Central banks have their inflation-taming reputations on the line this week.
The Fed slowed the pace of its rises yesterday –
notching up interest rates by just 0.25 percentage points. While chair Jay Powell was still in battle mode (“we’ve got a long way to go”),
markets rallied off the back of his more upbeat tone.
The BoE adopted a similar tone today when it added a further
0.5 per centage points to interest rates. The
ECB followed suit with the same increase, though it struck a more hawkish tone.
European policymakers were not swayed by evidence of
slowing inflation. Core inflation remained stable at a record 5.2 per cent over the year to January and the Eurozone is proving more resilient than economists expected –
growing by 0.1 per cent in the back end of last year.
‘The world is not ready for the long grind ahead’
Some experts warn there is a
gap between investor expectations and economic data. Markets are betting that central banks will slow their pace of increases and, in the Fed's case, could even drop rates – something we saw play out yesterday after Powell’s comments.
But that ignores the evidence of persistent price pressures. If policymakers keep rates raised – or push them higher – the bond market rebound could come crashing down.
There's also the risk of recession. The eurozone is performing better than predicted and the IMF upgraded its global economic outlook for 2023 by 0.5 percentage points.
But Ruchir Sharma, chair of Rockefeller International, warns that the consensus view among economists – who are expecting a mild recession in the global economy that will start soon but not last long –
could be wrong.
"While the next downturn may take longer to hit, it is likely to take an unfamiliar shape, possibly not much deeper but more enduring, as stickier inflation forces central banks and government rescue teams to the sidelines," he writes. "The world is not ready for the long grind ahead."
Britain's 'insolvency dam' has burst
Pessimism is particularly acute when it comes to the UK. The
IMF predicted it will be the only G7 economy to fall into recession this year. The fund downgraded its October forecast – which expected 0.2 per cent growth over 2023 – to a 0.5 per cent contraction. Even Russia is expected to fare better.
Britain faces two problems –
inflation and low productivity growth rates. One quick fix is to boost the number of people looking for work, which has dropped since the pandemic. But persuading the over 50s back to their desks – or increasing immigration – are not easy levers to pull.
Businesses are faltering in the face of these headwinds with profit warnings and insolvencies reaching levels last seen in the wake of the global financial crisis.
Some 22,109 insolvencies were registered from UK companies last year – the highest number in any year since 2009. The construction, retail and hospitality industries were particularly affected, but some experts noted “the stress is now deepening and spreading to all sectors".
Profit warnings are also on the up. Warnings from UK-listed companies rose by 50 per cent last year, according to research by EY Parthenon, with rising costs noted as the biggest problem. Indeed half of last year's profit warnings were due to this.
"Cost pressures are passing through supply chains, business confidence is weak, and credit markets are tightening," said Jo Robinson, EY-Parthenon partner.
Shareholders may well be left longing for the dividends of last year. Fund administrators Link Group suggests
UK payouts are likely to drop by 2.8 per cent as margins are squeezed.
Movers and shakers
At Unilever activist investor Nelson Peltz is angling for more value.
The consumer goods company’s new chief executive, Hein Schumacher — formerly head of a Dutch dairy co-operative — joins in July. And there’s plenty to do as its growth, shareholder returns and valuation are all languishing. Our Lex writers suggest continuing to invest in marketing and divesting some of its food brands.
It’s all change at Shell too which is undergoing its second internal restructure in three years. New chief executive Wael Sawan announced plans to combine the gas business and oilfields in one division. The renewables and energy solutions businesses will also join the oil refining and marketing divisions.
“I believe that fewer interfaces mean greater co-operation, discipline and speed, enabling us to focus on strengthening performance across the businesses and generating strong returns for our investors,” Sawan said in a statement.
Risk, litigation and brevity
Any director interested in climate litigation may want to pay attention to the fate of Holcim.
Four residents of Indonesian island Pulau Pari have filed a compensation case against the Swiss cement giant to
hold it liable for its pollution and secure compensation for “climate damages”. They argue that people face losing their livelihoods due to rising sea levels and flooding, even though they have not contributed much to global emissions.
It’s also worth taking a look at a surprise court decision in the US too. A Delaware judge decided that
shareholders could sue McDonald’s former “global chief people officer”, David Fairhurst, for allegedly failing to try to prevent sexual harassment at the fast-food company. Its market value plummeted when former chief executive Steve Easterbrook was dismissed over a relationship with an employee in 2019.
The decision will ratchet up pressure for executives and boards to ensure they have the right systems and controls in place for workplace conduct.
And if cyber risk was not on the agenda already, recent attacks on the Guardian newspaper, Royal Mail, data group Ion and retailer JD Sports will ensure it’s firmly at the top now.
But from the end of March,
Lloyds of London will not cover systemic cyber risk, or the types of mayhem caused by state-supported cyber warfare. The move is prompting broader questions about this part of the insurance industry, writes business columnist Helen Thomas, with the UK even considering whether the government’s terrorism reinsurance scheme should cover this systemic risk.
And finally, does it feel like you are wading through War and Peace when you get an annual report? You aren’t alone.
Annual reports have grown to an eye-watering 95,000 words – or 173 pages – according to research from lobby group Quoted Companies Alliance. While disclosure to investors needs to be protected, the QCA wants regulators to take another look at reporting requirements and help smaller companies with the time and cost burdens.
