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In this week’s Commercial Awareness update we discuss the Bank of England’s new growth forecasts, Tesco’s Booker takeover, Trump rolling back financial regulation, vegetable rationing and the engineers who made the selfie possible.
1. Revised Bank of England growth forecast
Last week it was announced the Bank of England has revised its economic forecast for 2017 and now expect the economy to grow 2% - up from the previous prediction of 1.4%. The central bank has also forecasted lower unemployment and a slightly less sharp increase in inflation for the year ahead, as they react to further signs the public and business is dealing well with the impact of the Brexit vote. Despite this revised forecast, leaders of big firms believe Brexit is ‘already damaging business’. In a survey of senior executives from over 100 of the largest 500 companies in the UK, 58% felt the referendum was having a negative impact on their business.
In a rate setting meeting at the Bank of England, it was decided interest rates will be held at 0.25% and a programme of quantitative easing would continue. Quantitative easing is a process of creating money electronically, for the purpose of buying financial assets and inject capital into the economy. The Bank of England has committed to giving a further £20.7 billion to lenders, who have had profits cut by continued low interest rates. Regardless of the positive signs for the UK economy, it is unlikely the UK will see interest rate rises in the near future.
Questions to ask yourself… How will the markets react when the Government triggers Article 50? What are the potential problems of Quantitative Easing?
2. Tesco’s planned Booker takeover
Tesco stunned the grocery sector in January by announcing a plan to acquire wholesaler Booker in a £3.7 billion deal. The takeover has run into problems lately as the supermarket giant is struggling to convince the Competition and Markets Authority the deal is in the best interest of the customer. Booker is a cash-and-carry wholesaler supplying independent retailers and also owns the Londis, Budgens and Premier brands – shops which are independently owned but run as franchises. The deal would add 5,400 shops to Tesco’s network of small stores, but this could lead to Tesco having too much control of the grocery market in some areas.
Analysts suggest Tesco may be forced to sell over 600 stores nationwide, which are situated less than 500 metres from a Booker owned store. However, Tesco’s suggest Booker’s franchise network operates independently, playing down the potential problem surrounding competition. Lawyers from Freshfields Bruckhaus Deringer and Clifford Chance have been enlisted to provide expertise on the takeover.
Tesco owns 28.3% of the total grocery market in the UK and the Booker takeover could add a further 2% to this share. According to analysts at Bank of America Merrill Lynch, this deal could trigger a merger between Sainsbury and Morrison.
Questions to ask yourself… Will this takeover have a negative impact for consumers? Could the takeover cause problems for small shop owners?
3. Apple and Facebook post strong results
Facebook has announced another very strong quarter of revenue and profit, as they again beat Wall Street expectations in Q4 of 2016. The social media firm earnt $8.81 billion in revenue – a 51% YoY growth - and profits reached $3.57 billion. Facebook’s ‘stickiness’ and continuing growing is defying expectation, with 1.86 billion active users on the social network last quarter (a 3.9% increase compared to the previous quarter).
It was also an excellent quarter for Apple, as huge iPhone 7 sales over Christmas marked its strongest ever quarter. Their net sales in Q4 were up 3% compared to the previous year, which was helped by record revenues in their Mac and Apple Watch division as well. In 2016, Apple had experienced three quarters of declining revenue, so these figures were a welcome improvement for the tech giants.
Despite strong iPhone sales, Apple last week was overtaken as the world’s most valuable brand by Google, after five years at the top spot. Analysts calculate the brand-worth in the top company each year as part of the Global 5000 rankings. In the report, Lego took over Disney as the world’s most powerful brand. The biggest losers in the ranking were fast food chains, as they struggle to break their association with unhealthy eating.
Questions to ask yourself… Has Apple just experienced a Christmas boost or is this growth set to stay?
4. Trump to roll back regulation
Last week Donald Trump started the process of scaling back financial regulation by ordering a review into the 2010 Dodd-Frank act. One of Trump’s key election pledges was to roll back what he believes is excessive government intervention in finance.
What is the Dodd-Frank act?
Named after the Congressmen who campaigned for the act, it was created to rein in risky practices by banks and other financial companies, while ensuring the customer was given a fair deal. Its primary aim is to prevent another financial crisis like in 2008-09. The law reduced banks dependence on debt and made them create blueprints for handling future crises. It also led to the creation of the Financial Stability Council and the Consumer Financial Protection Bureau – the latter promotes higher levels of consumer protection.
Is deregulation a good thing?
Trump’s administration suggest the legislation has failed to achieve its goals and has hurt community banks, who have struggled to comply with a number of the new laws. They believe banks will now have better ability to set prices more efficiently, therefore benefitting the customer. Wall Street reacted positively to news of the review, with increases to the share price of leading bank – Goldman Sachs rose by 4%. However, many commentators are apprehensive about deregulation, as it increases the ‘too big to fail’ thinking returning, which prevented the finance sector forecasting the 2008 crisis.
Questions to ask yourself… Could deregulation be a positive thing for customers? Which sectors could be disadvantaged from less financial regulation?
5. Vegetable rations in supermarkets
Supermarkets have set limits on sales of iceberg lettuce and broccoli, after a harvest drought caused by poor weather in southern Spain. Tesco has stopped customers buying more than three iceberg lettuces, while you can’t buy more than three broccolis from Morrison. The aim is to restrict larger buyers, such as restaurants and caterers, so regular customers don’t lose out. Approximately 80% of the UK’s vegetables comes from southern Spain and the bad weather across mainland Europe has also affected contingency supplies from Greece and Italy.
Leading supermarkets are trying to boost supply by importing vegetables from America. However, this will cost significantly more and is likely to lead to increased prices for the customer. It’s reported that Tesco icebergs now cost 79p, up from 50p.
Question to ask yourself… Is the UK too reliant on foreign imports?
6. And finally... £1 million prize for engineers who made the selfie possible
The four engineers who created the technology which made the selfie possible have been awarded with the £1 million Queen Elizabeth Prize – the world’s top award for engineering innovation. Working in USA and Japan over many decades, they developed the imaging sensor technology used in all digital cameras and smartphones today. Their work made most film based photography redundant and made Skyping, instant digital photography and streaming digital films possible.
Question to ask yourself… How much impact has this invention had to the modern world?