In this week’s Commercial Awareness update, we discuss the state of the UK economy, the ride-hailing app challenging Uber, Just Eat’s merger, claims of market manipulation and the most profitable company in the world.
Is the UK heading towards a recession?
There are growing concerns that the UK is heading to a recession after data showed the economy contracted by 0.2% between April and June. It was the first quarter of negative growth since 2012 and was a surprise for many. The economy grew 0.5% in the previous quarter, so there has been a big drop off since the start of the year. Commentators suggest that earlier in the year, the economy was being propped up by manufacturers stockpiling ahead of the first Brexit deadline of 29th March. In this most recent quarter, this wasn’t required anymore, which could explain the decrease in manufacturing output and construction. The car industry also was forced into shutdowns in the past quarter, pausing the manufacturing of new vehicles.
A recession is defined as two consecutive quarters of negative growth (negative gross domestic product); Britain isn’t in a recession just yet and the forecasts suggest that next quarter the economy will grow again. However, with Britain’s future with the EU still up in the air, there could be another surprise dip for the economy. It’s not just Britain that is worried about a recession, as Germany saw industrial production fall 5.2% in the last year, and the service sector is also showing signs of weakness. Their economy contracted 0.1% in the quarter between April and June. Further afield, both New Zealand and Thailand dropped interest rates more than the markets expected in order to stimulate their economies. For New Zealand, it was their lowest interest rate ever, as they look to encourage people to spend more and borrow more to increase the flow of money in the economy.
There was some good news last week for Britain though, as wage growth hit an 11-year high. Currently, wages are growing at 3.9% annually and there are more people in work than ever before. With inflation - the rate at which prices rise - standing at 2%, on average people are getting a 1.9% increase in real terms. If people are in work, getting paid more and can afford more, it’s likely to breed confidence in the economy.
Questions to ask yourself... Is GDP or employment rates the better measure of economic prosperity? Can Britain avoid a recession if it goes for a no-deal Brexit on 31st October?
What to look at this week
It’s been a mixed week for two of the biggest competitors in the ride-hailing app sector. Uber’s stock fell to a record low and dropped 7.6% on last Monday alone after it announced disappointing results. Uber lost a staggering $5.2 billion in the last quarter, which put fresh doubt into the market as to whether it could ever make a profit. To make matters worse, their main competitor, Lyft, beat market expectations last quarter with a revenue of $867 million, compared to the forecast $809 million. Shares jumped 13% on the news. It had been a tough couple of months for the firm, whose share price had dipped to 16% lower than their value when the company went public earlier this year.
There’s strong competition between the two companies as they fight to gain increased market share, especially in their main market of America, which has led to price wars. In the past, both have cut margins to offer cheaper rides for customers, but they’ve also given drivers favourable deals to encourage them to join them. The key over the next few years is to work towards profitability without losing market share.
Just Eat and competitor Takeaway.com have agreed a deal to merge and create one of the largest global takeaway companies. The new company will be worth £9 billion, with Just Eat valued at £5 billion - a 15% premium on its share price last week. Both companies are facing increased competition from the likes of Uber Eats and Deliveroo, so this merger aims to cut their costs and offer a wider service. Just Eat is strong in Britain and Western Europe, while Takeaway.com has bigger presence in central European markets. The new company will be listed on the London Stock Exchange, with Just Eat taking control of 52% of the company.
The news has been welcomed by investors, with shares in Just Eat rising 22%, which is well above the price the deal is based on. Both Just Eat and Takeaway.com have acquired competitors in recent years and last year combined they delivered 360 million orders, worth £7 billion.
Burford Capital, the company that provides funding for legal action, has suggested there was evidence of “illegal market manipulation”, which led to their share price crashing last week. They claim that American short-sellers Muddy Water took actions to deliberately manipulate the share price for their own gain. Muddy Water announced a new short position on the stock (betting it would fall) and then the day later revealed a report which labelled Burford Capital as ‘arguably insolvent’ and criticised the management of the firm.
Burford suggests there was a spate of activity which resembles illegal methods for driving the share price lower. They claim that trading data shows an “unusual flood” of orders being cancelled shortly before Muddy Water announced the short position on Twitter. The Financial Conduct Authority (FCA) has said they are investigating the claims. In a two day period, Burford’s share price plummeted 65%, wiping almost £2 billion off the value of the business.
Questions to ask yourself... How can Uber start increasing their margins and become more profitable? What competitive advantage does Just Eat have over Deliveroo or Uber Eats?
The most profitable company in the world
It’s not Google, Apple, Microsoft or Facebook. It’s not even Amazon. Last week, the state owned oil company, Saudi Aramco, maintained their status as the most profitable company in the world despite a fall in profits. In the first six months of 2019, they made $46.9 billion in profit, but this represented a 12% dip compared to last year. Saudi Aramco paid out $46.4 billion in dividends during the period, which included $20 billion to their owner, the Saudi government.
The decrease in profits can be largely explained by a decrease in oil prices, which has been negatively impacted over the trade disputes between American and China. When Trump hinted at more tariffs on Chinese imports last week, oil prices dipped again. Oil companies want free trade and a prosperous economy, because this leads to more demand for goods and therefore more being produced, which requires more oil to be purchased.
Question to ask yourself... What can the oil producing countries do to increase the price of oil?
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