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Economy

UK consumer confidence plunges over rising living costs and inflation

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UK consumer confidence has dropped to its lowest level in 11 months as people worry about surging inflation and fuel bills, suggesting that rising living costs will slow the household spending recovery.

The UK consumer confidence index, a closely watched measure of how people view their personal finances and wider economic prospects, fell four points to minus 19 in January, according to research company GfK.

This was the lowest reading since February 2021, when the country was in a strict lockdown, and below analysts’ expectations of no change from the previous month.

Joe Staton, client strategy director at GfK, said that “despite some good news about the easing of Covid restrictions, consumers are clearly bracing themselves for surging inflation, rising fuel bills and the prospect of interest rate rises”.

Line chart of Index showing UK consumer confidence drops further in January

All the components of the index deteriorated. However, the fall in consumers’ expectations about their personal financial situation for the year ahead and the sharp decline in the proportion of people who think this is a good time to make major purchases were particularly worrying for the pace of the UK recovery because they are more closely linked with personal spending patterns.

“The four-point fall in the major purchase index certainly suggests people are ready to tighten their belts,” said Staton.

Consumer spending has been a major driver of the UK economic recovery. In the third quarter, household consumption made the largest contribution to economic growth, accounting for 1.2 percentage points of the 1.3 per cent quarter-on-quarter expansion in gross domestic product.

The GfK index, based on interviews carried out between January 4 and 12, does not reflect Wednesday’s announcement of the easing of Covid restrictions. But Staton said it was unlikely that the mood would brighten when the health emergency receded “because it’s the cost-of-living squeeze that’s worrying us now and this will affect us for months to come”.

On Wednesday, the Office for National Statistics reported that consumer inflation rose at the fastest annual rate in 30 years in December. Economists are forecasting that inflation will peak in April when Ofgem, the energy regulator, will increase its default energy tariff price cap.

The GfK data chime with ONS figures published on Thursday which showed that in the first half of January two in three people in the UK reported their cost of living had increased over the previous month. Nearly nine in 10 of those blamed rising food prices and about eight in 10 attributed the squeeze to rising energy bills.

Linda Ellett, head of consumer markets, leisure and retail at KPMG UK, said their research suggested that about one-third of consumers would reduce their discretionary spending in 2022 because of rising living costs.

“The cost of living squeeze is also causing those who have been able to save during the pandemic to either sit on their savings, use them to offset costs, or to be conservative with how much of it they are willing to spend this year,” she added.



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Economy

Beware the promise of salary advance schemes

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High energy and food prices are particularly bad news for people who live from one payday to the next. In the UK, about 22 per cent of adults have less than £100 in savings, according to a government-backed survey. In the US, about 20 per cent of households say they could only cover their expenses for two weeks or less if they lost their income, according to the consumer protection regulator.

In this context, many employers are keen to do something to help their staff become more “financially resilient”. One increasingly popular idea is to partner with companies which provide “earned wage access” or “early salary advance scheme” products. These companies connect with an employer’s payroll to let employees draw down some of their forthcoming pay packet in advance.

The companies usually charge a fee per transaction (generally between £1 and £2 in the UK) which is paid by the employee or the employer. The products are largely unregulated because they are not seen as loans. They are proliferating in the UK, the US and a number of countries in Asia such as Singapore and Indonesia.

Revolut, the UK-based banking app, has also entered the market, telling employers it is a way to “empower employee financial wellbeing, at no cost to you”. Data is scarce, but research company Aite-Novarica estimates that $9.5bn in wages were accessed early in the US in 2020, up from $3.2bn in 2018.

In a world where many employers don’t offer ad hoc advances to employees any more, these products can help staff cope with unexpected financial emergencies without having to resort to expensive payday loans. Some of the apps like UK-based Wagestream, whose financial backers include some charities, combine it with a suite of other services like financial coaching and savings. There is also value in the clear information some of these apps supply to workers about how much they are earning, especially for shift workers.

But for companies which don’t offer these wider services, there is a question about whether payday advances really promote financial resilience. If you take from the next pay cheque, there is a risk you will come up short again the following month.

Data from the Financial Conduct Authority, a UK regulator, suggests users take advances between one and three times per month on average. While data shared by Wagestream shows 62 per cent of its users don’t make use of the salary advance option at all, 20 per cent tap it one to two times per month, 9 per cent tap it four to six times and 9 per cent tap it seven or more times.

As well as the risk of becoming trapped in a cycle, if you are paying a flat fee per transaction the cost can soon add up. The FCA has warned there is a “risk that employees might not appreciate the true cost” compared to credit products with interest rates.

Against that, Wagestream told me frequent users weren’t necessarily in financial distress. Some users are part-time shift workers who simply want to be paid after every shift, for example. Others seem to want to create a weekly pay cycle for themselves.

Wagestream users on average transfer lower amounts less often after a year. The company’s “end goal” is that all fees are covered by employers rather than workers. Some employers do this already; others are planning to as the cost of living rises.

Regulators have noticed the market but haven’t got involved yet. In the UK, the FCA’s Woolard review last year “identified a number of risks of harm associated with use of these products”, but didn’t find evidence of “crystallisation or widespread consumer detriment”. In the US, the Consumer Financial Protection Bureau is expected to look again at the question of whether any of these products should be treated as loans.

A good place to start for regulators would be to gather better data on the scale of the market and the ways in which people are using it.

Employers, meanwhile, should be wary of the idea they can deliver “financial wellbeing” on the cheap. Companies that believe in the value of these products should cover the fees and keep an eye on the way staff are using them. They could also offer payroll savings schemes to help people develop a financial cushion for the future. Nest, the UK state-backed pension fund, has just concluded an encouraging trial of an “opt out” approach to employee savings funds.

If employers don’t want to go down that road, there is a perfectly good alternative: pay staff a decent living wage and leave them to it.

sarah.oconnor@ft.com



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Economy

Jeff Bezos turns up heat on Joe Biden over US inflation

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Jeff Bezos lashed out at Joe Biden’s White House on Monday over policies he claimed risked stoking inflation, escalating a war of words over the cause of sharply rising prices that are dominating US politics in an election year.

The Amazon founder and world’s third-richest person took aim at the Biden administration’s failed Build Back Better bill, which would have increased taxes on the wealthy and large companies to pay for spending on childcare, education and programmes to curb climate change.

“Administration tried their best to add another $3.5tn to federal spending,” Bezos wrote on Twitter. “They failed, but if they had succeeded, inflation would be even higher than it is today, and inflation today is at a 40-year high.”

Bezos’s attack was an uncharacteristic outburst for one of the world’s best-known businesspeople, who has not previously used Twitter to wade into contentious political disputes.

It followed a back-and-forth with the White House that began on Friday, when Bezos criticised a tweet from Biden that suggested one reason inflation had taken off was that wealthy companies did not pay enough in tax. Bezos retorted that while high inflation and the level of taxes paid by companies were issues that deserved to be discussed, linking the two was a “non sequitur” that should be put before “the newly created Disinformation Board”.

The White House reacted scathingly to the Bezos tweets. “It doesn’t require a huge leap to figure out why one of the wealthiest individuals on Earth opposes an economic agenda for the middle class that cuts some of the biggest costs families face, fights inflation for the long haul and adds to the historic deficit reduction the President is achieving by asking the richest taxpayers and corporations to pay their fair share,” a spokesperson said.

Bezos also came under fire on Monday from Lawrence Summers, the former US Treasury secretary, who broke with most economists early last year to start warning about the rising risk of inflation. Summers called the tech entrepreneur “mostly wrong”, adding that it was “perfectly reasonable to believe . . . that we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible”.

Tensions between Bezos and the White House have been exacerbated by the president’s support for organised labour, including unionisation efforts at Amazon that have been building since Biden took office 18 months ago. “It’s also unsurprising that this tweet comes after the President met with labour organisers, including Amazon employees,” the White House spokesperson said.

Since stepping down as chief executive of Amazon last year, Bezos has become increasingly active on Twitter and used it to make occasional barbed asides related to his personal views, though not with the frequency or vehemence of rival tech billionaire Elon Musk.

Last month, Bezos suggested that Tesla’s heavy dependence on sales to China could give the Chinese government leverage to force Musk to bow to censorship after his planned purchase of Twitter.

As with Musk, Bezos has shown libertarian political instincts and once waged a bitter fight with Amazon’s home city of Seattle over a proposed tax increase. Amazon has also long resisted unionisation by its employees, putting it at odds with the Biden administration.

However, Bezos has also at times backed liberal causes, including donating heavily to defend same-sex marriage in Washington state and hiring Jay Carney, a former press secretary in the Obama White House, to head public policy and communications at Amazon.

The public spat between Bezos and the White House was symptomatic of broader frictions between business and the Biden administration and Democratic lawmakers over inflation, with some officials blaming corporate America for price-gouging and taking advantage of rising prices at the expense of ordinary consumers.

However, most economists said inflationary pressures were due to a combination of factors including high demand driven by government stimulus and the rebound from the coronavirus pandemic downturn, as well as the oil price shock exacerbated by the war in Ukraine and supply chain bottlenecks that have been more persistent than expected.





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China’s extreme Covid lockdowns drag down economic activity

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This article is an onsite version of our Disrupted Times newsletter. Sign up here to get the newsletter sent straight to your inbox three times a week

Good evening,

Could Covid be the undoing of the Chinese economic miracle? Figures released today show that lockdowns to enable President Xi Jinping’s zero-Covid strategy are enacting a significant toll on economic activity.

Industrial production, the motor that drove China out of the initial Covid shock in early 2020, dropped 2.9 per cent in April. This ran counter to expectations of a slight increase.

Meanwhile, retail sales, the country’s main gauge of consumer activity, slumped 11.1 per cent year on year, compared with forecasts of a 6.6 per cent fall from economists polled by Bloomberg.

Today’s data are a stark reminder of the economic damage being done by China’s zero tolerance approach to coronavirus, enacted through citywide lockdowns, mass testing and quarantine centres. Xi has reaffirmed his commitment to the policy as the tool to eradicate Covid ahead of his bid for a third term in power later this year, but it is expected to have deep ramifications, not just for China but for global supply chains.

The immediate future looks equally difficult for the world’s second-largest economy and its neighbours. The benchmark coal price for the Asian market was pushed to a record high today because of weak supplies from Australia.

High-energy coal shipped from the Australian port of Newcastle was assessed at almost $400 a tonne by Argus, a price reporting agency. That topped the previous high set in March after the invasion of Ukraine raised gas prices, pushing power stations to burn coal to generate electricity instead.

Latest news

For up-to-the-minute news updates, visit our live blog

Need to know: the economy

The economic gloom has spread to the EU. Today, Brussels cut its growth forecasts further and lifted its inflation outlook, blaming the energy crisis triggered by Russia’s invasion of Ukraine.

Both the EU and euro area are set to expand by 2.7 per cent this year, significantly lower than the previous forecast of 4 per cent. Inflation is now expected to surpass 6 per cent, with some central and eastern European countries likely to see double-digit price rises in 2022.

Latest for the UK and Europe

British manufacturers are bringing production back to the UK, reversing the “offshoring” trend of recent years because of concerns about how the pandemic and Brexit have disrupted supply chains. Three-quarters of companies have increased the number of their British suppliers in the past two years, according to a survey by Make UK, the manufacturers’ trade group.

A key part of the problem for Europe in its effort to wean itself off Russian oil and gas is the existence of infrastructure “pinch points” across the continent. Jonathan Stern, research fellow at the Oxford Institute for Energy Studies, said many projects being reconsidered have been planned for years but rejected as not commercially viable when assessed against cheap Russian gas supplies. That assessment has now changed.

Global latest

G7 foreign ministers have warned of a global hunger crisis unless Russia lifts its Ukraine blockade. Speaking at the conclusion of a three-day meeting in Germany on Saturday, German foreign minister Annalena Baerbock said some 25mn tonnes of grain were stuck in Ukrainian ports that were being blockaded by Russian forces — “grain that the world urgently needs”.

Inflation has returned to haunt Brazilians, triggered by the surge in global food and fuel costs. At 12 per cent, it is now at an almost two-decade high and officials are increasingly concerned that price pressures are becoming entrenched across the economy.

Need to know: business

America’s shale oil companies are enjoying a cash bonanza, following months of capital restraint by a sector that suddenly finds itself in demand thanks to the global energy crisis. Operators will generate about $180bn of free cash flow — operating income minus capital and maintenance outflows — this year at current crude prices, according to research company Rystad Energy.

Column chart of $bn  showing US shale free cash flows are soaring

McDonald’s has announced that the invasion of Ukraine means it can no longer run outlets in Russia. The Chicago-based company, which operated 850 restaurants in Russia and employed 62,000 people, is looking for a Russian buyer that would retain these staff. It said it expected to book a non-cash charge of $1.2bn to $1.4bn for the exit.

Renault has sold its Russian business Avtovaz, which made the Lada, to a state-backed car institute for two roubles. The French company’s exit highlights the meagre options facing businesses trying to leave Russia without huge losses on their investments.

Ryanair chief executive Michael O’Leary has warned that the outlook for flying remained fragile and vulnerable to new shocks, as the carrier reported a loss of €355mn for the 12 months to the end of March, down from €1.015bn the year before. O’Leary added the airline would “do very well” over the summer if travel was not disrupted by a new coronavirus variant or the war in Ukraine spreading.

City centre shopping malls may at last be evolving into multipurpose hubs for business and leisure as well as shopping, as envisaged by their 20th century creator, Vienna-born architect Victor Gruen. But reinvigorating older centres will require investment, a challenge in a cash-strapped sector that has suffered from brutal value destruction, according to an FT analysis of the property sector.

The World of Work

Anger about high bonus payments for executives, often paid on top of hefty salaries, is easy to understand. But now studies have found that the whole system of paying people to hit targets is flawed. This is in large part because a lot of bonus systems are outdated in an age of knowledge work, writes FT columnist Pilita Clark.

Male managers in the UK are blocking efforts to improve the gender balance at British companies, according to research by the Chartered Management Institute. Two-thirds of the male respondents in the survey of 1,149 managers said they believed their organisation could successfully manage future challenges without gender-balanced leadership. The survey follows widespread condemnation of sexist remarks directed at Aviva chief executive Amanda Blanc at the company’s AGM last week.

Packing up a workspace is a huge task, but one Oxford scientist did just that and moved his team to the Netherlands, in part to be closer to his family after 14 years of working in the UK and partly to avoid the adverse consequences of Brexit for British science.

Covid cases and vaccinations

Total global cases: 515.2mn

Total doses given: 11.7bn

Get the latest worldwide picture with our vaccine tracker

And finally . . . 

Illustration of ‘Rutherford Hall’
© Eliot Wyatt

The FT has a new columnist, critical communications strategist Rutherford Hall. He kicks off this week by offering some (rather suspect) advice to London-based Russian businessman (don’t on any account say oligarch) Oleg on why building a new swimming pool in the upstairs of his South Kensington mansion might not be the best way to improve his image. Hat tip to the FT’s UK editor-at-large Robert Shrimsley for “recovering” these emails.

Working it — Discover the big ideas shaping today’s workplaces with a weekly newsletter from work & careers editor Isabel Berwick. Sign up here

FT Asset Management — The inside story on the movers and shakers behind a multitrillion-dollar industry. Sign up here

Thanks for reading Disrupted Times. If this newsletter has been forwarded to you, please sign up here to receive future issues. And please share your feedback with us at disruptedtimes@ft.com. Thank you



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