In this week’s Commercial Awareness update we discuss the bond market, China’s economic climate, why many are predicting a global recession, British Steel, A level results and their impact on universities, and the most popular bank in the UK.
The markets and global prosperity
Last week the markets reacted negatively to an indication that a global recession could be on the cards, with many commentators suggesting investors were losing faith in the global economy. In recent weeks, there has been more demand for government bonds and gold. These are considered safer investments compared to buying equity in companies, whether through private investment or shares on the stock exchange. However, there were two key things which really sparked fear of a global recession.
Firstly, in the US last week, yield on long term 10-year government bonds is lower than those of the equivalent shorter term 2-year bonds. This means that demand for long term bonds is currently higher than short term bonds and therefore the price of long term bonds has risen. If the price of a bond rises, it’s yield will always fall. Normally, the longer the investment period on a bond, the more return you’ll receive as there is generally greater uncertainty over the long term - this is known as the yield curve. What happened last week was that the curve inverted, meaning short term bonds gave a better return than long term bonds, which tends to happen when investors aren’t confident in short term economic prosperity. The yield curve is a strong indicator of a coming recession and the last time it inverted was in 2007 - just before the financial crash. As a result of this, the American financial markets took a substantial hit on Wednesday, but did recover slightly towards the end of the week.
China’s economic slowdown
Secondly, data released last week shows that growth in the Chinese economy fell sharper than expected to a 17-year low. The trade war with America appears to be having an impact on business and consumer confidence. Industrial output fell from a 6.3% increase in June to a 4.8% increase in July when commentators expected it to be at 5.8% for July. Demand for China’s products has slowed, largely because of the trade tariffs imposed by America and the impact this has on confidence within internal markets too. Many expect the Chinese government to stimulate the economy by investing in infrastructure, property and other projects which will encourage the flow of money in the economy.
Questions to ask yourself... What can governments of large economies do to avoid a recession? What are the downsides of an investor buying government bonds?
Things to think about this week
A deal has been reached with the Turkish army pension fund (or Oyak) to buy British Steel, who are currently out of insolvency. Oyak has an investment arm, Ataer, that owns companies that produce about a quarter of Turkey’s steel. Therefore, adding British Steel to its portfolio is a logical step. Rescue talks between the steel producer and the British government recently broke down, but they reportedly received a number of bids. As it stands, they’ve accepted the Oyak bid and expect the deal to be finalised over the coming weeks.
British Steel employs 5,000 people, with 3,000 of those working on the Scunthorpe power plant. The deal will save a number of jobs and secure the future of steel in the UK, but Oyak has already hinted that there may be some job losses. The Scunthorpe location is much less productive than plants across Europe, so this will be a key focus for the new owners. Last year, it produced 2.8 million tonnes of steel but the aim will be to bring that up to more like 3 million tonnes. They will also look to work with the government to reduce the carbon footprint of steel production.
Which is the most popular bank?
A new official survey into customer satisfaction found that Metro Bank and First Direct gave the best service, while RBS were the lowest ranked for the second year in a row. 46,000 people took part in the survey and when asked whether they would recommend their bank to family or friends, 82% said they would for Metro Bank and First Direct, while only 46% would recommend RBS. It has been a tough year for Metro Bank after customers withdrew £2 billion of deposits in the six months leading up to June, which drastically slashed profits (£3.4 million from £20.8 million in pre-tax profits). Confidence took a hit when an accounting error led to them needing to take additional investment to cover potentially risky loans. This new survey will be welcome to Metro Bank but hasn’t done any favours for RBS. As a result of the customer survey, shares dropped 10% in the firm.
The survey also incorporated commercial services, with 17,000 small businesses asked about their banks. Swedish company Handelsbanken led the way again with an 85% satisfaction rating, while TSB were bottom. The major IT problems they experienced last year would have likely contributed to this rating.
A level results
Finally, A level results were released last Thursday with 1,000 of UK students receiving their grades and university places. The stand out headline is that the proportion of top grades (A* or A) has fallen to the lowest level since 2007 (25.5%). In terms of subject specific data, for the first time the number of girls taking science subjects took over boys and Spanish overtook French as the most popular language. Also, there were more students taking politics, which is likely to reflect an added interest in what has happened in American and British politics since 2016.
For university places, UCAS confirmed there was a slight dip of 1% in the number of students accepted onto degree courses, but they do expect a further 70,000 places to be offered through clearing. Universities are increasingly competing for students to join their university, especially after the government removed the cap on the students they could take. Having less students overall applying to university will only make it more competitive.
Questions to ask yourself... What can universities do to be more popular with students? How important is a banks online service (e.g. website and app) compared to their branches or phone lines? What measures could a company take to improve productivity?
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