March News Update

Exiting recession
Britain has barely limped out of recession, failing to hit its 0.4% growth target but exiting technical recession by growing 0.1% between October and December 2009. It is the last major economy to emerge from the downturn and there are fears that it could yet go back in to recession, further hurting the pound. Mark O’Sullivan, director of dealing at foreign exchange company Currencies Direct says, “It is a fact that markets feed on fear and greed and if we see confidence in the UK’s ability to stimulate growth slip once again, then the pound could be in for nothing short of a good hiding.”

The resignation of Financial Services Authority chief executive Hector Sants has raised speculation that he jumped before he was pushed owing to the fact that the Conservative Party – tipped as the likely winners of the impending General Election – would look to revert FSA powers to the Bank of England, something that Sants was loath to sanction. Liberal Democrat shadow chancellor Vince Cable says the resignation plunges the FSA into a great deal of uncertainty.

Despite evidence that the UK economy is now out of technical recession, energy provider npower is warning that out of date financial records could prolong financial instability for many UK businesses. This is likely to impact on credit ratings, reducing access to finance and essential supplies. Companies House records can be anything from 12 to 18 months out of date, which means that a company’s financial viability will be judged on its performance mid-recession, irrespective of how well it is doing now.

Quantitative easing has been stopped following other western European central banks’ strategies, after the Bank of England’s Monetary Policy Committee voted unanimously against continuing it. Central bankers have maintained ultra-loose monetary policy for a year in a bid to loosen credit and spur economic growth, according to rating agency Moody’s. Increased inflationary risk was said to be behind the move.

Inflation rose to 3.5% in January, according to the Office for National Statistics. The rise was as a result of petrol price increases and VAT returning to 17.5% in January. Mervyn King, governor of the Bank of England has written to the chancellor to reiterate the Bank’s forecast that the rise is a temporary surge in inflation, and is anticipated to fall to the target in the second half of 2010.

The UK trade deficit has widened more than anticipated to £7.278m after imports from non-EU countries rose at the fastest rate since March 2008. This will reinforce the possibility of a double-dip recession, says Mark Bolsom, head of UK trading desk at Travelex. “We crawled out of recession in the last months of 2009 and lower export volumes are not going to help push our GDP into a more robust and sustainable position.”

Economic recovery looks increasingly shaky following news that the number of people claiming unemployment benefit rose in January 2010. According to the Office for National Statistics, the number rose by 23,500 during the month, raising the total count to 1.64m. That is the worst figure since April 1997. The number of people out of work for more than a year also rose to 663,000, up by 37,000 in the three months to December 2009.

Business finance
SMEs have sourced £45bn from alternative sources of finance over the past 24 months. According to research from CreditPal, SME owners have been forced to make sacrifices such as selling private assets or relying on friends and family for emergency finances, instead of receiving funding from traditional financial institutions for bank loans and overdraft facilities. On average, each SME raised capital of £66,624 over the past two years.

Meanwhile, UK SMEs trading overseas are missing out on more than £1.7bn a year by remaining with their current banks and not shopping around for more competitive quotes on foreign exchange transactions, according to Moneycorp. Mark Deans, dealing manager at Moneycorp says, “Finance directors should start exploring other, cheaper options to provide a better service – for considerably less money.”

Research by the Institute of Directors involving more than 1,000 company directors reveals that banks have turned down almost 60% of businesses that apply to them for loans, forcing those businesses to fund themselves with credit cards. The survey contradicts claims made by banks that they were meeting lending demand. Of equal concern is the delivery of promised government support through the Enterprise Finance Guarantee.

There is a distinct misconception between the expectations of more than 100 business leaders at the top 200 FTSE companies over their finance functions and the role the functions actually perform, according to the results of a new study by PricewaterhouseCoopers. Some 80% of participants say they are dissatisfied with the level of management information they receive, leading CEOs to call upon their finance functions to provide more meaningful analysis and forward looking data.

Barclays has posted record annual profits of £11.6bn for 2009, 92% ahead of 2008 figures. The gain was attributed to its investment banking arm and the sale of part of the business last year specifically to raise funds. Chief executive John Varley and president Bob Diamond will forego their bonuses.

BNP Paribas is set to fork out £434.7m in bonuses for its 4,000 bankers. Staff in London and Paris will earn around £108,000 in bonuses. BNP Paribas is implementing new bonus policies for its investment bankers, which it says reflects a new “willingness to exercise restraint”. It adds that, “In this new environment, the group intends to promote the need for consistency between the actions of the employees in question and the company’s long-term objectives, in particular with regard to risks.”

Pensions crisis
BT shares plummeted despite a surge in profits after reporting that its pension deficit had hit £9bn and the regulator expressed concerns about its recovery plan. The group is set to make payments to cover the deficit starting at £525m a year on as part of a 17-year plan which began in 2009.

The UK arm of Reader’s Digest has gone in to administration, putting 117 jobs at risk. The decision was made in the wake of failed talks between the company’s US parent group and the UK’s Pensions Regulator. The two sides couldn’t reach a conclusion on how to pay a £125m deficit in its UK pension fund. Reader’s Digest had agreed a deal with the Pension Protection Fund to pay off a small part of the deficit but the regulator slashed any hope of this idea materialising.

Retail
New Look has shelved plans to float on the London Stock Exchange. This is the second time the organisation has bailed on its IPO, after it cited unfavourable markets as its reason for pulling out. However, “institutional investors have privately expressed doubts about New Look’s financial structure”, according to The Times. The company joins a list of other businesses that have also recently shelved IPO plans, namely Merlin – owners of Alton Towers and Madame Tussauds – and Travelport.

Insolvency
Insolvency statistics for Q4 2009 show there were 4,566 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales. This was a decrease of 1.7% on the previous quarter and a decrease of 1.1% on the same period a year ago. Alan Tomlinson, partner at insolvency practitioner Tomlinsons, says the reduction was attributable to businesses “developing strategies for dealing with the recession and the more tolerant attitude of the HM Revenue & Customs. In addition, there were 35,574 individual insolvencies in England and Wales in Q4 of 2009.

This was an increase of 24.9% on the same period a year ago. Commenting, Alec Pillmoor, head of personal insolvency at Baker Tilly, says the situation could worsen because of the predicted increase in interest rates and reductions in public sector spending.