisers and increasing costs as the principal causes.

It comes as the Financial Conduct Authority (FCA) and the Treasury close their joint consultation today (22 December), which was set up to investigate the Advice Gap.

True Potential represents 20% of the UK adviser market and has polled hundreds of advisers to identify the root causes of the Advice Gap. The firm has also carried out research into consumer demands and behaviour involving more than 16,000 people across the UK as part of its ‘Tackling the Savings Gap’ campaign, one of the largest studies of its type ever commissioned.

Almost 60% of advisers said the cost of providing advice, including regulation and compliance, is the greatest barrier. 30% identified the Retail Distribution Review (RDR) as the major obstacle.

The investigation by True Potential shows that the number of advisers has plummeted, from around 200,000 sales advisers in 1990 to fewer than 23,000 financial advisers today. This compares to around 150,000 legal professionals and 330,000 accountants.

Meanwhile the fees incurred by adviser firms have soared. True Potential’s own group FCA fees have risen by over 100% in 2015/16 compared to the previous year while the Financial Services Compensation Scheme Levy is up by 133% in the same period.

But advisers are not the only ones to be worse off. Since RDR banned commissions, clients find themselves paying twice: once through a fee, normally taken out of their overall investment; and secondly by missing out on the tax and savings benefits, had the full amount been invested.

Post-RDR, a client paying £100,000 to a product provider will typically see £3,000 deducted to pay for the advice. This means only £97,000 gets the tax and savings benefits versus the full £100,000 before 2013 when the adviser received a commission.

True Potential managing partner David Harrison said:

“The origins of this Advice Gap can be traced back to RDR.

“Too few advisers, too many potential customers, and finally a payment system that encourages financial advisers not to look for new clients or to charge higher fees for their services, easily explains the emergence of the Advice Gap.

“The solution is firstly to encourage more advisers into the market by reducing the absurdly high costs and fees levied on them. The burden of regulation should be distributed fairly and not simply heaped on the larger firms, while the growing number of small and micro businesses offering advice operate with less scrutiny.”

True Potential asked its consumer panel about their experiences with professional financial advice. 76% said that they do not currently have an adviser and when asked why, 35% said they did not wish to pay for advice.

David Harrison added:

“Costs to the consumer must also be addressed. It is perfectly clear that consumers are not prepared to pay for advice and it is hard to think of many other sales processes where consumers must pay for the advice as well as the eventual purchase. It’s an alien concept.”

Atradius warns New Year could deliver new round of retail insolvencies

– Retailers pin hopes on high consumer confidence to spark last-minute rush
– Female fashion sector could lose out in pre-Christmas spend
Retailers are holding out hopes for a last minute Christmas shopping frenzy to keep them afloat throughout 2016, say retail experts at trade credit insurer Atradius.

With more positive economic news on the horizon, improving employment prospects, low inflation and a significant drop in the cost of fuel, consumer confidence has been boosted to arguably the highest level in a decade. Against this backdrop, Owen Bassett, senior risk underwriter at Atradius, observes that conditions for a strong retail performance this Christmas should be close to perfect – however, he fears that instead there may just be a perfect storm – withshoppers still hungry for bargains, discounting remains high leaving retailers facing another difficult festive season. The New Year could start bleakly for some and a fresh wave of insolvencies could be around the corner.

Owen said:

“With consumer confidence riding high, retailers might have hoped for improved customer spending in the run up to Christmas. However, so far, retail hasn’t performed as strongly as anticipated and it seems that the extra pound in people’s pocket has been spent on leisure activities such as holidays, entertainment events and eating out.

“Retailers traditionally take upwards of 40% of their annual profits between October and December so it is a crucial time of year for them. Those who went into the fourth quarter needing – rather than wanting – a strong performance could be looking at a troubled future. Experience tells us that when retailers need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and with the first payment of quarterly rent due in January it can be difficult to survive after a poor Q4.”

In a bid to pull in customers, we are now seeing heavy discounting in stores but Atradius also warns that for many Black Friday may prove to have a negative revenue impact in the post-Christmas analysis after the hype failed to materialise on the high street, causing real problems for retailers.

Owen continued:

“Last year, retailers felt that they gave away too much with such heavy discounting leading to finer margins and some retailers having to release profit warnings. This year, the market was more measured having learned their lesson the hard way last year. Some didn’t compete at all and others reduced their offering. However, for in-store retailers the lack of a rush for bargains has left many with significant stock to shift and, if sales cannot be achieved at normal price before Christmas, retailers will be forced into discounts after Christmas. Last year the revenue impact from Black Friday was felt immediately, this time the effect on margin erosion is slower to show – but will still be felt.

“Looking at the sector as a whole, while electrical, furniture and DIY retailers have performed well this year, clothing retailers – particularly female fashion – have struggled and that pattern continues. Certain sub sectors are benefiting from pent-up demand. After a long spell of ‘tight belts’, consumers are no longer delaying spend on their homes and on items that are overdue for replacement such as electrical appliances which only have a limited lifespan.

“However, the story for high street fashion is not so positive and despite continued demand, the outlook is mixed. The female fashion sector is now saturated with many similar businesses competing for the same pound. Those that cannot compete in terms of operational efficiency or that don’t continue to appeal to consumers’ tastes in fashion will find themselves in difficulty.”

Trade credit insurance supports businesses in all sectors to manage risk and to trade safely.

The 2015 European private equity deal market achieves highest total value since 2007

– Private equity deals reach highest total value and highest average value per deal since 2007
– European private equity exit market also achieves all-time record yearly value in 2015
– UK, France and Germany remain the dominant deal markets
The European private equity deal market has recorded its highest total value for a given year since 2007, according to the latest data published by the Centre for Management Buyout Research (CMBOR), sponsored by Equistone Partners Europe Limited.

After a strong second half of the year – recording the highest value since H2 2007 – with €42.3bn worth of deals and an average deal value of €151.2m, the total value for European private equity deals in 2015 stands at €80.9bn. This is the highest yearly total since 2007 when total value stood at €172.9bn and is the fourth highest on record behind 2007, 2006 and 2005 respectively. 2015 also saw the highest average value per transaction since 2007, standing at €131.6m versus €171.1m in 2007.

Moreover, the research shows that there has been a steady yearly increase of about €10bn in the total value of private equity deals since 2013 (€59.4bn 2013, €69.6bn 2014 and €80.9bn 2015).

The total exit value in Europe stands at €153.2bn which is a new record. IPOs and trade sales have been particularly strong and are both at record values of €48.7bn and €63.8bn respectively.

The UK watches and waits…

A currency market update from Charles Purdy, director of Smart Currency Exchange.

To round off a week that has been focused primarily on the US rate hike (and consequent dollar rally), market interest lay on the potential ‘Brexit’ on Friday. David Cameron hinted that the UK may hold an In-Out vote on membership to the European Union (EU) in 2016, rather than in 2017, as originally anticipated. This move has shaken trader confidence and as a result, sterling finds itself at 0.2% weaker against the euro.

The ongoing outlook for sterling is increased volatility against its major pairings, as a result of outstanding questions on the UK’s relationship with the EU and indecision surrounding a UK interest rate hike, combined with another possible increase in interest rates in the US.

Little data for the euro, but will markets move in line with consumer confidence?
It was a very quiet day for the euro across the board on Friday, as little data was released and markets fell quiet as Christmas week approaches.

We could see some movement in the currency markets this week, as Consumer Confidence data from the Eurozone is released – forecast to improve slightly from -6.1 up to -5.9 – overall, a disappointing figure, but a sign that the European economy is moving in the right direction. Initial Gross Domestic Product (GDP) figures for France come out today, but as this is not a major release, we can in all likelihood expect the markets to quieten down as the seasonal holidays draw near.

USA experiences a welcome lull following the interest rate excitement
It was a quiet day for the US dollar on Friday, with only the Services Manufacturing Purchasing Manager’s Indices released, showing a drop from both previous and expected figures.

With the festive season fast approaching, minimal data will be released this week. What we can look forward to, however, is the Final Gross Domestic Product (GDP) figures that will come out on Tuesday 22nd December. These are expected to be revised down, in addition to the data for Durable Goods Orders, which is also expected to drop slightly in comparison to the previous month.

Holiday season peace and quiet for world currencies
As we approach the festive holidays, a sense of quiet and calm starts to descend on Western and Eastern fronts. In terms of significant data to be released in this time, we expect the New Zealand Trade Balance data late on Wednesday 23 December. The Canadians will also release some of their key figures the following day. After improving outcomes last month, they will hope for much of the same. After falling short of expectations in both their Gross Domestic Product (GDP) figures and Core Retail Sales last month, they too will be hoping for an improvement.

Commercial property debt falls

Outstanding commercial property debt is on course to fall to a 10 year low during 2015, declining by 1% in the first half of 2015 to £163.7bn, according to academics at De Montfort University. However, strong levels of new loan origination in 2015 mean that the total amount outstanding may actually increase for the first time since the recession.

The half-year edition of the De Montfort Commercial Property Lending Report, the most comprehensive study of the UK’s commercial property lending market, concludes that the continuous decline in total real estate debt since 2008 “appears to have almost halted and may subsequently be reversed by year-end”.

The value of new loan originations in the first half of 2015 was £24.7bn. This was the highest half year value reported to the research since £49.2bn recorded for the first half of 2007. In a further sign of commercial property market health, the value of distressed loans fell from £23.2bn at year-end 2014 to £15.7bn at mid-year 2015.

The proportion of loans with a loan to value (LTV) ratio of less than 70% has continued to grow in the first half of 2015, representing 80.5%, of £135.5bn, of outstanding debt of the traditional lenders and allocated to investment projects. Outstanding debt with a LTV ratio of between 71% and 100% fell from 14.3% of the total, (£20bn) at year-end 2014 to 12% (£16bn) at mid-year 2015.

The first half of the year also showed an encouraging pick-up in development finance, particularly for speculative or partly pre-let projects, where more non-traditional lenders now feel comfortable providing finance against such schemes. At the same time, the research suggests that banking regulation may be having an adverse impact on development finance by the traditional lenders. At mid-year 2015, only 2.8% of debt was allocated to commercial development projects by these lenders.

Interest rate margins for senior debt continued their three-year long decline but the pace of decline has moderated considerably. At mid-year 2015, the average margin for senior loans secured by prime office property was recorded at 214bps, down from 218.7bps recorded at year-end 2014. The report suggests that that “the floor in interest-rate margins may have been reached”.

Following a surge in non-traditional lenders in 2014, Banks and Building Societies remained the dominant lenders in the market, holding 76% of all loan originations at half-year 2015, compared to 75% at year-end 2014. The level of new lending by UK banks and building societies remained stable at 39% of all loan originations.

Ion Fletcher, director of policy (finance) at the British Property Federation, commented:

“We seem to have reached a turning point in the amount of commercial property debt in the market, with the impact of post-crisis deleveraging almost totally cancelled out by new lending. While this suggests things are ‘hotting up’, a stabilising of senior debt margins and broadly level LTV ratios indicates lenders remain risk-conscious.

“We are also encouraged to see increased lending to speculative commercial property development projects. These are crucial if we want SMEs to have room to grow their businesses.”

Markit chief economist comments on latest UK retail sales data

Commenting on the new figures, Chris Williamson, chief economist at Markit, said:

“UK retail sales surged as shoppers took advantage of ‘Black Friday’ discounts. Sales were up 1.7% in November, smashing expectations of a mere 0.5% rise, according to the Office for National Statistics. The increase pushes sales 1.5% higher in the fourth quarter so far compared to the third quarter, adding to signs that the economy has enjoyed a strong end to the year. GDP looks set to rise by 0.6% in the final three months of the year.

“Retailers may see some pay-back after the Black Friday promotions led shoppers to pull-forward spending that would otherwise have taken place in December, but the underlying sales trend looks set to remain strong as we head into 2016.

“As well as discounts (store prices were 3.3% lower than a year ago in November amid aggressive Black Friday promotions), consumer spending is being driven by a host of other tailwinds. Households are benefitting from improved job security, which is now running at a post-crisis high according to December survey data, low inflation and falling energy prices, the latter helping free-up more income to boost retail sales, as well of course from ultra-low interest rates. All of these tailwinds show no signs of fading.

“The Bank of England has made it clear that they are not prepared to follow the US in hiking interest rates until wage growth shows definite signs of picking up. With the latest data showing pay growth slowing rather than accelerating, the first hike still seems a long way off. However, if this strong consumer spending trend continues, it’s hard to see how some policymakers will be comfortable with holding off with rate hikes next year. ”

Members of the UK200Group discuss the impact technology will have on businesses in 2016

Members of the UK200Group of independent accountancy and law firms have commented on new research from Barclays which shows that SMEs think technology will be the biggest driver in growth in 2016.

The bank’s study has revealed that more than a third of SMEs (39%) UK’s SMEs believe that the availability of better technology will be the most important contributor for business growth in 2016.

The survey also revealed that consumer demand will be vital to accelerate growth, although this fell from first to second most influential factor with a net score of 32%.

The other key factors that SMEs believe will have a net positive impact on growth in 2016 include international markets and opportunities overseas (25%), a move to online or improvements in digital presence (23%), and major sporting and cultural events (10%).

When it comes to the factors expected to hinder growth in 2016, extreme weather takes the top spot, with 23% of SMEs surveyed believing it could have a negative impact on their business in the year to come. Money or funding constraints (20%) as well as competition among similar businesses (18%) are also concerns for the year ahead.

Duncan Montgomery, tax partner at UK200Group member firm Whittingham Riddell, said:

“New technology is fundamental to many businesses and better processes can allow for big increases in turnover without adding staff cost and training time on expansion.

“Where SMEs occasionally fall down is where new technology is introduced without having enough people fully engaged in the tech to ensure it adds value rather than frustration. Investing properly in training and ensuring that key departments have strong IT individuals is often key to success.”

Jonathan Russell, partner at UK200Group member firm ReesRussell, said:

“Technology, or at least the use of technological advances, is an area where many small businesses are looking to take their businesses forward. However, aside from those businesses which are in the technology sector, the big driver is competitiveness.

“There remains a huge concern about the lack of demand across the board and therefore we are still seeing businesses chasing the same customers rather than finding new ones. Businesses have got to find new ways of attracting those customers. In an continuingly cash stretched economy, price is becoming or remaining a prime driver and efficiency gain, which a business can make through better use of technology in order to become more competitive, is a must.

“The further use of technology to get in front of customers and making the sales process easier is also a big driver. It is unlikely that the world is suddenly going to find a new supply of money now credit taps remain firmly shut. Businesses, both large and small, must use every avenue open to them to secure that sale.”

Cost cutting focus stifling UK businesses

– Research suggests procurement needs a new broom as focus shifts to growth and innovation
Years of cost saving drives in UK organisations could be stifling businesses and damaging the reputation of procurement as the department responsible for it, suggests new research by Redshift on behalf of Wax Digital.

Only one in four procurement professionals said their department was ‘highly effective’ in the CPO Viewpoint study which questioned over 200 senior decision makers in procurement, finance, IT and sales and marketing. Other departments saw procurement’s effectiveness as even lower – just 12% in finance and 4% in sales and marketing deeming it at the top of its game.

Procurement is also accused of hindering business progress by ‘prioritising cost over value’ – and this is a criticism that even a third of procurement professionals levelled at themselves. 68% of procurement respondents admitted that they hinder other departments’ progress in one or more ways, with 86% in sales and marketing and 78% in IT agreeing.

Cost saving could also be holding back other areas of procurement value such as support for innovation. All departments surveyed agreed that procurement’s most common area of value was ‘overall cost reduction’ but in contrast ‘supporting innovation’ is the lowest area of value, cited by just one in ten surveyed.

Daniel Ball, director, Wax Digital, said:
“Inevitably, UK businesses and organisations have focused on cost cutting and had to take sharp measures for at least half a decade now, but this research suggests that doing by so they may have stifled business growth and innovation, as well as the performance of procurement teams which are critical to ensuring that supply chain partners and suppliers are readied to support this growth and delivering innovation collaboratively.”

While procurement is clearly seen as delivering some value to the business it’s more likely to be considered ‘necessary’ rather than ‘value adding’. Even a majority of procurement people hold this view at 52% compared to 46%. And only 28% in sales and marketing and 36% in IT see procurement as ‘value adding or critical’.

It also seems that other departments don’t want to let procurement loose on their most strategic spending areas – perhaps for fear of highly scrutinised ‘cost over value’ cuts. Across finance, IT and sales and marketing the areas of spend where procurement is planning to support these departments is totally at odds with the departments’ own spending priorities. For example, IT’s spending priorities for the year ahead are infrastructure (34%), security (34%) and enterprise software (22%), whereas procurement assistance is most commonly focused on devices (28%), and hardware (26%). Strikingly 22% in procurement could not cite any areas of IT buying that they were helping with.

Daniel Ball concludes:
“As the business landscape gains positivity it’s time for procurement to widen its focus on where it can deliver other areas of value to the business beyond pure cost savings.”