Britain is weathering the worst cost-of-living squeeze in memory better than indicated by dire projections for a catastrophic recession.
Read more: World Economic Forum 2023 summit kicks off at Davos on Jan 16 | 10 top points
Real-time indicators and surveys point to the health of consumer spending and business investment. They suggest a deep recession is unlikely following official figures that showed surprisingly strength in both October and November.
An Institue of Directors survey showed the number of executives planning to increase invesment in the next year outweighed those anticipating cuts, with 5% set for “much higher” spending.
The data along with softening inflation and falling energy costs are a boost for Prime Minister Rishi Sunak’s government, which is struggling to contain the fallout from crippling strikes and plummeting disposable incomes. It also complicates the Bank of England’s calculations on how quickly to raise interest rates.
For months, the central bank has projected that the economy had already tipped into a recession in the second half of last year. It expects no growth until 2024, when Sunak is likely to fight another election.
Friday’s figures from the Office for National Statistics showed the economy grew slightly in two of the final three months of 2022, meaning a recession probably won’t start until this year at the earliest. While the UK still is projected to have the worst and longest slump of any Group of Seven nation, there’s signs the downturn may be less protracted than feared.
Read here: World Bank warns global economy could tip into recession this year
What Bloomberg economics says
“The current downturn may be shallower than we had initially expected. That won’t matter much for the Bank of England’s next policy decision — the committee is laser-focused on inflationary pressures. It could, however, carry more bearing further out. If the economy doesn’t weaken enough to cool the labor market, the BOE may be forced to do more.”
Data due out next week are likely to show that companies kept hiring in December, bidding up wages for workers at a historic pace. Economists surveyed by Bloomberg also expect inflation will tick down further from 10.7% in November and that retail sales are likely to have rebounded in December.
Industry groups led by Make UK and the Institute of Directors say British factories and small businesses still plan to plow investment into the economy this year. That’s despite recession warnings and dismal confidence readings.
“What we found was, even though you’ve got those difficult challenges at the moment, there are some green shoots,” said Bhavina Bharkhada, head of policy and campaigns at Make UK.
Make UK’s survey this week showed that manufacturers’ investment plans have held up in recent months, with executives planning to pump money into new products and energy efficiency. More than two-thirds of factories are pumping investment into product development and training staff, while over half are spending to boost energy efficiency.
Kitty Ussher, chief economist at the IOD, said there’s a “marked” difference in the way business leaders felt and how they were acting. While sentiment is near rock bottom, investment intentions are near levels last seen in 2019, before the pandemic hit, according to the latest survey from the group that represents company executives.
“In 2019 confidence was pretty low, but you also had investment intentions pretty low as well,” Ussher said. “They correlated really well. What’s really noticeable at the moment is confidence is as bad as the beginning of lockdown, yet the economy is fully open.”
Read here: World economy headed for a recession in 2023: Researcher
The IOD’s surveys indicate business leaders are still alarmed about high levels of inflation, which have largely been caused by sky-high energy prices. Ussher thinks optimism could grow again this Spring so long as inflation eases in line with the BOE’s forecasts and the situation in Ukraine doesn’t deteriorate.
Shoppers also appear to be withstanding soaring energy and grocery bills, shaking off a historic shock to their disposable incomes. Richer households that account for the lion’s share of spending haven’t cut back as much as poorer ones.
Credit and debit card data showed the strength of demand in recent weeks along with an easing of financial conditions, according to Panmure Gordon. Stock prices have risen while market interest rates and mortgage costs have fallen in the past quarter with Panmure’s own financial conditions index easing back to +0.4 after soaring from -0.5 to +0.7 in the first 10 months of 2022.
Retailers including Marks & Spencer Group Plc and Tesco Plc, have reported strong Christmas sales, an indication that households are still opening their wallets. Consumer confidence has also begun to climb away from record lows.
Card spending in late 2022 outperformed 2021 levels, said Simon French, chief economist at Panmure Gordon. Households are enjoying a tax break and support for natural gas and electricity bills that’s among the most generous in Europe.
“There’s a risk of a hangover in the first half of the year,” French said. “There’s the risk the jobs market and the property market lean in against what has been a near term outperformance. I’m still thinking there will be a recession, albeit a much shallower one than the Bank of England and Office for Budget Responsibility saw.”
Growing optimism over the growth outlook for 2023 will bolster the case for those policy makers at the Bank of England arguing that more tough action will be needed to tame double-digit inflation. Markets currently expect the Bank of England’s benchmark lending rate to peak just below 4.5%. Investors are paring their bets on significant increases despite signs of resilient demand.
Read here: One-third of world economy to be in recession: IMF chief’s dire warning
A stronger economy could keep inflationary pressures higher even as the squeeze on households is eased by the downward trend in natural gas prices. City of London forecasters have upgraded their expectations for UK growth in the latest survey by Bloomberg. In the new forecasts, economists expect a 0.9% contraction in 2023, 0.1 percentage points better than the previous month.
“There’ll come a point in the Spring when the heating gets turned off and there’s a quite a big debate about whether the Bank of England should keep raising rates,” Ussher said. “The issue then for the Bank of England is to work out whether the rise in optimism is a problem.”
‘Rationalise corporate tax rates’: US group’s appeal to govt ahead of budget
Ahead of the annual budget presentation, an India-centric top US strategic and business advocacy group has urged Union Finance Minister Nirmala Sitharaman to simplify and rationalise direct and indirect taxation system in India, a move it believes would increase the confidence of global investors and yield greater foreign direct investment.
Click here for full coverage of Union budget 2023
Direct taxes can be in the form of income tax, capital gains tax or securities transaction tax, while indirect taxes such as GST, Customs Duty or VAT are levied on all end-consumers to buy any goods or services.
“Rationalise corporate tax rates for foreign companies,” said the US-India Strategic and Partnership Forum (USISPF) in its submission to the finance ministry ahead of the annual budget presentations on February 1. It said that the rate for foreign companies, including banks be reduced to bring parity and sought to rationalise tax for new manufacturing companies.
Urging India to simplify capital gain tax reforms, USISPF sought harmonising holding periods and rates of different instruments.
“Reiterate India’s commitment to the global tax deal,” it said and urged the Union Finance Minister to extend the concessional tax regime to Foreign Portfolio Investment (FPI) from investment in securities.
USISPF has also suggested tax incentives to specific sectors like renewable energy and R&D investment in the health sector.
Among the Forum’s recommendations include advocating for a stable and predictable tax environment, improving the ease of doing business environment, rationalisation of the cost of doing business, and rationalisation of tax rates and tariffs.
On indirect taxes, the USISPF sought clarification on customs duty exemptions provided to oil and natural gas companies, reduction in customs duty rates for x-ray machines from 10 per cent to 7.5 per cent and providing customs duty exemption on all items imported by specified research and development units.
USISPF urged the finance minister to roll back the customs duty increase on nutritional products considering the importance and significance of the product and encourage the availability of scientifically designed nutritional food in India.
Among its recommendations on customs tariffs and duties and customs, processes include addressing ambiguities in the customs tariff act on telecom products, an extension of concessional customs duty to advanced biofuel projects and strengthening the process on the ground with respect to trade facilitation schemes like CAROTAR and Faceless Assessment.
LIC doubles down on Adani amid Hindenburg’s fraud claims
India’s largest life insurer is plowing more money into Gautam Adani’s flagship unit, undeterred by a short seller’s fraud allegations that wiped out more than $50 billion of the conglomerate’s market value in two sessions. State-controlled Life Insurance Corp. of India is spending about 3 billion rupees ($37 million) as an anchor investor in a $2.5 billion new share sale by Adani Enterprises Ltd., according to a filing. The investment would add to its current holding of 4.23%.
Also Read | LIC, SBI savings at risk amid Hindenburg vs Adani? Here’s what banks said
LIC’s investment signaled its vote of confidence in Asia’s richest man and his beleaguered group on Jan. 25, which is facing its toughest test yet after US-based Hindenburg Research in its report earlier this week characterized its meteoric rise as “the largest con in corporate history.” LIC is among 33 institutional investors coming in as anchors in the FPO, along with names such as Abu Dhabi Investment Authority and Al Mehwar Commercial Investments LLC.
While the amount Mumbai-based LIC is investing is relatively tiny — considering it has almost 43 trillion rupees of assets under management at LIC — it marks a contrarian position to other domestic financial institutions that have little to no Adani investments. It also comes in the face of a contagion that hit stocks exposed to Adani Group, including LIC that plunged the most in more than a month on Friday in Mumbai.
“LIC thinks contrarian,” said Arun Kejriwal, founder of Kejriwal Research & Investment. “It has always minted money whenever there is market volatility. It doesn’t receive money for short duration. It acts as long-only fund.”
Also Read | Gautam Adani: Asia’s richest man in the eye of a storm
An email and text messages sent to the LIC chairman seeking comments on its Adani Group investments were not immediately answered.
With over 250 million policy holders across India and assets under management as large as the nation’s mutual fund industry, LIC is among India’s systemically most important institutions. Its exposure to the Adani Group, known to be closely aligned to Prime Minister Narendra Modi’s development goals, is also symbolic of the tycoon’s political clout.
LIC is an investor in five Adani companies, with stakes ranging from 1% to 9% that was worth a total of 722.68 billion rupees on Jan. 24 — just before the Hindenburg report was published.
No other Indian insurance company has any significant holding, as per December 2022 data filed with stock exchanges. Most mutual funds have largely stayed away from the group, despite some wild rallies seen by some of the stocks. Adani Enterprises for instance, surged over 1,900% in the last five years, trumping even the likes of Elon Musk’s Tesla Inc.
The high exposure of state-backed financial institutions “has implications for financial stability” and for the millions of Indians “whose savings are stewarded by these pillars of the financial system,” Jairam Ramesh, a lawmaker with the opposition Indian National Congress party, said in a statement Friday.
The sell off triggered by Hindenburg’s report may now be adding more weight to such concerns. The rout deepened Thursday, with some units like Adani Green Energy Ltd. and Adani Total Gas Ltd. tumbling by their daily limit of 20%. Adani Enterprises fell 19%.
The short seller has alleged that Adani Group was involved in “brazen” market manipulation, accounting fraud, used offshore shells for money laundering and siphoned from listed companies. The conglomerate has dismissed the report as “a malicious combination of selective misinformation and stale, baseless and discredited allegations.” It said it’s also exploring legal action.
Last week, Adani Group Chief Financial Officer Jugeshinder Singh acknowledged the lack of interest shown by domestic institutional investors.
“We understand mutual funds missed Adani growth stock rally,” he said at a press briefing. “We should have communicated to mutual funds.”
LIC, SBI savings at risk amid Hindenburg vs Adani? Here’s what banks said
As the shares of Indian billionaire Gautam Adani faced a bloodbath on Friday following a report by a US investment firm claiming it had committed “brazen” corporate fraud, concerns have been raised over its implications for financial stability and savings of crores of Indians in financial institutions such as Life Insurance Corporation (LIC) and State Bank of India (SBI).
The Congress party called for an investigation into the allegations made by Hindenburg Research and said it may have exposed India’s financial system to systemic risks “through the liberal investments in the Adani Group made by strategic state entities like LIC, SBI and other public sector banks”.
Jairam Ramesh, Congress general secretary in charge of communications, said in a statement that the Hindenburg report demands a response from the Congress party since the Adani Group is “no ordinary conglomerate” and has been “closely identified with Prime Minister Narendra Modi since the time he was Chief Minister of Gujarat.”
“Furthermore the high exposure of financial institutions such as the Life Insurance Company of India (LIC) and the State Bank of India (SBI) to the Adani Group has implications for financial stability and for the crores of Indians whose savings are stewarded by these pillars of the financial system (sic),” Ramesh said.
“These institutions have liberally financed the Adani Group even as their private sector counterparts have chosen to avoid investing because of concerns over corporate governance and indebtedness. As much as 8 per cent of LIC’s equity assets under management, amounting to a gigantic sum of ₹74,000 crore, is in Adani companies and comprise its second-largest holding,” the statement added.
Also Read | For Hindenburg Research, Adani Group is a man-made disaster in the making
CPI(M) leader Sitaram Yechury said if the allegations are proven correct it will “destroy lives of crores of Indians who park lifelong savings in LIC & SBI.”
As Friday witnessed a sharp fall in shares of group companies and the lenders that have exposure to it, some of India’s leading public sector banks said their exposure to the Adani Group was within the limits prescribed by the Reserve Bank of India. RBI allows for no more than 25% of a bank’s available eligible capital base to be exposed to any one group of connected companies.
“There is nothing alarming about our Adani exposure and we don’t have any concerns as of now,” Dinesh Kumar Khara, chairman of country’s largest lender State Bank of India, told Reuters.
Khara said the Adani Group hadn’t raised any funding from SBI in the recent past and that the bank would take a “prudent call” on any funding request from them in the near future, reported Reuters.
SBI has reached out to the company for clarification and the board will take any decision on the bank’s exposure to the group only after that, reported Reuters quoting an unnamed official.
An official at the state-run Bank of India said the loans to the Adani group were within permissible limits.
“Our exposure to the Adani Group is below the large exposure framework of the Reserve Bank of India,” Reuters quoted an unnamed executive at the Bank of India as saying.
“Till last month, the Adani Group’s interest payment on loans has been intact.”
Bank executives at two other private lenders said that they were not yet in “panic mode” but being watchful, according to the report.
The Adani Group comprises the flagship Adani Enterprises Ltd, as well as Adani Ports and Special Economic Zone Ltd, Adani Power Ltd, Adani Green Energy Ltd and Adani Transmission Ltd.
The ports-to-energy conglomerate said it was exploring legal action against Hindenburg Research calling the report “maliciously mischievous”. Hindenburg responded that Adani had ducked the issues its research had raised and instead resorted to “bluster and threats”.
“If Adani is serious, it should also file suit in the US,” the firm said in a statement. “We have a long list of documents we would demand in a legal discovery process.”
(With inputs from Reuters)
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