In this week's Commercial Awareness Update, we discuss the Bank's decision on UK interest rates, China and Italy's new infrastructure plan, Next's yearly sales and Ford's new expansion.
UK interest rates on hold
The Bank of England announced this week that it would keep interest rates on hold, while Brexit uncertainty continues. The Bank’s Monetary Policy Committee (nine members who are responsible for this decision) voted unanimously, so rates will stay at 0.75%. Interest rates were dropped to 0.5% in 2009 from 5% a year earlier as the Bank aimed to stimulate the economy after the financial crisis. If interest rates are low, borrowing money is cheaper and there’s less incentive to save (due to lower returns), so spending is consequently expected to increase. However, this can lead to higher inflation and interest rate increases are often a mechanism to control price rises.
Inflation in February this year was at 1.9% and is expected to remain close to the 2% target over the coming months. Therefore, there isn’t a great need to raise interest rates, especially as consumers are already worried about the impact of Brexit. The Bank has stated its desire to increase interest rates - a move which reflects strength in the economy. The Bank may also be worried about a future economic crisis - if interest rates are already low when there’s a downturn, there’s less they can do to stimulate the economy. Analysts expect interest rates will rise in the second half of this year if a no-deal Brexit is avoided, with the possibility of four separate rises before the of 2020.
China's New Silk Road
Italy is in talks with China about an agreement to join China’s ‘Belt and Road’’ infrastructure plan, known as the New Silk Road. It is believed that Italy are close to signing a non-binding memorandum of understanding, which will show their commitment to the project. Having a powerful European nation like Italy involved, will create a significant boost for China, who have come under scrutiny recently for increasing their investment in Europe. In the last month, the EU have strengthened the monitoring of foreign investment in key sectors. However, with Italy trying to remove itself from a technical recession, they may be more inclined to be part of an agreement for more investment from China.
The president of China, Xi Jinping, plans to link China and Europe in a project, which has been likened to the ancient silk road trade route. China will provide loans to fund infrastructure spend by other countries on railways, roads, ports and more. For example, in 2016, Chinese companies bought a 51% stake in port authorities in Piraeus in Greece. There are worries of increasing debt owed to China from countries across the world and concerns over how China may be able to leverage their influence in the years to come.
Companies to watch
Clothing retailer, Next, has not escaped the decline of the UK high street, but has stated that their online business is continuing to grow. While sales in Next’s high street stores fell by 8% last year to £1.95bn, its online sales thrived, rising by 14.7% to £1.92bn. Furthermore, annual profits in Next’s physical stores fell by 20% while online profits jumped 14%. Overall, Next’s profits were in line with projected figures, only falling 0.4% to £722.9m.
The company stated that while these figures are displaying a “long-term threat” to its physical business, a “larger opportunity” in the online space has emerged. This has been supplemed by 53% of Next’s sales now coming from online shopping, with the difference between stores and online become increasingly more stark. In addition, Next has asserted that the “slow transition to the online channel...is of comfort”, but that physical stores are still a “valuable financial asset and an increasingly important” part of online business.
The CEO of DIY Group Kingfisher, Veronique Laury, is stepping down due to profits tumbling. Kingfisher, which owns companies such as B&Q and Screwfix, has had a difficult year, amid profits falling 13%. Laury, who has been overseeing a turnaround strategy, was set to remain at the firm until a successor was found.
The turnaround plan, termed “One Kingfisher”, which has involved unifying product ranges and boosting ecommerce, was set to cost £800m over five years. However, just three years into the strategy, sales have continued to lag with shares falling 27% over the past year. These results raised doubts over the CEO’s future at Kingfisher. Laury stated that the transformation has been “exciting” but also “very challenging”. This past year, while sales at B&Q fell by 2.8%, Screwfix performed strongly with a 10% rise in sales. However, Kingfisher owns companies across Europe and these companies have had a large effect on the firm’s success.
Car giant, Ford, is investing £682m in a new production plant to accelerate the production of all-electric vehicles. This was announced after the firm stated that rapid growth meant they needed to expand their plans in the growth of electric vehicles. The new plant will be located in Michigan and create 900 jobs.
This has come as part of Fords $11bn plan to invest in Alternative Vehicle (AV) technologies. In January, the company stated it wanted to have 40 hybrid and all-electric cars in its model line by 2022, with 16 being fully electric. The head of global operations, Joe Hinrichs, stated that their new plan allows them to “accommodate the pace of growth of this exciting new technology”. Carmakers are beginning to invest heavily in AV technology due to global pressures from regulators about cutting carbon emissions.
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