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Manufacturing businesses in Northern Ireland have made “significant” strides towards adjusting to new trading arrangements that were imposed after Brexit, according to the region’s trade body.
A survey by Manufacturing NI found that less than a quarter of its members were struggling with the so-called Northern Ireland protocol, which governs trade in the region. This compared with more than 40 per cent six months ago.
The findings, which will be published on Friday, will add weight to demands from the region’s business for the EU and the UK to settle their differences over the deal that left Northern Ireland in the EU’s single market for goods, creating a trade border in the Irish Sea.
Stephen Kelly, chief executive of Manufacturing NI, said while the responses showed that manufacturers were “overcoming issues”, there was also “more work required” to make the deal work for everyone.
Talks will resume this week between the UK and EU over the deal which the British government has warned places an “unsustainable” burden on businesses.
It will be the first meeting in person between Liz Truss, the UK foreign secretary, and the EU’s Brexit commissioner Maros Sefcovic since Truss took over responsibility for the talks following the resignation of Lord David Frost as the UK’s chief negotiator late last year.
Truss will host Sefcovic at her grace-and-favour residence in Chevening, Kent, with a working dinner on Thursday night.
The UK is demanding that the EU radically reshape the protocol by reducing the amount of checks required on goods travelling from Great Britain to Northern Ireland. London argues it is hurting business and destabilising the region’s politics.
Northern Ireland’s mainly Protestant unionist parties, who want to remain part of the UK, have unanimously rejected the protocol. In contrast, the nationalist Sinn Féin party, which is traditionally backed by Catholics and seeks a united Ireland, has said the protocol was “here to stay”.
Sir Jeffrey Donaldson, leader of the Democratic Unionist Party, which heads the region’s power-sharing executive, has demanded a timeline for enforcing the UK’s protocol demands.
Trade groups have said that Northern Ireland has the potential to benefit from having dual access to both the UK and EU markets.
Officials on both sides admit that significant differences remain over how to implement the deal, which has soured wider EU-UK relations since the Brexit agreements came into force in January 2021.
Simon Coveney, Irish foreign minister, hailed a “good and friendly” first meeting with Truss last week. But he told the FT bluntly in December that it was now time for concessions.
Kelly added that the survey showed his members were increasingly grasping opportunities presented by the region’s unique position straddling the EU and UK, and were picking up more business in GB and in the EU.
The number of companies reporting negative impacts on sales to Great Britain fell from one-third to one-fifth since July; while the number reporting problems with EU suppliers also fell sharply over the same period.
But Kelly noted there were “still problems” within the new trading arrangements and a “strong desire” for the two sides to make the rules simpler for the benefit of both business and the wider Northern Ireland economy.
The European Commission claims that recent economic data showing Northern Ireland’s economy outperforming the rest of the UK proves the protocol can work. It has tabled proposals it said would cut customs red tape by half and food and animal checks by 80 per cent, but the UK disputes this.
The biggest negative impact so far has been on fresh food supplies, since these are subject to more rigorous checks than machine parts. Sefcovic has said companies should adapt by sourcing more goods from the island of Ireland.
Elevated fuel and housing costs drove Australian inflation to higher than expected levels in the fourth quarter of 2021, increasing the likelihood of an interest rate rise in the second half of the year.
The consumer price index rose 3.5 per cent in the fourth quarter compared with the previous year, and 1.3 per cent from the third quarter, according to data published on Tuesday by the Australian Bureau of Statistics. Economists had expected a year-on-year rise of 3.2 per cent.
The rapid spread of the Omicron coronavirus variant has added to inflation worries. Food prices have risen on supply chain disruptions as supermarkets, retailers and logistics companies have struggled to source workers owing to the country’s isolation policies.
Michelle Marquardt, head of prices statistics at the ABS, said the most significant price rises in the December quarter were new housing, holiday and accommodation costs and automotive fuel, which surged almost a third from a year earlier.
“Shortages of building supplies and labour, combined with continued strong demand for new dwellings, contributed to price increases for newly built houses, town houses and apartments,” she said.
Unemployment hit a 14-year low in December, making for a tight job market, but the spread of Omicron and low migration numbers because of strict border policies have led to a labour shortage.
Shane Oliver, chief economist at AMP, said the data made a rate increase more likely. “So we continue to see the Reserve Bank of Australia raising rates in August with RBA commentary adjusting in a more hawkish direction. At least it’s not the 7 per cent inflation seen in the US,” he said.
Sean Langcake, senior economist for BIS Oxford Economics, said that programmes designed to stimulate residential construction had led to cost inflation for materials and workers, contributing to underlying inflation.
“While some of these cost pressures could still be seen as transitory, we expect the RBA will strike a more hawkish tone at next week’s meeting. A rate rise in 2022 is now more likely in light of these data,” he said.
The RBA said in November that it was unlikely to raise interest rates from its 0.1 per cent level in the short term until inflation was sustainably within its 2-3 per cent target range.
The timing of a potential rate increase could influence Australian elections, which are due to take place in the coming months, with housing prices a crucial issue for voters.
Jon Fletcher, general manager of the Grange Hotel near Sherborne in Dorset, was told last week by his drinks supplier that prices would rise by an average of 12 per cent this year, the latest in a punishing round of cost increases.
“Everything is going up,” said Fletcher, who has had to cover similar rises in laundry costs and wages, and has been warned of a substantial increase in his energy bill. “It all adds up; some of it is very big.”
British companies have warned that their recovery from the pandemic risks being dented by rising inflation as they wrestle with the dilemma of what proportion of the costs can be passed on to consumers.
Glenn Turner, owner of Gloucestershire-based Brightfusion, which makes scientific toys and engines, was forced to put up prices last year by 6 per cent — the first increase on some products in 20 years. He is already planning the next rise for later this year.
“You worry about how the price increase impacts your sales — and ultimately your business,” said Turner, who also runs Maidenhead-based Kontax Engineering.
“I have never before experienced price increases coming from all parts of the business . . . supplies, postage, wages, energy, its across the board. We know we have tax increases coming in future too. I am making a loss on some products owing to the increase in costs.”
UK inflation rose to 5.4 per cent in December, the highest rate in 30 years. This has been driven by a broad range of factors, according to economists, but underpinned by policy decisions by central banks to keep rates low and pump cash into economies to help mitigate the effects of the pandemic.
The inflationary pressure from the resulting consumer and corporate spending has been exacerbated by the energy crisis, a labour shortage that has pushed wages up and global supply chain disruption that has triggered higher costs for shipping and distribution.
Steffan Ball, UK chief economist at Goldman Sachs, said the bank had revised up its estimates for inflation this year from 5.7 per cent to 7.2 per cent. “It’s a significant increase and it will be felt. We now assume the Bank of England will hike rates in February and May.”
Inflation is a key risk to the economic recovery, according to Tony Danker, director-general of the CBI business lobby, and has become most companies’ top concern.
“Input costs have been followed by higher wage expectations and taken together with energy prices, something has to give,” said Danker, who called on ministers to help smooth the “cash flow crunch” for small businesses and take action on energy costs.
“Either this means yet more price rises and a bigger hit to the consumer, or it means less investment from falling margins and a worsening supply side.”
Different industries are being affected by a variety of cost increases — from wages in the hospitality industry to raw materials and shipping in manufacturing and retail.
Russell Weston, managing director at Snowbee, a Plymouth-based design and manufacturing company specialising in fishing tackle, said the biggest expenditure item was the “exorbitant” charges being levied by shipping companies.
“They are all charging whatever they can get away with,” he said, pointing to the cost of bringing a container from Asia rising from £1,650 before the pandemic to £9,500.
Energy costs have doubled, he added. “It’s absolutely crippling. It affects every single consumer good coming into this country and it will go down to the consumer. There won’t be any more cheap fridges.”
But companies can only pass on part of the increased costs, according to Fletcher. “We will put prices up but it’s difficult to raise food and beverage to a level that would absorb the costs. People will only spend so much on a pint.”
Inflation is hitting businesses regardless of size, although many bigger companies can withstand the price shocks better than smaller rivals that have fewer financial resources and are often less able to pass on price increases to consumers.
A survey carried out by Iwoca, the small business lender, found that nearly three in four small business owners said inflation was a top economic concern in 2022.
Still, results this month from large listed British companies have started to show how broad the impact of sustained higher prices will be on UK plc.
Retailers from Sainsbury’s, DFS and Dunelm to Topps, B&M and Asos have warned over operating costs inflation. M&S said that food inflation rose from 2.7 per cent in the 12 weeks to December to 3.5 per cent in December itself, but added that it had not yet passed much of that on to customers.
Clothing retailer Next warned that prices would rise by up to 6 per cent in the second half of the year because of shipping costs and wage inflation. Topps Tiles said it had started to pass on costs caused by higher shipping costs and inflation in goods but “as selling prices will increase by a lower percentage than cost prices, we do expect percentage gross margins to be moderately lower”.
The hospitality sector is also suffering. Greggs, the bakery chain, said that inflationary pressures from both ingredients and labour mounted towards the end of 2021 and were likely to remain high in 2022. Whitbread, the hotels and restaurants group, said that it expected inflation of 7 and 8 per cent on about £1.4bn of its costs. Construction is also under pressure, with housebuilder Persimmon warning of material prices rising by more than 5 per cent.
Investors worry that rising inflation will mean that earnings are hit or become worth less in realm terms, leading to a slump in company valuations.
Nick Moakes, investment director of the Wellcome Trust medical research charity, said that inflationary pressures would lead to the toughest investment market since the last financial crisis.
He warned about further pressure in the year ahead, with companies also needing to shoulder the burden of rising national insurance costs in April. “We’re in a world now where inflation is probably a lot more entrenched; it’s going to be difficult to shift.”
UK public borrowing dropped more than expected in December thanks to improved tax revenues and savings in public spending as the economy recovered.
Public sector net borrowing was estimated to have been £16.8bn last month, £7.6bn less than in December 2020 when most of the country was under tight restrictions, data from the Office for National Statistics showed on Tuesday.
Borrowing was lower than the £18.5bn expected by economists polled by Reuters and in line with last October’s forecast by the Office for Budget Responsibility.
Central government receipts were £68.5bn last month, up 10 per cent compared with December 2020, boosted by stronger tax receipts as the economy recovered.
At the same time, the government spent £86.7bn, down £1bn from the same month the previous year, reflecting savings from the job retention scheme that ended in October.
However, some of the savings were offset by higher spending on the NHS Test and Trace programme and the cost of vaccines. Interest payments were also up compared with December 2020 due to high retail price inflation to which index-linked gilts are pegged.
In the year to December, borrowing was £147bn, nearly half that in the same period the previous year.
Public debt — borrowing accumulated over time — rose to about 96 per cent of gross domestic product, a level not seen since the early 1960s.
Rishi Sunak, chancellor, said: “Risks to the public finances, including from inflation, make it even more important that we avoid burdening future generations with high debt repayments.”
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