In this week’s Commercial Awareness update, we discuss business confidence after an uncertain three months, the relationship between inflation, living standards and demand, a Japanese-EU free trade deal and oil prices after the latest OPEC output figures.
1. Business confidence takes a hit
Confidence in the British economy has decreased sharply amongst some of Britain’s top executives, a survey published today by Deloitte reveals. 42% of chief financial officers (CFOs) have become less confident in the economy over the last three months, as the general election and uncertainties over Brexit take effect. There’s also worrying evidence that output may be slowing in the British economy, which appears to have contributed to this lowering of confidence. The Institute of Economics and Social Research found Gross Domestic Product (GDP) was up 0.3% last quarter compared to the previous year, but this was well below the predicted 0.6%. Industrial production also missed expectations, falling 1.2% in the three months to May – the pound fell 0.4% against the dollar on the back of these figures.
A Confederation of British Industry (CBI) lobby group has called for the government to stay in the single market and customs union until a deal with the EU has been finalised. The head of the CBI, Carolyn Fairbairn, said it was “impossible” for a new trade deal with the EU to be completed by March 2019, so has called for a “bridge” agreement to ensure British business has protection from Brexit uncertainty. This follows David Davis’ suggestion that Britain is pushing for a transition agreement while negotiating a deal with the EU.
While uncertainty continues, Liberal Democrat MP Sir Vince Cable has suggested Brexit may not even happen, due to the complexities involved and the disagreements within both the Conservative and Labour parties on how best to proceed. This outcome does seem unlikely, but if a major event was to occur, like the economy crashing, a rethink could be on the cards. Losing big business to the EU has been a key issue surrounding ongoing economic prosperity since Britain voted to leave and the French government yesterday announced a new series of measures designed to woo financial institutions away from Britain, including tax cuts for banks.
Questions to ask yourself… What can the government do to boost confidence in economy? Could Sir Vince Cable’s claim turn out to be correct?
2. What’s happening to inflation and living standards?
Living standards were lower last year than at any time since 2011, as inflation rose quicker than wages. A report from the Office for National Statistics (ONS) claims there was a 2% decline in disposable income in 2016, and prices increased 0.1% more than wages. Inflation is at the highest level it’s been for years at 2.7%, meaning living standards are likely to continue to decline. Food prices are a contributor to the cost of living and the former manager of Sainsbury’s, Justin King, suggested shoppers are “completely in the dark” about how Brexit will impact their weekly shop. Talking to BBC Panorama, he suggested the three benefits of the free trade within the EU – prices, quality and choice – will go backwards.
Increased inflation is likely to have a negative impact on demand, as consumer confidence and purchasing power decreases. However, rising inflation and less disposable income can also change demand, having a positive impact on some businesses. Last week, retailer Primark reported a boost in sales as the warm weather increased demand for their low-cost summer fashion. Credit Suisse estimates that like-for-like sales in the UK have risen 6%. This is in complete contrast to other large fashion retailers who are seeing their clothes sales squeezed, especially those on the high street.
Questions to ask yourself… How can the government take steps to boost demand in the economy? Should supermarkets be more transparent about price hikes?
3. Japan and EU outline a free trade deal
In international business news, the EU and Japan last week agreed an outline for a free trade deal after four years of negotiations. The Japan-EU Economic Partnership Agreement (JEEPA) is by no means confirmed, but the announcement shows progress in talks between the two parties. The deal would mean Japan reduces tariffs for European agricultural imports, which currently face average tariffs of 21%. The deal would actually remove 85% of tariffs on exports like beef, cheese, pasta and wine. On the other side of the deal, the EU would reduce tariffs on Japanese cars (currently 10%) over a seven-year period.
The significance of this latest announcement has been debated by commentators, with some thinking it could be political motivated. During the week of the G20 summit and in the wake of Donald Trump’s isolationist stance, this proposed trade deal is a demonstration of the appetite for global cooperation and free trade between nations. If this proposed deal comes into effect, the European Union and Japan could form a trading bloc of a similar size to the North American Free Trade Agreement (NAFTA), which is currently the largest free trade bloc – although this could change as Trump has outlined aims to renegotiate NAFTA.
Questions to ask yourself… Can Britain do better free trade deals once outside the EU? How will Trump’s isolationist policy impact the American economy?
4. Oil Prices Crash
After five years of international oil prices steadily rising, last week saw a crash as OPEC (the Organisation of the Petroleum Exporting Countries) released figures of recent oil supply in America. On Wednesday, the international oil price benchmark, Brent Crude, fell 4% in New York trading. This dip followed a report from the US regulators, which showed oil output in the US rose 1% to 9.34 million barrels per day. Last year, OPEC agreed to cut production levels in a bid to boost the oil price, but this appears to have had little impact as exports are still rising. In 2016, the oil price dipped lower than $30 per barrel, which was a key factor in OPEC’s decision to curtail supply.
As oil production has become easier and cheaper over recent years, supply has outweighed demand and prices have dipped, but is this trend set to continue? The Energy Information Administration (EIA) predicts not. Due to growing industrialisation and a world population of which will near ten billion by 2050, demand for oil will continue to increase. Therefore, based on this model, oil prices will steadily rise over the next few decades, no matter what advances are made in oil production.
Questions to ask yourself… Which industries benefit from lower oil prices? Is curtailing supply ultimately a short-sighted strategy?