In this week’s Commercial Awareness update, we discuss how austerity could be ended, inflation, Uber’s IPO, Tesla’s record year and ASOS flexing their muscles abroad.
What would it take to end austerity?
The budget is to be announced next week with Chancellor Philip Hammond ready to set out the country’s financial plan for the new financial year. The government faces a difficult road ahead, with no apparent breakthrough in the post-Brexit trade deal with the EU, rising consumer debt and competing priorities. At the party conference just a few weeks ago, Theresa May promised to “end austerity”, but the Conservative government has also previously committed to eliminating the deficit. Is it possible to do both? According to the Institute of Fiscal Studies (IFS) the Chancellor will need to find an extra £19 billion to invest into public services per year to put a stop to austerity. The deficit (the difference between government expenditure and what it collects) is at its lowest point since 2002, but to fund an end to austerity would likely mean increased borrowing. The budget deficit in September stood at £4.1 billion, which is £800 million less than September 2017 and lower than the £4.5 billion that commentators expected.
If the government doesn’t increase borrowing, the IFS has said there would need to be “substantial” tax increases to fund public service expenditure. The problem is that tax rises are politically unpopular and, at a time in which the government is weak, it’s not a decision they will want to take. For corporation tax, Britain is actually likely to cut rates to encourage business investment in the UK post-Brexit. May has pledged to have the lowest rate of corporation tax of any country in G20.
Growth in the UK is key if Britain is going to end austerity and also cut the deficit. Better-than-expected growth in the economy will mean that the government will have more money to spend and also gives the Chancellor the confidence to pursue a bolder financial strategy. Currently, growth is at its lowest for years and the forecast doesn’t look strong for the coming years - analysts point to Brexit uncertainty and signs of a new global recession for this lack of confidence.
Looking ahead to the budget
The budget is due to be announced next week. It will outline the tax and spending plans for the financial year starting in April 2019. Brexit will be a key theme, but it is difficult to budget due to the lack of certainty. It is likely that funding for NHS and Universal Credit will be major parts of the speech, while there is potential for tax hikes on fuel, alcohol and cigarettes.
Some good news for the economy was that inflation fell to 2.4% in September, with falling food prices being a vital factor in the drop. In August it was at 2.7% and economists had expected a drop by 0.1% for the month. The greater drop eases pressure on the Bank of England to raise interest rates and also means consumers will have more disposable income - new figures show that wages are currently rising 3.1%. In September, the demand for food dropped 1.5% as the strong summer for British supermarkets came to an end. The whole retail industry saw a drop of 0.8% in the month, which is putting increased strain on the high-street.
Questions to ask yourself... Are there signs the world is heading for a global recession? What's a more important priority for Britain at this moment - remove the deficit or increase public spending? What are the downsides of lowering corporation tax?
Companies to watch
Uber looks set to complete one of the biggest Initial Public Offerings (IPOs) ever next year with the company likely to be valued at $100 billion - some have even said it could be as high as $120 billion. A number of banks are bidding to take the firm public at this valuation, with Morgan Stanley and Goldman Sachs looking most likely to take leading roles. It will be interesting to see what the market appetite is for the ride-hailing app, which currently runs at a loss, especially as Uber’s closest rivals, Lyft, plan to float on the stock exchange at a similar time. Lyft is expected to be valued at $15 billion, with JPMorgan Chase & Co taking a leading role in the public offering.
2018 has been a big year for IPOs with 173 of them raising $45.7 billion - almost 50% up on the previous year. However, 2019 looks set to be even bigger with the two ride-hailing apps leading the way. Experts believe a number of other big tech companies could float on the stock market next year, with Slack, Postmates and even Airbnb reportedly thinking of taking the step.
After a rocky past few months for Tesla and their CEO Elon Musk, there was some good news last week as they sold 69,925 vehicles in the third quarter. The electric car startup outsold Mercedes-Benz, who invented the concept of the car 132 years ago. After being bugged by delivery issues, this quarter saw a turnaround with 83,500 vehicles dispatched to customers. Musk suggested that profitability would be possible in 2019, given the new figures. In light of these, Tesla’s share price rose 4.9% on Tuesday trading.
Despite this big quarter for sales, Elon Musk’s future is far from secure. The US Securities and Exchange Commission has filed a lawsuit against him for securities fraud after he tweeted about a plan to take Tesla private. The outcome of this will go a long way in deciding his future, with potential punishments including not being able to be a director of a company for a number of years.
British online fashion retailers, ASOS, saw strong sales growth for their 2018 financial year, announcing a 26% uplift in revenue and 28% increase in profit. It made £2.35 billion this year, compared to £1.88 billion for the previous year. The sales in Europe did particularly well, helped by a weakened pound compared to the euro - making clothes more affordable for customers and helping ASOS to increase its profits. The results pleased shareholders and the news encouraged the share price to rise 14%. In recent months, ASOS’s share price has dipped, so this was welcome news for the online retailer.
Questions to ask yourself... What are the advantages of being a publicly listed company? How important is Elon Musk's profile to Tesla? Should ASOS think about physical stores?
We’re delighted to be partnered with Hogan Lovells for the Commercial Awareness updates in October. They are a top global law firm combining a unique balance of ambition and approachability with over 2,500 lawyers working in over 47 offices. They deliver practical solutions to prestigious clients and have a dynamic working culture where the ambition of their trainee solicitors is supported to ensure their success.