UK factories plan price hikes; job cuts at Unilever and Royal Mail – business live

UK factories are planning to raise their prices by the most since 1977, fuelling the cost of living squeeze, after being hit by surging costs and shortages of skilled labour.

The CBI’s latest industrial trends survey has found that UK manufacturing sector continues to face intense cost and price pressures.

Firms reported that their average costs in the quarter to January grew at their quickest rate since April 1980, and they don’t see any let-up soon — with costs expected to grow at a similar pace over the next three months.

As a result, the balance of firms expecting to hike domestic prices this quarter, rather than lower them, rose to 66% – the highest reading since April 1977.

The export prices expectations balance was the highest since January 1980.

Rain Newton-Smith, CBI chief economist, warns:

“Global supply chain challenges are continuing to impact UK firms, with our survey showing intense and escalating cost and price pressures.

Manufacturers also raised prices sharply over the last three months, close to the previous quarter’s record pace.

Factories are also being hit by staff shortages — the share of firms saying skilled labour shortages will limit their output next quarter hit the highest level since October 1973.

Tom Crotty, group director at chemicals producer INEOS, says:

“It is no surprise that manufacturers remain acutely concerned about the impact of labour shortages on their business. Alongside this, manufacturers continue to face rising energy costs and broader inflationary pressures amid ongoing supply chain disruptions.

The government must work together with businesses to tackle these challenges as we begin to feel the effects of the cost-of-living crunch.

There was a small fall in the proportion of firms saying shortages of materials and components would limit growth, but it remained elevated by historical standards.

UK manufacturing output volumes in the quarter to January grew at a slower pace than in December, though growth remained firm compared with the long-run average.

Output increased in 10 out of 17 sub-sectors, with headline growth mostly driven by the food, drink & tobacco sub-sector. A majority of manufacturers expect output growth to increase in the next quarter.

Bloomberg are reporting that tech giant Nvidia is preparing to abandon its purchase of UK chip designer Arm, after struggling to win approval for the deal.

Here’s the story:

Nvidia Corp. is quietly preparing to abandon its purchase of Arm Ltd. from SoftBank Group Corp. after making little to no progress in winning approval for the $40bn chip deal, according to people familiar with the matter.

Nvidia has told partners that it doesn’t expect the transaction to close, according to one person, who asked not to be identified because the discussions are private. SoftBank, meanwhile, is stepping up preparations for an Arm initial public offering as an alternative to the Nvidia takeover, another person said.

The purchase — poised to become the biggest semiconductor deal in history when it was announced in September 2020 — has drawn a fierce backlash from regulators and the chip industry, including Arm’s own customers. The U.S. Federal Trade Commission sued to stop the transaction in December, arguing that Nvidia would become too powerful if it gained control over Arm’s chip designs.

The acquisition also faces resistance in China, where authorities are inclined to block the takeover if it wins approvals elsewhere, according to one person. But they don’t expect it to get that far.

The deal for the Cambridge-based chip designer has also faced scrutiny in the UK. In November, the government ordered an in-depth investigation that could result in the deal being blocked.

The “phase 2” investigation was ordered on public interest grounds, due to competition and national security concerns.

Related: Nvidia bid for Arm: UK orders competition investigation

European stock markets have pushed this morning, although anxiety over the Ukraine crisis and tomorrow’s Federal Reserve meeting are still high.

The FTSE 100 is now up 60 points, or 0.8%, recovering around a third of Monday’s fall.

Germany’s DAX (+1.2%) and France’s CAC (+1.4%) are also staging a moderate rebound.

The pan-European Stoxx 600 hits its lowest since October yesterday, meaning some stocks now look more attractive.

As Victoria Scholar, head of investment at interactive investor, puts it:

“Stocks are on sale and European traders and investors are bargain hunting. Demand for shares at discounted pricing is driving today’s mini rally after a cocktail of concerns around the Fed and geopolitical tensions sparked the worst day for European indices since June 2020.

Although Wall Street staged an impressive comeback into the close last night, swinging from losses to gains, the positive energy failed to permeate the Asian session which saw the Shanghai Composite shed more than 2.5%.”

Japan’s Nikkei also had a tough session, hitting its lowest levels in over a year.

Wall Street is expected to open lower after first sliding then recovering yesterday.

Investors are anxious to hear from the Fed chair Jerome Powell tomorrow – for details on how it plans to unwind its stimulus programme, and whether interest rates will probably rise in March.

The European Union’s securities watchdog has warned that the “gamification” of the financial markets has introduced a new generation of retail investors who may not be aware there are few protections in assets like cryptocurrencies, Reuters reports:

Gamification refers to using smartphones to trade, a trend which took off on Wall Street during the coronavirus pandemic with apps like Robinhood, and has spilled over into European markets.

“We want investors to engage more in financial markets and not just keep their money under the mattress,” Verena Ross, chair of the European Securities and Markets Authority, told a Forum Europe financial services conference.

But gamification also presents significant risks, creates speculation and leaves investors not realising there are protections when trading markets like cryptoassets, she said.

Social media has also allowed the spread of unauthorised trading advice and the bloc is due this year to revamp its “retail investor” strategy to reflect the rise of digital finance, Ross said.

“We are looking at how to raise awareness and warn investors what they are letting themselves in for,” Ross said.

The bloc has already proposed banning “payment for order flow” in the retail market.

More here: ‘Gamification’ in financial markets under scrutiny, says EU watchdog

[Payment for order flow is the controversial process where market makers pay a fee to receive retail investors’ orders. It gives them a better view of the market, and allows retail trading apps to offer zero-commission, but regulators fear it creates conflicts of interest.]

Royal Mail shares have jumped 5%, leading the FTSE 100 risers this morning.

But the company should be careful not to go too far with its cost-cutting programme, warns Russ Mould, investment director at AJ Bell.

Royal Mail’s latest update showed the firm is continuing to drive efficiencies with plans to cut a further 700 management jobs.

“The decline in parcel volumes year-on-year is only to be expected given tough comparative figures to beat as a year earlier nearly all retail stores were shuttered thanks to Covid restrictions, meaning demand for online orders soared.

“Perhaps more important is the fact the company maintained its share of a highly competitive market and it remains confident that, as we emerge from the pandemic, the amount of parcels being sent will remain permanently higher, thanks to a structural shift in the way people buy goods.

“It’s not all positive news. Royal Mail has seen a substantial increase in the number of complaints as deliveries have faced big delays in recent weeks.

“In fairness at least some of this can be attributed to a factor entirely out of its control as the Omicron variant left many of its workers sick and unable to work.

“In streamlining the business, Royal Mail needs to ensure it doesn’t go too far and diminish its operational capability or spark widespread industrial action, the threat of which has hung over the business in the past.

“Outside of the UK, Royal Mail’s GLS international parcel courier division continues to make solid progress, and perhaps at some point suggestions that this part of the group might be spun off could be revived.”

Germany still risks falling into a recession, despite the pick-up in business confidence this month.

Germany’s economy is expected to have shrunk in the final three months of 2021, and could stagnate, or worse, in January-March too.

Carsten Brzeski, global head of macro at ING, says:

The German economy went into hibernation at the turn of the year. When the first official estimates are released on Friday, it will require a small miracle for them not to show a contraction in the economy in the final quarter of 2021. And despite today’s improvement in sentiment, the risk of Germany being in an outright recession has not disappeared.

Even with some temporary relief from exports and industrial activity, the Omicron wave in Asia and the Chinese New Year clearly argue against a steep short-term improvement in supply chains. Consequently, global supply chain frictions, the impact of the current social restrictions on leisure, hospitality and retail, and the impact of high energy prices on private consumption do not bode well for the short-term outlook for the German economy.

However, such a technical recession would be mild and short-lived and is unlikely to harm the labour market, he adds [although the Ukraine crisis does also threaten the recovery].

On the contrary, we stick to our view that the German economy will stage an impressive comeback in the spring. Admittedly, geopolitical risks could still spoil the growth party but the end of social restrictions and significant relief in global supply chains should combine to give the German economy an enormous boost.

German business morale improved in January for the first time in seven months, in a sign that Europe’s largest economy could be turning the corner.

The IFO institute’s business climate index has risen to 95.7 this month from an upwardly revised 94.8 in December, with company bosses more upbeat about the outlook.

Ifo President Clemens Fuest said.

“The German economy is starting the new year with a glimmer of hope.”

Yesterday’s survey of German purchasing managers showed that the supply chain problems that have hurt factories for many months have started to ease.

Jobs are also being cut at Unilever.

The Marmite maker Unilever has just announced it plans to cut around 1,500 senior and junior management roles as part of a global restructuring plan.

The FTSE 100 company, known for brands such as Dove soap, Hellmann’s mayonnaise and Ben & Jerry’s ice-cream, announced the cuts as it comes under mounting pressure from a US activist investor and other shareholders to improve its performance.

Unilever employs about 150,000 people worldwide, including 6,000 in the UK and Ireland.

The chief executive, Alan Jope, has been under pressure for months to revive sales growth as the company missed its profit margin targets. In recent days it emerged that the US activist investor Nelson Peltz has built a stake in the troubled company.

Unilever says it will reorganises its operations around five Business Groups: Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.

The proposed new organisation model will result in a reduction in senior management roles of around 15% and more junior management roles by 5%, equivalent to around 1,500 roles globally.

Changes will be subject to consultation. We do not expect factory teams to be impacted by these changes.

Related: Unilever plans thousands of job cuts as investors increase pressure

Jope says the move will create ‘crystal-clear accountability for delivery’:

“Our new organisational model has been developed over the last year and is designed to continue the step-up we are seeing in the performance of our business. Moving to five category-focused Business Groups will enable us to be more responsive to consumer and channel trends, with crystal-clear accountability for delivery.

Growth remains our top priority and these changes will underpin our pursuit of this.”

Back in the markets, the Russian rouble has stabilised after a rocky Monday.

The rouble is 0.15% stronger against the dollar at 78.66, after hitting a 14-month low of 79.50 yesterday.

Overnight, US president Joe Biden insisted there was “total” unity among western powers after crisis talks with European leaders on how to deter Russia from an attack against Ukraine, as Downing Street warned of “unprecedented sanctions” against Moscow should an invasion take place.

Related: UK warns of ‘unprecedented sanctions’ against Russia as Biden says west is united on Ukraine

The government borrowed almost £17bn to balance its books last month – the fourth highest December total on record – as the public finances felt the impact of sharply rising inflation.

Rising tax receipts were partly offset by a surge in interest payments on the £2tn national debt, swelled by the emergency measures to support the economy over the past two years.

Prompting a warning from the chancellor of the need to reduce government borrowing, debt interest payments rose to a six-month high of £8.1bn after the sharp rise in inflation. Repayments on some of the UK’s borrowing is linked to the cost of living.

Despite the arrival of the Omicron variant, the Office for National Statistics said the UK’s budget deficit was £7.6bn lower at £16.8bn than in the same month a year earlier and came in below the £18.5bn expected by the City.

Tax receipts in December rose by £6.2bn compared with a year earlier, including a rise in corporation tax, stamp duty, income tax, VAT and fuel duty receipts.

Related: UK government borrows almost £17bn in December as inflation soars

In the City, shares have opened higher after Monday’s heavy losses.

The FTSE 100 index of blue-chip shares has risen by 50 points, or 0.7%, after shedding 196 points yesterday.

Rising inflation means the cost of servicing the national debt is likely to keep increasing in the coming months, undermining the recovery in the public finances, says Laith Khalaf, head of investment analysis at AJ Bell:

“Money flowing out of public sector continues to comfortably exceed the cash coming in, to the tune of £16.8bn in December. Despite the high figure, the dials are generally heading in the right direction from the peak of the pandemic, albeit not as quickly as the Chancellor might like.

“Central government tax revenues rose by 10% year on year, boosted by low levels of unemployment, even in the aftermath of the furlough scheme. Meanwhile expenditure came in lower than last December, but only just, because interest payments on government debt trebled compared to last December, to £8.1bn, a record for the month.

“That’s because higher inflation has pushed up the cost of government bonds that are pegged to RPI, costing the government £5.5bn in December 2021. With price rises still coming down the track, inflation is going to continue to bump up the coupons paid by the government to holders of RPI linked bonds, so this won’t be a flash in the pan.

“To add considerable fuel to the fire, interest rates are rising, which means the government will have to pay more interest on the £875bn of gilts held with the Bank of England. And if that were not enough, gilt yields have shot up, to over 1% on the 10-year bond, which means the government will also be paying more for freshly issued debt than before the pandemic.

The UK public sector finances fared better than expected in December following the identification of Omicron in November, says Richard Carter, head of fixed interest research at Quilter Cheviot:

Net borrowing sat at £16.8bn, down from £17.4 billion in November, and £7.6bn less than in the same month last year. Tax receipts were up to £68.5bn.

“As the impact of Omicron was not as bad as had been expected, growth was less negatively impacted than anticipated. This in turn increased the government’s tax take, therefore reducing the need to borrow, and resulted in a better debt to GDP ratio than might have been expected – 96.0% of GDP, 0.1% lower than in November 2021.

“These figures could have been worse, but the Omicron variant proved less impactful than many had initially feared. While the government did opt to move to its ‘Plan B’, the UK avoided major public health restrictions such as lockdowns and we have since returned to ‘Plan A’.

James Smith, Research Director at the Resolution Foundation, says chancellor Rishi Sunak has room to help cushion soaring energy bills:

“As we await further evidence of the impact of Omicron on economic activity, today’s figures suggest that the latest wave has not had a huge effect on the public finances so far, with borrowing in December broadly in line with the OBR forecast.

“Borrowing for the first nine months of the financial year is now £13 billion lower than the OBR’s October forecast, mainly reflecting the stronger-than-expected post furlough scheme labour market. This fiscal room for manoeuvre makes it inevitable that the Chancellor will set out a plan to deal with the cost of living crunch.

“With soaring energy bills set to push around six over families into fuel stress, a targeted package to limit the rise in energy bills is the top priority, with the majority of gains from a delayed National Insurance increase going to the richest fifth of households.”

Samuel Tombs of Pantheon Economics points out that December’s borrowing met the official forecasts, but that probably won’t stop the chancellor taking steps to ease pressure on households:

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

UK government borrowing fell in December thanks to a rise in tax receipts, despite a jump in the cost of repaying the national debt.

Public sector net borrowing, excluding state banks, dropped to £16.8bn last month, less than expected. That’s £7.6bn less than in December 2020, as the economy recovers from the impact of the pandemic.

It’s the fourth-highest December borrowing since monthly records began in 1993 (the UK borrowed more in both December 2009 and 2010 during the economic downturn following the global financial crisis).

Tax receipts rose by £6.2bn year-on-year, including a rise in corporation tax, stamp duty, income tax, VAT and fuel duty receipts.

Government spending fell by £1bn, as the furlough job protection scheme and support for self-employed workers wrapped up last autumn.

Borrowing so far this financial year is still running below forecasts. The UK has now borrowed £146.8bn since April, £129.3bn less than a year ago and £12.9bn less than the official Office for Budget Responsibility forecast.

© Provided by The Guardian
UK public finances to December 2021 Photograph: ONS

© Provided by The Guardian
UK public finances to December 2021 Photograph: ONS

That could intensify calls for the government to make a dramatic U-turn on its planned national insurance tax increase, as the cost of living crisis worsens.

Yesterday, former Conservative cabinet minister David Davis threw his weight behind calls for the tax increase due to come in from April to be scrapped.

Related: Scrap national insurance rise, says ex-minister David Davis

However, the interest payments on UK government debt tripled year-on-year in December, due to rising inflation.

Interest payments on central government debt hit £8.1bn in December 2021, a December record and £5.4bn more than in December 2020. That’s due to the jump in the RPI inflation rate, which pushed up the cost of repaying index-linked gilts (government bonds, whose interest rate is fixed to RPI).

Overall, the UK’s national debt was £2,339.9bn at the end of December 2021 or around 96.0% of gross domestic product — the highest ratio since March 1963 when it was 98.3%.

© Provided by The Guardian
UK public finances Photograph: ONS

Reaction to follow…..

Also coming up today

Global stock markets remain on edge, after a dramatic day’s trading on Monday.

Asia-Pacific markets have dropped, amid fears that Russia could invade Ukraine and worries that the US Federal Reserve would wind down its support for the economy faster than expected.

European markets slumped yesterday, but after joining the rout, Wall Street staged a rapid late recovery to finish slightly higher.

Related: US stock markets see another wild day amid concerns over Fed and Ukraine

Michael Hewson of CMC Markets says:

Yesterday’s declines in European markets had more to do with events on the Ukraine, Russia border than with any other factors that have dominated sentiment over the past two weeks.

It appears that the penny has finally dropped with financial markets that events in eastern Europe have the potential to get even worse, after NATO announced it is putting additional ships and aircraft on standby for mobilisation, and that the US is considering sending troops to shore up its Baltic defences, in response to requests from the likes of Estonia for a greater US presence to deter a potential Russian escalation.

European shares are expected to open higher today, but the New York market is currently forecast to drop when it reopens. More volatility ahead.

The agenda

• 7am GMT: UK public finances for December
• 9am GMT: IFO survey of German business climate
• 11am GMT: CBI’s industrial trends survey of UK manufacturing
• 3pm GMT: US consumer confidence report for December

On the public finances, Chancellor of the Exchequer, Rishi Sunak says:

“We are supporting the British people as we recover from the pandemic through our Plan for Jobs and business grants, loans and tax reliefs.

“Risks to the public finances, including from inflation, make it even more important that we avoid burdening future generations with high debt repayments.

“Our fiscal rules mean we will reduce our debt burden while continuing to invest in the future of the UK.”