Category: Economics


Will Supply Chain Problems finish off the UK Car Manufacturing Industry?

In 1922, there were 183 motor companies in the UK: by 1929, following the slump years, there were still 58, with production dominated by Morris and Austin. In 1932, the UK overtook France to become Europe’s largest car producer – a position it held until 1955. In 1937, the UK produced 379,310 cars and over 100,000 commercial vehicles.

Production continued to grow, with the all-time high reached in 1972 when the UK built 1.92m cars. The record for this century was in 2016, with 1.72m cars. Since then, however, we have seen a sharp decline in numbers, with 2016’s figures halved to 860,000 last year. Last month brought the news that the UK had built 100,000 fewer cars than in the same period last year – meaning that we are almost certain to see another decline in overall numbers this year. 

Anyone who has watched a news bulletin will be able to list the reasons: first the pandemic, global supply chain problems and now rising energy costs. 

The main problem is the supply of semiconductor chips, which perform an increasing number of functions in cars, from airbags to emergency braking systems to the ever-more-common touchscreens. And as we move increasingly towards electronic vehicles we’re going to need even more chips. 

The problem is that the wait times for the chips are increasing, not decreasing, with the recent lockdowns in Shanghai – and the knock-on effects on the port there – having made the situation significantly worse. There have even been concerns expressed in the US that China is seeking to dominate and control the future supply chain for both electronic and autonomous vehicles. 

So where does that leave the UK car manufacturing industry? Aston Martin, Bentley, Rolls Royce and Jaguar all make cars in the UK – as do Nissan, who last year committed to a major expansion of their Sunderland plant, creating 1,600 new jobs. Overall, there are around 800,000 people employed in the UK car industry, so it remains vital to the country’s economy. 

The UK, though, is now a long way down the global league table, ranking 18th in 2021 – directly behind Slovakia and just ahead of Iran. Output in the top five countries – China, the US, Japan, India and South Korea – dwarfs that of the UK, meaning that the manufacturers of semiconductor chips have much bigger markets than the UK.

Given the demand for the high-end cars that the UK specialises in, we are not likely to see the industry disappear any time soon, but the longer the supply chain problems continue, the more vulnerable the UK’s car industry becomes. According to the Society of Motor Manufacturers and Traders, the industry has a turnover of nearly £80bn, adds £15.3bn of value to the UK economy and sees eight out of every ten cars produced exported. It’s an industry we cannot afford to lose. 

Wait times for semi-conductor chips increase due to China lockdown
Ukraine war drives supply chain crisis
UK car production down as energy costs rise
China EV manufacturers grapple with rising costs
China looking to control global EV supply chain?
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Will Russia Default on its Debt? And What Would That Mean?

In the middle of March, Russia was due to make an interest payment of $117m (£89m) on two bonds denominated in dollars. There was some dispute over the payment: Russia said it had made the payment, the investors holding the bonds said they hadn’t received the money. The papers generally reported that if Russia didn’t make the payment by April 30th, it would be in default.

That payment has now been made, but what does it all mean? What does a country have to do – or not do – for it to be in default? And what does it mean for the rest of us if Russia does default on its loans?

In its simplest form, if Russia (or any country) fails to make an interest payment within the laid-down timeframes – or, for example, it pays in roubles when dollars have been specified – then it would constitute a default. Russia is already locked out of international borrowing markets due to the West’s sanctions: a default would mean it could not regain access until all creditors were paid in full (assuming the sanctions had been lifted).

Other countries that have defaulted have seen aggressive creditors go after physical assets – when Argentina defaulted, one creditor tried to take a naval vessel as payment. Good luck knocking on the Kremlin door and telling Vladimir Putin you’ve come for one of his nuclear subs…

More seriously, the World Trade Organisation has already said that the conflict in Ukraine will reduce global growth this year, cutting its earlier forecast of 4.7% to just 2.5%. A wave of defaults would presumably make that situation even worse – and any possible defaults will have consequences that spill over from Russia.

Russia and Russian companies are generally held to owe about $150bn (£114bn) in foreign currency debt, with interest payments falling due on a regular basis. The payment we mention above is simply one of a regular series of interest payments.

We know, Putin is demanding payment for his oil and gas in roubles, in a bid to strengthen the currency – but bondholders will want their interest payments in dollars, which may well prove difficult for Russia. And any default by Russia itself – which becomes more likely as sanctions are ramped up – may well trigger defaults from Russian companies. Defaults would almost certainly drive the few remaining foreign investors out of the country.

But as we noted above, the potential problem goes wider than Russia. The debt is largely held by institutional investors such as hedge funds, companies, banks and pension funds. The problem for the investors is that the possible default has caught many of them by surprise. The last country to default was Argentina in 2020 – but that problem had been building for a long time. With Russian bonds currently trading on international markets at large discounts, many investors could be looking at large losses.

As this article was being written, the horrors in various regions of Ukraine continue to come to light. They will unquestionably lead to demands for more, and tougher, sanctions. But the tougher those sanctions are, the higher the risk of Russia defaulting on payments that become due – and that will have implications that go well beyond Russia.

BBC News
Al Jazeera

How the War in Ukraine Will Push up Prices

Following Russia’s invasion of Ukraine on February 24th, people have been asking the question, is the war is likely to push up prices in the UK, making the current cost of living crisis even worse? The short answer is ‘yes, almost certainly’. We have tried to explain below what is likely to happen and how prices at home might be impacted. 

As you will know, the war has sharply pushed up the price of energy and fuel, with the oil price seemingly rising and falling with the advance and retreat of Russian troops. The price of oil has reached its highest level in almost 14 years, while gas prices have more than doubled. 

The UK gets only 6% of its crude oil and 5% of its gas from Russia, with the EU sourcing nearly half its gas from the country. The problem – not just with oil and gas but with many commodities – is that countries may seek to stockpile, which will further drive up prices. 

The cost of your weekly shop could also rise. Russia and Ukraine were once dubbed ‘the breadbasket of Europe’, exporting almost a quarter of the world’s wheat, together with half of sunflower products, such as seeds and oil. While the UK typically produces 90% of the wheat consumed in the country, farmers may well find themselves paying more for fertiliser, which is one of Russia’s biggest exports. 

The continuing war may also push up the price of aluminium, which will mean an increase in the price of tinned goods. 

If prices continue to rise – and despite Rishi Sunak’s comments in his Spring Statement many economists see inflation pushing up towards 10% this year – then the Bank of England will almost certainly increase interest rates in a bid to keep a lid on inflation.

Inevitably, this will mean an increase in mortgage rates for people with mortgages linked directly to base rates – and rates generally are almost certain to go up. 

We’ve mentioned tinned goods – but the war may also mean those rather larger tins we drive around in will increase in price. Russia is a major exporter of metals, including nickel (used in lithium-ion batteries) and palladium, which is used in catalytic converters. Throw in continuing supply chains problems further disrupting the supply of semiconductor chips and an increase in the price of cars looks likely. 

These are worrying times. We have obviously seen sharp fluctuations in world stock markets with the progress of the war, but it is important to remember that saving and investing is a long term commitment.


The UK Closes in on the CPTPP

Last month, it was reported online that the UK was ‘closing in’ on CPTPP membership. The Department of Trade announced that we had moved into the ‘second and final phase’ of the application, and the UK could be a member ‘by the end of the year’.

Many of our clients will know that the CPTPP is a trade bloc. But who are the other members? And what would membership mean for the UK? 

CPTPP stands for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The 11 member countries are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. 

The agreement evolved from the Trans-Pacific Partnership (TPP) which had been agreed in 2016, and which included the USA. Donald Trump withdrew the US from the agreement when he became President, and the CPTPP in its present form was officially signed in Santiago in March 2018. 

It is immediately apparent that all the countries involved have some link with the Pacific. Brunei may not be the largest economy in the world – it accounts for around 0.01% of global GDP – but it is demonstrably closer to the Pacific than the UK. 

Why then does the UK want to join? And what benefits would being a member bring? 

Simply put, the CPTPP is a huge trading bloc. The 11 member countries account for 13.4% of global GDP at approximately $13.5tn (£10.26tn) making it one of the world’s largest free trade areas. For comparison, China, which is not a member of the CPTPP, accounts for around 15.1% of global GDP. 

If the UK were to become a member of the bloc – and that now looks very likely – it means that the vast majority of our exports to the member countries would become tariff-free, giving a significant boost to British business. Anne-Marie Trevelyan, who has taken over from Liz Truss as Secretary of State for International Trade, said: “CPTPP is one of the largest and most exciting free-trading clubs in the world. Today’s announcement … means the finishing line is in sight.” 

Joining the CPTPP would have a number of advantages. It would mean lower tariffs on key exports such as cars and whisky, and should also benefit the UK’s farmers, with CPTPP members expected to account for 25% of the global demand for meat by the end of the decade. The CPTPP countries are also advanced in both the digital and services sector – which should play to the UK’s strength as the world’s second-largest services exporter. 

Two-thirds of the world’s middle classes are expected to be in Asia by the year 2030, by which time UK exports to the member countries are expected to have grown 65% to £37bn a year. This would be an unquestioned boost to jobs, which could well increase over time, with South Korea, Taiwan, the Philippines and Thailand all thought to be keen on joining. 

The Government will be working hard to make an announcement by the end of the year – by which time, of course, we are likely to be only 18 months off another General Election.

World rankings
UK closes on CPTPP membership
Government data,and%20work%20in%20member%20countries.

Could Ukraine Crisis Force National Insurance U-Turn?

“Events, dear boy, events.” This famous quote is often attributed to former prime minister Harold Macmillan after being asked what could knock his government off course.

This could be a timely quote right now, as the horrific events in Ukraine look set to impact on consumers and businesses across the world.

The UK government will have hoped that the recent dropping of coronavirus restrictions would have kickstarted a period of strong consumer confidence and economic growth.

But rising food and energy prices have made its efforts to pay back the bill it racked up throughout the pandemic, such as a planned increase in National Insurance, hugely controversial.

Despite vocal objections, Prime Minister Boris Johnson and Chancellor of the Exchequer Rishi Sunak recently joined forces and insisted the National Insurance hike would go ahead.

However, Russia’s invasion of Ukraine is pushing up global energy prices even further, and the use of sanctions by the West means there are questions over the stability of Russian gas supplies in Europe.

That’s led to fears from some analysts that inflation could exceed eight per cent in the next couple of months, which could be devastating for both businesses and households who are already struggling in the face of ever-increasing costs.

As a result, Rishi Sunak is facing renewed calls to scrap his planned National Insurance increase.

Manufacturing trade body Make UK, for example, has urged the chancellor to postpone the tax increase until the UK is on a stronger economic footing, after a survey found that nearly three-quarters of manufacturing businesses would pass on, or be likely to pass on, the increase in their costs following the tax hike to their customers.

Meanwhile, the study showed that three-fifths of those polled believe the National Insurance increase could affect their hiring intentions.

Stephen Phipson, chief executive of Make UK, said: “The proposed increase remains illogical and will be even more ill-timed given how circumstances have rapidly changed since it was announced.

“The cost burden on business is continuing to escalate and, while some of these increases are due to global events, government must avoid shooting business in the foot by an entirely self-imposed decision.”

The government has already acknowledged that the consequences of the Ukraine invasion will lead to higher prices for consumers and businesses in the UK.

Foreign secretary Liz Truss, for example, told Sky News: “There will be an economic cost here in Britain. There will be a cost in terms of access to oil and gas markets.”

However, ministers have not been forthcoming about whether ongoing events in Ukraine will knock its domestic policy off course.

One thing that is clear though is that the voices that called for the National Insurance hike to be delayed or scrapped are likely to get much louder over the coming days and weeks, particularly as Rishi Sunak is gearing up to deliver his Spring Budget later this month.

Mr Sunak’s political opponents might also remind him that the Conservative Party had pledged not to increase National Insurance in its 2019 election manifesto.

The government’s argument has been that the coronavirus pandemic and the costs that came with it couldn’t have been foreseen at the time of the last election.

But many will argue that the same could be said about the Russian invasion of Ukraine, and that ministers need to be flexible in the face of an extreme situation, especially when so many homes and livelihoods are at stake.

Will Mr Sunak back down in the face of strong opposition or stick to the path he’s already laid out? We will have to wait and see.

What Will Rishi Sunak Say in his Budget?

Chancellor of the Exchequer Rishi Sunak is expected to deliver his Spring Budget on March 23rd, in which he’ll outline his view of the country’s fiscal position.

Mr Sunak has long been keen to stress that the money spent on the Government’s coronavirus economic support packages, such as the furlough scheme and the Bounce Back Loan Scheme, will need to be paid back eventually.

So with coronavirus restrictions now being removed completely in England, he may believe this is the time to start settling this bill, perhaps through a combination of tax rises and spending cuts.

But this could prove politically difficult in the current climate. For instance, consumer price inflation now stands at 5.5 per cent – its highest level in 30 years. And inflation could rise higher still, with some estimates suggesting it could hit more than seven per cent by April.

That’s led to the very real possibility of households struggling to meet their basic living costs over the next few months, as the cost of everything from energy to food soars.

The Chancellor will have hoped that ending coronavirus restrictions would have kickstarted a renewed period of strong economic growth and consumer confidence.

But the cost of living crisis means his hope for the economy to start firing on all cylinders could be hamstrung before he’s had a chance to pay back the Covid debt.

Mr Sunak has already had to announce new support measures to deal with the cost of living issue, such as a £150 council tax refund for some households and a £200 rebate to help with energy bills.

So will he go ahead with hitting people’s pockets even harder?

The prospect of tax rises in the Budget could prove hugely unpalatable to many, and not just hard-pressed members of the public, as many backbench Conservative MPs will consider low taxes a core part of their political ideology.

That means the option put forward by the Labour Party of hitting oil and gas companies with a windfall tax looks doubtful, even though the likes of BP and Shell have recently announced record profits.

However, at a time when he’s being routinely touted as a possible successor to Boris Johnson as Prime Minister, the option of increasing household taxes will be a big political gamble for the Chancellor.

And of course, the Government has already pledged to proceed with one high profile and hugely controversial tax hike – an increase in National Insurance, which the Government hopes will boost funding for health and social care.

The Government also needs to look at how it plans to fund its net zero strategy, which includes a commitment to end the sale of new fossil fuel cars by 2030, and its flagship Levelling Up strategy, a drive to improve services such as transport, broadband and education across the country, also by 2030.

Even in normal times, the Budget is a delicate balancing act, with the chancellor of the day weighing conflicting priorities, circumstances, pressures and calls to decide on a fair way forward.

But as the country moves from one crisis to another, and the political stakes are so high for the Chancellor personally, this could be a far more tentative Budget than what the Government might otherwise have hoped for, with Mr Sunak potentially going against his political instinct by borrowing and looking to pay back the money some time in the future.

Levelling up
Net zero
Soaring house prices
National Insurance hike

Semiconductor Shortage Hits Car Production

Many industries have been feeling the pressure as a result of global supply shortages of semiconductors, such as gaming and consumer electronics.

But a new report from the Society of Motor Manufacturers and Traders (SMMT) shows that car manufacturing in the UK is also taking a big hit, which could spell bad news for the industry over the coming months, as the chip shortage shows no sign of abating.

According to the SMMT, car manufacturing output in the UK fell by more than 41% in October 2021, with just 64,726 units produced. That was the fourth consecutive month in which output dropped, and was the weakest October performance since 1956.

The SMMT has cited the global semiconductor shortage as a key factor behind this decline, with Chief Executive Mike Hawes describing the situation as “extremely worrying”.

He stated that while the UK’s automotive industry is resilient, Covid-19 is “resurgent” across many of its key markets, while global supply chains are “stretched and even breaking”.

This, he said, means the immediate challenges in keeping the car manufacturing industry operational are “immense”.

Mr Hawes has therefore urged the government to take action to support the sector, such as working to address high energy costs and supporting employment and training. He also called on ministers to introduce measures to boost the sector’s competitiveness in line with global rivals, and help businesses whose cashflow is currently under pressure.

This is far from the first warning from a prominent organisation of the impact of the global semiconductor shortage.

Brandon Kulik, head of Deloitte’s semiconductor industry practice, recently predicted that the chip shortages currently being experienced worldwide could last for some time.

Speaking to Ars, he said the supply issues are “going to continue indefinitely”, adding that this probably meant years rather than months or quarters.

Simon Segars, chief executive of chip design firm Arm, has also spoken of the scale of the problem, telling the Web Summit event earlier this month that the shortage is the “most extreme” he has ever seen, with the wait for chips taking up to 60 weeks.

As a result, he believes many people who have bought devices for Christmas “might be disappointed”.

Mr Segars stated that many factors are contributing to the shortage, including a sudden increase in demand for cars, the rollout of 5G and geopolitical tensions between western and Asian nations.

The sheer scale, number and complexity of these issues suggests that the shortage of semiconductors could be with us for some time yet, and that businesses delivering products such as cars, gaming consoles and mobile phones could struggle to fulfil many of their orders.

Can small businesses afford Net Zero?

Even if you live on a remote rock in the middle of the sea you’ll have heard of COP26 – the conference on climate change which was recently held in Glasgow. It ended not with a global commitment to reduce carbon emissions, but with what more sceptical observers have described as a ‘huge win for coal,’ as India and China forced a significant change in the final agreement.

Instead of a commitment to ‘phase out unabated coal power,’ COP26 ended with a commitment to ‘phase down’ the use of coal – a very significant difference. 

Nevertheless, the drive to net zero (balancing the greenhouse gases going into the atmosphere with those taken out of the atmosphere) will continue, with UK Prime Minister Boris Johnson having nailed his colours very firmly to the green mast. It does, though, pose some pertinent questions. Who will pay for the drive to net zero? Will the burden fall on small businesses? And is there any benefit to them in achieving net zero? 

According to the UK Government’s own figures the capital required to transition to net zero will be £650bn. Only 4% of this is being provided by the Government, meaning that the balance – the small matter of £624bn – will need to come from private sector finance and investment. According to reports, the amounts involved in the US – and the amount contributed by Government – are equally staggering. 

Clearly business will only invest these amounts if it sees them as a profitable use of company funds. Government will unquestionably demand that businesses show how they are going to achieve net zero, with the Treasury requiring big businesses to show (by 2023) how they will achieve their climate change targets. 

That’s fine if you’re a bank. If you’re HSBC and you’ve just made $5.4bn (£4.02bn) in the third quarter the cost of transitioning to net zero won’t make a significant impact on you. 

Supposing you’re Pete the Plumber? Presumably the Government will at some point demand to know how you’ll achieve net zero. But, as we all know, tradesmen need their vans. They need to travel to people’s house – and frequently disappear halfway through the morning for supplies. They won’t be able to do that on public transport. As they’re businesses recover from the pandemic they may very well not be able to afford an electric van. And they may see the benefits of transitioning to net zero as questionable at best. 

If we’re changing banks then we may take the bank’s ‘green audit’ into account. If we need a plumber at six in the morning well… We’ve always dealt with Pete, he’s never let us down and right there and then we don’t care if he’s got an electric van or not. 

As several commentators have pointed out, it is easy to see this coming apart very quickly. Without state subsidies Pete is going to pass the cost of his new electric van onto his customers. And if he does receive a subsidy to pay for his new van, the consumer will pay for it anyway in the shape of higher taxes. 

When you look at it in practical terms it is going to be very difficult for small businesses to justify the investment the Government is demanding – or to see the benefits of making that investment.

Why doesn’t the UK have a Trade Deal with the US?

“Get Brexit done,” Boris Johnson famously said in his party political spoof of Love Actually just before the last General Election. Well, Brexit got done and – with International Trade Secretary (now Foreign Secretary) Liz Truss leading the way – the UK embarked on a series of deals with other countries, most notably applying to join the CPTPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. 

The CPTPP is arguably the world’s largest trading bloc, comprising 11 countries including Japan, Mexico, Australia and Singapore, with China also apparently looking at joining. 

One country that is not a member of the CPTPP is the US, with Donald Trump having withdrawn from the agreement early in his presidency. 

Neither, so far, does the US have a trade agreement with the UK, with the Guardian reporting in September that hopes of an early deal had all but vanished following Boris Johnson’s meeting with US President Joe Biden. 

Very clearly Boris Johnson saw a US/UK trade deal as one of the key benefits of Brexit, and it is fair to assume that one would have been done – or close to being done by now  – had Donald Trump still been in the White House. 

The priorities of the new Democratic administration are very different, however. Previous Democrat President Barack Obama said that if the UK left the EU, it would be “at the back of the queue” for a trade deal, and the Biden camp seems to be taking a similar line. 

Biden himself has made no secret of his love for Ireland. Ten of his 16 great-great-grandparents came from Ireland. Adapting a quote from James Joyce, Biden has said: “[When I die] north-east Pennsylvania will be written on my heart. But Ireland will be written on my soul.” Biden may look to tie any agreement on trade to deals over the Irish border – which will be strongly resisted by the UK. 

At the time of writing, it therefore appears more likely that the UK may look to join the broader US-Mexico-Canada (USMCA) free trade agreement. This replaced NAFTA, the old North American Free Trade Agreement, updating areas such as intellectual property and digital trade. 

This may not be quite the headline-grabbing, photo-opportunity trade agreement that a US/UK deal would have been, but it would still represent access to a significant trading bloc with a combined population of around 470m. 

On the other hand, if Boris Johnson is still Prime Minister, he may only have to wait until 2024 to resurrect the prospect of a deal with the US. Who is the bookies’ clear favourite to be the Republican nominee in 2024? That would be one Donald J Trump…

Is China panic buying commodities? Should we worry?

November brought us the COP26 climate change summit in Glasgow, the United Nations’ 26th ‘Conference of the Parties’ – the countries that signed the original UN agreement on climate change. 

Nearly 200 world leaders are expected to attend the Conference. It will unquestionably generate plenty of heated debate. Sceptics will ask why a conference on climate change needs 25,000 attendees, many of them travelling halfway round the world. Supporters will say that ‘not enough is being done.’ 

Xi Jinping, the Chinese leader, did not attend but instead sent Xie Zhenhua, China’s special climate envoy.

China is generally accepted as the world’s biggest polluter. To give just one example, the country currently has 235 operational airports, with plans to build another 160 by the middle of the next decade. 

But perhaps there is a more immediate question with regard to China: is it buying up all the world’s commodities? Will we be paying higher prices in the coming months because China has been panic buying? 

At the end of September Goldman Sachs became the latest bank to cut its growth forecast for China, reducing its estimate for the full year from 8.2% to 7.8% and predicting nil growth for the third quarter. The reason cited was simple: China is struggling with energy shortages, with some economists estimating that up to 44% of the country’s industrial activity has been adversely affected. The consequent shortage of raw materials meant that China’s ‘factory gate inflation’ was the highest it had been for 13 years. 

That was September: the position unquestionably worsened in October. Recent flooding in China – particularly in key mining areas – has pushed the price of coal to a record high. When figures were released for September, factory gate prices had risen again and were growing at their fastest pace in 26 years, adding to inflation risks around the world as producers passed on higher prices. 

Most significantly, though, it appears that Beijing has given state-owned energy companies and industry a directive to secure winter energy supplies at any cost. 

Will this lead to possible supply shortages in other parts of the world? In a word, ‘yes.’ This change of tack by China – presumably in response to interruptions to industrial output and the possibility of a cold winter – could ‘ripple’ around the globe. We may not have heard the last of energy suppliers in the UK going bust or, sadly, of consumers facing significantly higher bills.

China and climate change:
China airports:
China panic-buying commodities:
Price of China’s coal surges to new high:
China frees up coal prices to combat energy shortages:
China factory gate prices growing at fastest rate in 26 years: