Economy

Ministers have been urged to extend help for UK businesses struggling with soaring energy costs beyond the six month cliff-edge set out under the terms of the government’s £150bn support package on Wednesday.Companies said the energy subsidies would remove the threat of skyrocketing bills in October, when many were facing contract renewals. But bosses added that the lack of clarity about what would happen beyond six months risked hitting business investment. Support for households, by contrast, runs for two years.Ministers have said they will review which sectors are most vulnerable before deciding on additional help. Companies welcomed the promise of state support, which will cap wholesale energy prices at more than half this winter. But many said bills would remain much higher than last year, owing to the surge in prices following the Ukraine war. Neil Clifton, managing director of Midlands-based group Cube Precision Engineering, which makes products for the automotive and aerospace sectors, said his energy bills had been due to rise from £12,000 in August 2021 to £44,000 this year.He said state support would limit them to between £23,000 and £25,000, which he called “not ideal, but something we can manage”.Clifton questioned when his energy supplier would inform him of the new prices and at what level they would be set, given the extra costs that could be added to bills, including the standing charge. Craig Beaumont, chief of external affairs at the Federation of Small Businesses, said small businesses would not know how much their bills would rise until their supplier contacted them. He also raised concerns about future increases in standing charges, and questioned why there was no help for groups that signed new contracts in February and March. Nimisha Raja, founder of Nim’s Fruit Crisps, a snack manufacturer based in Sittingbourne, Kent, said the package “doesn’t help us at all” because the government “has done nothing to address” her £14 a day standing charge. Lionel Benjamin, co-founder of AGO Hotels, said the package would “only mask the problem for a short while” and that “more will need to be done longer-term to stop businesses collapsing”. He added that energy now accounted for almost a third of his group’s operating costs, up from 8-12 per cent before its latest contract renewal.Liz Truss, the prime minister, on Tuesday said extra help would be available for pubs after six months but gave no further detail on which other sectors might benefit from a new support package. Sacha Lord, night-time economy adviser for Greater Manchester, welcomed that pledge but said “businesses will still be paying more than they’re used to” and that “the real concern is whether they can afford to continue trading”.

Jason Black, director of Cornish Inns, a pub company with four sites across Cornwall, said he had been facing a more than twofold increase in his electricity bill to £450 per MWh when the contract for his largest venue was renewed in October.That bill will now be halved, while costs across Black’s three other sites will fall about 15 per cent.He praised the government for doing “the right thing” but said it should offer “more targeted help for pubs and restaurants, as we don’t know what [the consumer downturn] will do to people heading out”. The package also covers organisations including charities and schools. Kevin Courtney, joint general secretary of the National Education Union, said that although the measures “provide a ceiling on funding pain . . . schools are still paying vastly more for their energy than was expected a year ago, with harmful consequences for education”. More

Even with Prime Minister Liz Truss’s action to stem rises in energy bills, the economic pain is just beginning. UK households still face pressures on their finances not seen since the second world war. The same is true for companies. Caught by both rising costs and falling consumer spending, this pincer movement is troubling businesses both large and small. So far, with spending levels still strong in the economy, many companies have been able to raise prices to mitigate the issue. They will also receive help with a cap on non-domestic energy bills this winter. Even with the underlying strengths and government support, the big question is what happens next. This is a drama that is likely to be played out in three acts, culminating with corporate distress and a recession. Act 1: Never-ending billsIn the first quarter of 2022, average electricity bills for companies were about 30 per cent higher than a year earlier. Rising bills have not stopped landing in the inboxes of company managers ever since. With a crisis point having been reached in early September, the government pledged to act almost immediately to prevent companies being asked to pay up to five times their previous rates in gas and electricity charges. It has promised to set a limit on energy bills for the next six months, with help for some smaller companies extending well into next year.

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Even so, at the new controlled price, many companies will still face much higher costs for energy than a year ago. Among the hardest-hit companies are energy-intensive industries, often at the base of the supply chain, producing metals, plastics and other parts crucial for manufacturing and building. These are now feeling the pinch. Small business confidence plunged in both the manufacturing and construction sectors this year.

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Although oil prices have come off the boil in recent months, manufacturing companies that use crude oil or other fuels including gas have seen the largest rise in costs over the year to August. Gas prices have increased about 50 per cent. For the manufacturing industry, input costs have risen 20.5 per cent in the most recent year, adding to their challenges. With food inputs also up about 20 per cent, prices of many supermarket items have naturally risen sharply.At the other end of the supply chain, leisure industries that rely on heating large spaces, such as shops, swimming pools or nurseries, are having to turn thermostats down and put prices up. Small businesses feel they are at the sharpest end. The squeeze is not limited to raw material costs. In much of the service sector, companies are affected more by wage increases than by higher costs. Regular pay grew at an annual rate of 6.2 per cent in the private sector in July, the most recent month available. That was the highest rate of increase this century, excluding a period during the pandemic when the figures were distorted. Even so, pay is growing slower than prices, which were 9.9 per cent higher in August than a year earlier, putting pressure on companies to pay more. This will be hard to resist when there are currently as many vacancies as there are people classified as unemployed, twice the normal tightness in the labour market.

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In jobs in wholesale trade, construction and hospitality, advertised rates have risen sharply since the start of 2022, according to Indeed.com, the recruitment website. By contrast, advertised pay for nurses is barely rising, even after their services were in such demand as a result of the pandemic. Act 2: Rising borrowing costsCompanies have more to be concerned about than raw material and wage costs. The cost of debt is rising too. Having kept official interest rates close to zero for more than a decade, the Bank of England raised borrowing costs from 0.1 per cent last November and has signalled further rises to help bring inflation down. The Monetary Policy Committee set rates at 1.75 per cent in August and financial markets expect them to rise above 3 per cent by the end of the year. Large UK companies often have fixed borrowing costs, limiting their exposure. The BoE thinks the proportion of large companies facing material risks of repayment difficulties will rise from 30 per cent to 46 per cent at the end of this year. Interest rates would have to rise to 4.5 per cent for this exposure to reach historic highs, capturing just over 60 per cent of companies. That, however, is no longer above market expectation. Smaller companies are not nearly as well protected. While the new debt these companies took on during the pandemic was generally at fixed rates, the BoE estimates that 70 per cent of their existing stock of loans is exposed to interest rate rises within a year. Many of these companies will be exposed to a nasty borrowing costs shock in the months ahead.

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At the same time, companies must look at sales. These have been falling on the high street and stress is evident in the consumer confidence figures. This fell in August to a near 50-year low as households worried about their own financial situation and the wider economy. Act 3: Spending under pressureConsumer spending will probably fall further. Food, rents, mortgages, petrol and energy prices, which account for more than 40 per cent of household budgets, are all rising quickly. Many consumers will cut down on discretionary spending this winter and focus on the basics. Poorer households will be forced to make even more difficult choices.A survey of 3,000 people by SellCell, a price comparison website, showed a majority of households planning to cut down on entertainment spending and eating out. Only 24 per cent of respondents said they would not cut discretionary spending at all this winter. Intentions to cut back do not always result in actual spending reductions, but the early evidence from the high street suggests greater spending restraint in non-food stores than in supermarkets, indicating that discretionary spending is likely to be hit. With food manufacturers’ costs having risen about 20 per cent, the likelihood is that food price inflation will rise further from the August level of 13.4 per cent. That will put severe pressure on cafés, restaurants and food outlets to cut costs at a time when consumers are becoming much more price conscious. And the BoE still wants to impart a shock to ensure that inflation comes down. To the central bank, a higher rate of unemployment and lower rises in wages are the necessary evils required to restore price stability. The BoE thinks the recession will be shallow but last through much of next year, with unemployment rising to more than 6 per cent. The data suggests the process is already well under way. Households are cutting back at the same time as corporate profits fall. Signs of corporate distress such as the 42 per cent rise in corporate insolvencies since last year are likely to rise even further.This is how recession starts. More

BERLIN/LONDON/HELSINKI (Reuters) -Germany nationalised gas importer Uniper on Wednesday and Britain capped wholesale electricity and gas prices for businesses, as Europe splurged cash to keep the lights and heaters on this winter amid an escalating war in Ukraine.Russian President Vladimir Putin added to the energy price pain on Wednesday, sending oil and gas prices higher by announcing a partial military mobilisation.European governments have already earmarked almost 500 billion euros ($496 billion) in the past year to shield citizens and companies from soaring gas and power prices, according to research published by think-tank Bruegel. Russian cuts to gas supply to Europe in retaliation for Western sanctions on Moscow over its invasion of Ukraine have left utilities exposed to sky-high spot prices as the scramble for alternative supplies has helped drive up consumer bills. Uniper has been among the biggest corporate victims, with Germany earmarking another 8 billion euros in the latest step in its rescue while Britain said its new plan would cost “tens of billions of pounds.” Among the high spenders, France will allocate 9.7 billion euros to take full control of utility EDF (EPA:EDF).”We have stepped in to stop businesses collapsing, protect jobs, and limit inflation,” Britain’s finance minister Kwasi Kwarteng said, while another cabinet member said the final cost of its energy support would depend on how high prices climbed.More than 20 British power providers have collapsed, many crumbling because a government price cap prevented them from passing on soaring prices.European gas prices on Wednesday hit as much as 212 euros per megawatt hour (MWh), below this year’s peak of around 343 euros but up more than 200% from a year earlier. Oil prices rose nearly 3%.INCREASED RISKS”The partial mobilisation is definitely a bullish factor as it increases the risks of a prolonged war in Ukraine,” said Viktor Katona, lead crude analyst at Kpler.Uniper’s full nationalisation follows a multi-billion euro cash injection that proved inadequate.The German government will buy the remaining stake owned by Finland’s Fortum to give the state a 99% holding. “This is clearly not sustainable from a public finance perspective,” Bruegel senior fellow Simone Tagliapietra said of Europe’s overall energy crisis bill.”Governments with more fiscal space will inevitably better manage the energy crisis by outcompeting their neighbours for limited energy resources over the winter months.”‘DO EVERYTHING POSSIBLE’German Economy Minister Robert Habeck, announcing the Uniper move and other steps to help Germany avoid energy rationing this winter, said: “The state will … do everything possible to always keep the companies stable on the market.”The nationalisation gives the German government control of some assets in Russia, a government spokesperson said, adding that it was examining what to do with these.Germany was more reliant than many others in Europe on Russian gas, mostly supplied via the Nord Stream 1 pipeline. Russia halted flows through the pipeline, blaming Western sanctions for hindering operations. European politicians call that a pretext and say Moscow is using energy as a weapon. The German government has already put Gazprom (MCX:GAZP) Germania, a unit of Kremlin-controlled Gazprom, and a subsidiary of Russian oil company Rosneft under trusteeship – a de facto nationalisation. Adding Uniper’s bailout, the bill amounts to about 40 billion euros.Fortum CEO Markus Rauram said selling the firm’s stake in Uniper was a painful but necessary step, adding that the company which is majority owned by the Finish state lost about 6 billion euros on its Uniper investment. Russia’s gas flows to Europe via Ukraine were steady on Wednesday while eastbound gas flows via the Yamal-Europe pipeline to Poland from Germany were halted.In the United States, Democratic and Republican senators on Tuesday proposed that President Joe Biden’s administration use secondary sanctions on international banks to strengthen plans for a price cap by G7 countries on Russian oil.Moscow has said it would cut all oil and gas flows to the West if such a cap was implemented.The move by U.S. lawmakers came hours before Putin ordered Russia’s first mobilisation since World War Two, warning the West that if it continued what he called its “nuclear blackmail” Moscow would respond with its vast arsenal. Several countries have banned imports of Russian crude and fuel, but Moscow has managed to maintain its revenues through increased crude sales to Asia.($1 = 1.0087 euros) More

WASHINGTON (Reuters) – How much faith Federal Reserve officials still have in prospects for a “soft landing” as they take aggressive action to quash the highest inflation in 40 years will be revealed on Wednesday when the central bank releases fresh policymaker forecasts.The projections from the 19 policymakers, to be published in tandem with the announcement of what is likely to be the Fed’s third straight 75-basis-point interest-rate hike, are not expected to coalesce around a massive jump in unemployment or a contraction of the economy. Those were the outcomes the last time the Fed, under Paul Volcker’s leadership, battled super-high inflation in the 1980s. Earlier this month Fed Chair Jerome Powell said he believes that this time around the Fed can avoid such “very high social costs” in part because households and businesses haven’t internalized the kind of inflationary mindset that back then required double-digit interest rates to vanquish.At the same time, he said, Americans are in for “some pain” ahead as the Fed works to end inflation and prevent what would otherwise be even worse outcomes.”While the Fed is still likely to view a soft landing as a modal outcome, the window appears to be narrowing,” Bank of America (NYSE:BAC) economists wrote. “Recent Fed communications have acknowledged this, in part, by leaning more strongly in the direction of needing to slow labor markets and accepting the risks to activity that come with it.”UNEMPLOYMENT FORECAST IN FOCUSAnd while the new quarterly summary of policymaker projections may appear to rule out a Volcker-style “hard” landing, it is widely expected to point to notably higher unemployment and slower economic growth in the coming year that by at least one well-known benchmark could signal a recession of some stripe. That benchmark, known as the Sahm Rule after former Fed staffer Claudia Sahm who identified and formalized it, says the U.S. economy is typically in recession once the 3-month moving average of the unemployment rate rises half a percentage point above the rate’s lowest three-month average over the preceding 12 months. That low currently is around 3.56%. Economists polled by Reuters expect the unemployment rate to rise to 4.1% by the second quarter of 2023 and to 4.3% by the fourth quarter – far lower than the 14.7% reached in the pandemic crisis or the 10.8% peak during the Volcker recession – but high enough to meet the Sahm Rule test. Historically once the unemployment rate rises by half a percentage point, it continues to rise another point or two, if not more. Policymaker projections for the economy hinge on their views of the appropriate setting of monetary policy, a window into which will also be published on Wednesday as part of the Fed’s quarterly summary of economic projections, or SEPs. This week’s decision is expected to take the Fed policy rate to a range of 3%-3.25% from the current 2.25%-2.50%. The so-called “dot plot” incorporated in the SEPs will indicate each policymaker’s view of where rates should be at the end of each year through 2025.”We expect the dot plot to show a peak fed funds rate of 4.4% next year, which will push the unemployment rate to near 4.5% over the forecast horizon,” wrote economists at Deutsche Bank (ETR:DBKGn). In the most recent forecasts issued in June, the fed funds rate was seen peaking at 3.8% in 2023, with the jobless rate climbing to 4.1% the following year.RECESSION AHEAD?Since the dot plot’s advent in 2012, only one policymaker has ever forecast rates to rise that high, and that forecast – in late 2012 and early 2013, for end-of-year 2015 rates to reach 4.5% – turned out to be spectacularly wrong. The Fed instead kept the policy rate at near zero until December 2015, when it lifted it by just a quarter of a percentage point.This time around, though, financial markets are pricing in a top Fed funds rate of 4.5% next year, with a rate cut or two seen as more than likely toward the second half of 2023. Wednesday’s projections will also give a read on how quickly Fed policymakers expect their actions to take a bite out of inflation and how much the economy is likely to slow. In June, inflation was seen remaining above the Fed’s 2% target through 2024, while not even the most pessimistic policymaker expected the economy to contract in coming quarters. Most penciled in gross domestic product growth of between 1.3% and 2% for each of the next three years. “The new economic projections will highlight the Fed’s pain tolerance with real GDP growth likely to be revised significantly lower,” wrote EY-Parthenon Chief Economist Gregory Daco, adding that the forecast for next year’s unemployment rate could very well exceed 4.5%. Inflation projections, however, could stick close to those laid out in June, he said, amid “dueling forces from inflation persistence and a more aggressive Fed stance and likely recession.” More

Britain’s government also gave more details of support to businesses for energy costs, which it said would cost tens of billions of pounds.Two-year gilt yields rose to their highest since October 2008 at 3.381%, up 9 basis points on the day, while five-year yields were the highest since November 2008 at 3.361%, up more than 6 basis points. More

“On a review of current liquidity conditions, the Reserve Bank of India has decided to conduct a Variable Rate Repo auction on September 22,” RBI said in a statement on Wednesday. India’s banking system liquidity slipped into deficit for the first time in more than three years. The deficit stood at 218.73 billion rupees as on Tuesday, according to RBI. Overnight rates traded above RBI’s Marginal Standing Facility rate through the trading session on Wednesday. RBI repo rate stands at 5.40%, while MSF rate stands at 5.65%. ($1 = 79.9680 Indian rupees) More

Output will shrink 2.2% next year, compared with an earlier projection for a 0.3% contraction, the analysts said Wednesday in a report to clients. Gross domestic product in Germany, which is most exposed to lower energy shipments, will drop as much as 4%. Inflation, meanwhile, is seen averaging 6.2% in 2023, down from 8.2% in 2022, as continued supply-chain disruptions, tight labor markets and a weak euro offset the impact of the deteriorating economy. Deutsche Bank (ETR:DBKGn) still expects the European Central Bank to lift its deposit rate to 2.5% by the end of the first quarter.©2022 Bloomberg L.P. More

Investing.com — The Federal Reserve is set to raise U.S. interest rates again – but by how much? Vladimir Putin rattles the nuclear saber as he calls up 300,000 reservists for his war in Ukraine, causing the dollar and European gas prices to rise again. Existing home sales are due, and homebuilder Lennar reports quarterly earnings. In the U.K., Prime Minister Liz Truss prepares another energy relief package, and the U.S. government will publish its weekly oil inventories as fears for global oil demand grow. Here’s what you need to know in financial markets on Wednesday, 21st September.1. Decision Day at the FedThe Federal Reserve is set to raise U.S. interest rates again, with the market split over whether to expect an increase of 75 basis points, as happened last time, or a full percentage point. Another upside surprise to U.S. inflation in August has inclined some analysts to the latter, although the consensus is still – just about – for 75.Of more importance, arguably, will be the Fed’s so-called ‘dot-plot’, which maps where the policymakers expect rates to be over the next couple of years. This should send a signal about how high the central bank thinks rates will have to rise, and how long they will have to stay high before victory over inflation can be declared. Short-term interest rate futures imply a peak next year of between 4.25% and 4.5%, i.e., around 2 percentage points higher than today.The Fed’s decision is due as usual at 14:00 ET (18:00 GMT), with chair Jerome Powell’s press conference half an hour later.2. Putin ups the ante with partial mobilizationRussian President Vladimir Putin surprised the West Wednesday by declaring a partial mobilization of the country’s 2-million-strong military reserve and confirming his intention to annex those parts of Ukraine currently under Russian occupation.Putin said the mobilization would be limited to those who have already served in the armed forces and who have relevant experience and training. Defense Minister Sergei Shoigu said in a subsequent televised address that it would only affect 300,000 people.The move marks a massive shift for the Kremlin and could be seen as a response to recent defeats on the battlefield in Ukraine and signs that its leverage over European energy markets may be fading as European gas prices fall.3. Stocks set to open higher; home sales data, Gap job cuts eyedU.S. stock markets are set to open moderately higher despite the drama in Russia but are essentially in a holding pattern ahead of the Fed meeting later.By 06:40 ET, Dow Jones futures were up 70 points, or 0.2%, while S&P 500 futures were up 0.2% and Nasdaq 100 futures were largely flat. The three benchmark cash indices had lost around 1% each on Tuesday in a bout of pre-Fed jitters.Stocks likely to be in focus later include homebuilder Lennar (NYSE:LEN), which reports results on the same day that existing home sales data for August are due. General Mills (NYSE:GIS) is also due to report. Also in focus is Gap (NYSE:GPS), which is to cut 500 corporate jobs, according to a Wall Street Journal report.4. U.K. energy bailout and Uniper nationalizationThe U.K.’s new Prime Minister Liz Truss announced a relief package for businesses to help them with their energy bills over the coming winter. The package will cap electricity and gas prices at around half of the current spot market price for six months. A more selective relief scheme will then be applied thereafter.The move, with an estimated cost of 40 billion pounds ($45.5 billion) is the second big fiscal package announced by Truss to deal with the energy crisis. The pound fell to a new 37-year low in response, spooked by data published earlier showing a big rise in public borrowing due to higher interest costs.Europe’s energy crisis meanwhile claimed another victim in Germany, where the federal government agreed to nationalize Uniper (ETR:UN01), the country’s biggest gas supplier, whose finances have been ruined by the shut-off of Russian supplies.Elsewhere, French Finance Minister Bruno Le Maire asked the EU to bring forward a planned loosening of state aid rules to help businesses get through the winter.5. Oil surges on the Putin factor; EIA data awaitedCrude oil prices rose sharply as the market moved to price in a higher geopolitical risk premium after Putin’s speech.By 06:40 ET, U.S. crude futures were up 2.4% at $85.95 a barrel, while Brent futures were up 2.3% at $92.74 a barrel.Nuclear grandstanding aside, the big item of the day is U.S. inventory data for last week, where a 2.16 million barrel increase in crude stocks is expected. The American Petroleum Institute’s data, released on Tuesday, undershot expectations with a build of just over 1 million barrels. More