Closing post
Time to recap…
The governor of the Bank of England has told MPs he hopes mortgage rates will keep falling.
Testifying to the Treasury Committee today, Andrew Bailey said:
“Obviously we have had a big change in market interest rates in the last few months and so the cost of mortgages is coming down.”
Bailey also told MPs that rising interest rates had not destabilised the financial sector, but that the Middle East conflict was a risk, if it pushed energy prices higher.
Several economists have predicted that UK inflation will drop to 2% in the next few months, which would give the Bank of England the leeway to cut interest rates.
Deutsche Bank predict the CPI rate will fall to 2% by April.
Andrew Goodwin, chief UK economist at the consultancy Oxford Economics, predicts inflation will average 2.1% this year.
Investec see inflation dropping to just 1.5% in July-September.
In other news:
Updated
Eton mess: start of school term delayed as flooding causes toilets to back up
Elsewhere today… the average Etonian parent may be fairly flush, but flushing problems mean their offspring won’t be off to school as early as planned.
Eton college has been forced to delay the start of school term after the toilets in its boarding houses backed up because of flooding in the Thames Water sewers caused by recent heavy rains, my colleague Alex Lawson reports.
The £46,000-a-year private school apologised to parents, saying pupils would begin the year learning remotely online, after the water company informed it of the issue.
Pupils had been due to return to the prestigious boys’ school, near Windsor in Berkshire, on Tuesday after the Christmas break.
“I am very sorry to say that Thames Water have just alerted us to the fact that their sewerage drains are backfilling due to floodwater,” said an email sent to parents and guardians, first reported by Bloomberg.
“The sewers in the centre of Eton won’t cope with the arrival of nearly 1,350 boys.”
The session wrapped up briskly, as a ringing division bell summoned MPs to a vote.
Danny Kruger squeezed in one last question, about the development of Britcoin – a UK digital pound.
Q: Have you considered the issues of privacy and programmability; when we last spoke, you said it hadn’t been considered yet.
Deputy governor Sarah Breeden says it is being very actively being debated, and it will be part of the BoE’s response on the Britcoin issue.
This issue came up last September, when Kruger flagged the risk that governments could use digital currencies to track what people were spending.
Updated
Q: What’s holding back the development of a sterling-denominated stablecoin in the UK?
Bailey says stablecoins purport to be money, as they can be used transactionally. That poses very different challenges to regulators than other crypto assets.
[Stablecoins are backed by a specified asset or basket of assets which they use to maintain a stable value against that asset].
Bailey, though, suggests they are not stable enough yet, comparing them to “opaque” money market funds.
Bailey: Crypto assets have lost momentum
Danny Kruger MP quizzes the Bank officials about the financial risks from cryptocurrency.
Q: What is your prediction for how crypto assets are taken up by the financial system?
Andrew Bailey says these unbacked crypto assets (as opposed to stablecoins) are not taking off as a means of payment.
Using bitcoin is fairly inefficient, so it is not taking off generally as a payments method, the BoE governor says. The momentum of a few years ago has not kept up, he adds.
Bailey then repeats a point he has made often before, that bitcoin has no intrinsic value.
People may want it extrinsically, because they want to end things, but it doesn’t have intrinsic value.
Q: Bitcoin’s rise over the last year (up 150%) suggests a lot of people think it’s the future… Kruger points out.
Deputy governor Sarah Breeden says the lack of regulatory framework has prevented traditional finance from getting involved in bitcoin in a safe way.
This is changing, with the UK laying out a crypto regime and the SEC considering a bitcoin ETF, Breeden adds.
Thérèse Coffey MP, a new member of the Treasury committee (following November’s cabniet reshuffle), asked the Bank of England about the risks from China’s property sector.
Q: Are banks taking steps to mitigate against potential losses here?
BoE deputy governor Sarah Breeden says risks in the China property market have been crystallising since 2021.
Banks exposed to China have been taking impairment charges (losses) on the back of that, Breeden points out.
From a financial stability perspective, the BoE hasn’t yet seen signs of problems in China’s property sector spilling into the wider Chinese economy. And if that does, the BoE is confident that UK banks are resilient enough to cope.
Investec also predict UK inflation will drop to the Bank’s 2% target sooner than previously thought.
In a new research note this afternoon, they say:
We are now of the view that the headline rate of CPI inflation will moderate closer to 1.5% in Q3 this year, from its current rate of 3.9% and below the 2.0% target.
Investec predict that this will allow the Bank to cut interest rates three times this year, down to 4.5% by December.
Andrew Goodwin, chief UK economist at the consultancy Oxford Economics, is in the same camp as Deutsche’s chief UK economist, Sanjay Raja, when it comes to inflation.
They expect a drop over the next few months to the Bank of England’s 2% target rate, as Deutsche also forecast today (see earlier post).
Goodwin said:
“The UK inflation outlook has been transformed by steep falls in oil and gas prices and the recent softening in core price pressures. We now expect CPI inflation to average 2.1% in 2024, down from our November forecast of 3.1%. Inflation is on track to return to the 2% target in April.
“Wholesale gas prices have fallen sharply in recent weeks and the Ofgem energy price cap is on track to fall by 12% in April. Our commodities team has also cut its forecast for oil prices following recent declines. We expect these two categories to knock more than 1 percetange point off CPI inflation in 2024, with the drag in April being as high as 1.6ppts.
He added:
“Even before the recent falls in oil and gas prices, the Bank of England’s inflation forecasts had looked too high. We expect the BoE to lower its projections significantly in February’s Monetary Policy Report, as it begins to prepare the ground for rate cuts. Lower inflation means we also expect stronger growth in real household incomes and GDP this year.”
Bailey: We're watching Red Sea crisis closely
Bank of England governor Andrew Bailey has said he is monitoring the situation in the Red Sea closely as attacks on the vital shipping lane has rerouted cargo ships away from the Suez Canal.
Bailey told MPs today:
“We’ve certainly seen – as best we can tell from the monitoring – shipping traffic is being affected and is being rerouted. That will increase shipping prices and shipping costs. I think initially that will be an issue in the monetary policy world.
“I would say one of the things, fortunately, that hasn’t happened is that we have not had a prolonged spike in oil prices.
“We had a bit of an initial spike and at the moment we’re seeing that, if anything, the oil price is actually coming down a bit, and there seems to be some price management to keep it there.
“This is very helpful because clearly quite a bit of the shipping traffic that goes through those straits and through the Suez Canal is oil, oil and liquefied natural gas.
“We have to watch it very carefully, though, because it is obviously having an effect.”
Q: Has the Bank exposed UK to financial risk by scrapping its mortgage affordability test in August 2022?
[that test forced borrowers to show they could afford a three-percentage-point rise in interest rates before they could be approved for a home loan].
Deputy governor Sarah Breedon says the test isn’t needed, as the UK also has an affordability test enforced by the FCA, and a macroprudential loan to income limit on loans.
Those two measures provide sufficient resilience, she argues.
Q: So you don’t see any circumstances where you might bring it back this year?
Andrew Bailey does not.
Q: How about credit card debt?
Andrew Bailey says the Bank watches this area closely, but it isn’t seeing a substantial upturn in credit card arrears.
Q: Which households will have a worse 2024 than others, in relation to their mortgage rates?
Andrew Bailey says the rental market is more stretched, as lower-income households are more likely to rent than own their own home.
Rental inflation is running at around 6%, says Bailey, who adds he “really hopes” that comes down.
BoE governor Bailey: Hopes mortgage rates will keep falling
Labour MP Keir Mather asks the Bank of England about the impact of high interest rates on mortgages.
Q: How confident are you that increases in mortgage payments won’t have any serious financial repercussions?
Very good question, Andrew Bailey says.
He reiterates his earlier point that while some households are really struggling, in aggregate households are not as stretched as they were after the financial crisis (see here).
Bailey points out that unemployment remains relatively low, as does the number of borrowers in arrears while repossessions are now rare.
He says:
One of the worst things we have in the past was a big upturn in repossessions and the suffering that caused for people.
[However, recent data has shown a rise in households behind on their payments, while the the number of buy to let mortgages in arrears has doubled in a year].
Bailey then adds that there has been a big change in market expectations for interest rates.
[Investors think they are now at their peak, at 5.25%, having previously expected them to hit 6%, which has sparked a flurry of cuts to mortgage rates in recent weeks].
The governor says:
“Obviously we have had a big change in market interest rates in the last few months and so the cost of mortgages is coming down.”
Bailey adds that he hopes this continues.
Updated
The committee turns to the Bank’s countercyclical buffer, a tool which allows the BoE to influence how much capital banks build up.
The Bank left the buffer unchanged at 2% in November, having been cut to 0% early in the pandemic.
Q: Is there a case for changing the buffer this year?
FPC external member Carolyn Wilkins says the committee sees 2% as a neutral rate – it could raise it, if it thought risks to the banking sector had increased, or if the BoE wanted to ensure banks could withstand shock without having to tighten credit.
Alternatively, if deteriorating credit conditions were likely to lead to a cutback in lending, the Bank could lower the buffer.
FPC external member Jonathan Hall tells MPs to rember that the buffer is meant to be counter cyclical to the financial and credit cycle, not to the economic cycle.
So it should be used to encourage banks to build up capital in the good times, ready for a rainy day, so the banks can support the real economy through a shock.
"No evidence" that QT is causing stability problems
The commitee turns to the Bank of England’s quantitative tightening progamme, though which it is selling some of the bonds it bought after the 2008 financial crisis and in the pandemic.
Q: Will those sales of £100bn of bonds this year, when the government is also selling bonds (to fund the deficit) have an impact on financial stability?
Deputy governor Sarah Breeden says QT sales could have a limited impact on bond yields in the markets.
[if there is a glut of bonds, prices will fall, and yields will go up].
Breeden says the Bank lays out its bond sales plans clearly, and all the evidence is that there has not been any impact on market functioning or financial stability.
QT will lower the amount of reserves held by commercial banks, Breeden points out. It will also lower the value of deposits in the system, so banks need to adjust for that too.
Breeden says:
There are a number of channels through which quantitative tightening might matter for market stability and for banks. So far, there’s no evidence that has been a problem.
BoE: Exuberence and geopolitical dangers are top risks in 2024
Q: What is the biggest threat to financial stability in the year ahead?
Jonathan Hall, external member of the Financial Policy Committee, says there is a danger of exuberance. Some people may take on too much risk because interest rates are expected to be less volatile.
Hall says:
If conditions seem calm, if volatility is low, then you could get a risk of exuberance, so people taking on more risk because they think the market is more benign.
Governor Andrew Bailey points to the danger of further global shocks.
He points out that the Middle East is still a “very uncertain place”, meaning there is still the potential that energy prices spike (this hasn’t happened yet, though, he says).
Sarah Breeden, deputy governor for financial stability, picks “uncertainty”. If that isn’t priced properly in markets, there is a risk of a market adjustment, Breeden says.
Isn’t that always a danger, though, Harriett Baldwin MP asks.
Breeden says the risk environment at the moment feels “particularly challenging."
Carolyn Wilkins, another external member on the FPC, says there is a danger that geopolitical risks create “an uptick in inflation” and a slowdown in economic growth.
That would be “stressful from a financial stability point of view”, Wilkins warns, addding that the Bank runs stress tests to check that financial institutions can withstand those kind of that kind of shocks.
We’ve just embedded a live feed of Andrew Bailey and other members of the BoE’s financial policy committee answering from the House of Commons’ Treasury Committee this afternoon at the top of the blog.
Bailey: Households with mortgages less stressed than in GFC
Committee chair Harriett Baldwin begins the session by asking about the macroprudential impact of interest rates, on the UK’s financial stability.
Governor Andrew Bailey says it’s important from an economic stability point of view that inflation is brought down to target.
[Bailey wearing his Financial Policy Committee hat today, while interest rates are set by the Bank’s Monetary Policy Committee, which he also chairs].
Bailey says there is a difference between the level of borrowing costs, and the speed of any chances, citing the panic in the financial markets after the mini-budget, where unexpected, rapidly rising bond yields triggered the LDI crisis.
Bailey points out that there has not been a pronounced increase in unemployment since the Bank started raising interest rates.
He points out that some people are experiencing very difficult times. But in aggregate, UK households with mortgages are not as stretched as they were during the global financial crisis 15 years ago, he argues.
Bailey says the Bank looks at the “cost of living adjusted debt service ratio” which takes household income, deducts essential spending, and then compares the residual income to household debt service costs.
Bailey says:
It’s interesting to look at that, [as] it is nowhere near as stretched as it was during the global financial crisis period. So there is…some mitigation.
Bank of England governor to be questioned by MPs
Over in parliament, MPs are preparing to question the Bank of England governor, Andrew Bailey, about the financial stability of the UK.
The Treasury Committee will examine the BoE’s latest financial stability report, released last month, and probe the threat to financial stability posed by interest rate rises.
The Committee says:
The decision to increase and then hold the Bank Rate has seen UK households and businesses face rapidly increasing running costs while borrowing also becomes a more costly option. Members of the Committee are likely to probe whether these pressures could have implications for the UK’s economic resilience.
MPs on the Treasury Committee may choose to question witnesses on the impact increasing levels of debt may have on the UK’s financial stability, as well as asking for views on the extent to which Artificial intelligence is considered a risk by the FPC.
The hearing is due to start at 2.15pm.
The witnesses are:
Andrew Bailey, Governor, Bank of England
Sarah Breeden, Deputy Governor for Financial Stability, Bank of England
Jonathan Hall, External Member, Financial Policy Committee
Carolyn A. Wilkins, External Member, Financial Policy Committee
Deutsche Bank: UK inflation to fall below 2% in April and May
Economists at Deutsche Bank have predicted that UK inflation could drop to the Bank of England’s 2% target this spring.
In a reserach note this morning, Deutsche Bank predits UK CPI inflation will average 2.5% year-on-year in 2024, down from a previous forecast of 2.7%.
Headline inflation will drop “a little below 2% in April and May”, Deutsche predict, before hovering around 2-2.5% for the remainder of the year.
Deutsche’s chief UK economist, Sanjay Raja, adds:
Core CPI, we think will slow to just under 4% y-o-y, with services inflation tracking just above 5% y-o-y. RPI, we think, will drop to 3.5% y-o-y on the year.
Updated
Here’s our news story on the estimated cost of the HS2 line from London to Birmingham having ballooned to as much as £66bn.
In the City, shares in insurance companies have dropped this morning following critical comments about the sector from the UK regulator.
Admiral are now the top faller on the FTSE 100 index, down 5.6%, while Direct Line (-6.7%) is leading the fallers on the smaller FTSE 250 index.
According to Reuters, traders pointing to an article in the Insurance Post that quoted the Financial Conduct Authority’s Head of Insurance Matt Brewis as saying premium finance was a “poor product”.
Those comments could suggest insurers coule make changes to the way such products are priced.
Thomas Bateman, equity research analyst for insurance at Berenberg, said:
“(The article) has reignited the discussion around premium finance, and while the FCA has talked negatively about it (the product) in the past, we believe the recent comments, which have been made publicly, are more negative than they have been in the past.
Back at parliament, HS2 Ltd executive chairman Sir Jon Thompson has told the transport committee that the decision not to extend HS2 north of Birmingham could lead to a reduction in seat capacity for train services between London and Manchester compared with today.
This is because the initial plans for the project involved extending platforms at Crewe station and building a new station at Manchester Piccadilly to accommodate 400-metre HS2 trains.
Following Rishi Sunak’s decision to scrap the Birmingham to Manchester section of the high-speed line, HS2 trains running north of Birmingham are expected to be configured to about 250 metres to fit in the stations.
That means they will be half the size of those originally planned, comprising one 550-seat unit rather than two.
In that scenario, Thompson explained, there would be fewer seats on the route from London to Manchester.
Sir Jon said:
In other words, capacity could go down.
“The reason why I can’t be absolutely definitive about that is because it may, of course, be that somebody’s got a fantastic plan to resolve that, but I’m not aware of it.
“So, under the current scenario, unless you extend Piccadilly station … my understanding is there would be a reduction in the number of seats from London to Manchester.”
Back in October, rail experts warned that journeys from London to Manchester that use the new HS2 line as far as Birmingham could run slower than current services, as well as having lower capacity.
There are more economic warning lights flashing in Germany today.
Sentiment among German housing constructors has dropped to all-time low, according to a survey published by Munich-based Ifo institute.
It found that 56.9% of German residential construction companies said order books were too low, up from 49.1% the previous month,
IFO’s index of business sentiment among builders dropped to -56.8 points, the lowest level since records began in 1991, with over a fifth of builders complaining that projects had been canceled.
Separately, German wholesalers expect their revenues to fall 2% in nominal terms this year, continuing a downward trajectory after a 3.75% decline last year.
The BGA lobby group warned that sentiment in Europe’s biggest economy was “on the floor”.
Dirk Jandura, president of the BGA, said.
“The results of our current company survey are alarming. While other economies have already recovered, Germany is stuck in an economic dead end.”
Full story: AI-driven misinformation ‘biggest short-term threat to global economy’
A wave of artificial intelligence-driven misinformation and disinformation that could influence key looming elections poses the biggest short-term threat to the global economy, the World Economic Forum (WEF) has said.
In a deeply gloomy assessment, the body that convenes its annual meeting in Davos next week expressed concern that politics could be disrupted by the spread of false information, potentially leading to riots, strikes and crackdowns on dissent from governments.
The WEF’s annual risks report – which canvasses the opinion of 1,400 experts – found 30% of respondents thought there was a high risk of a global catastrophe over the next two years, with two-thirds fearful of a disastrous event within the next decade.
Eurozone may have fallen into recession, ECB vice-president warns
Over in the eurozone, the vice-president of the European Central Bank has warned that a recession may have struck.
Luis de Guindos told an audience in Madrid that the euro zone may have been in recession last quarter and prospects remain weak,
De Guindos welcomed the drop in eurozone inflation last year, to just below 3% in December, but cautioned that growth developments are more disappointing.
Economic activity in the euro area slowed slightly in the third quarter of 2023.
Soft indicators point to an economic contraction in December too, confirming the possibility of a technical recession in the second half of 2023 and weak prospects for the near term.
The slowdown in activity appears to be broad-based, de Guindos added, with construction and manufacturing being particularly affected.
Official GDP data shows the eurozone shrank a little in Q3 2023, by 0.1% – another contraction in Q4 would mean a technical recession.
Inflation is likely to fall at a slower pace this year than in 2023, says Vice-President Luis de Guindos.
— European Central Bank (@ecb) January 10, 2024
High wage pressures, geopolitical tensions and upcoming wage negotiations are adding to uncertainty around the future path of inflation.https://t.co/LzMWimO0Uz pic.twitter.com/ZXVociVhEi
Sainsbury's in contact with government over Red Sea disruption
The boss of Sainsbury’s has revealed his company is in regular contact with the UK government about the disruption to shipping in the Red Sea (see earlier post).
Simon Roberts said Sainsbury’s was working with the government to help reduce the impact of problems in the Red Sea caused by attacks by Houthi rebels on cargo ships.
He told reporters:
“Through the last three or four weeks our team have spent time working out how to get the impact to an absolute minimum,” he said.
“The vast majority of container ships are instead going around the Cape of Good Hope which is making journeys 10 to 14 days longer.
“We are working on our sequencing of orders to ensure we always have good availability in product areas which can travel through these routes, such as general merchandise and wine.
“Getting products from across the world is an important issue for the Government, so we are on regular calls to make sure we have the latest intel and understand the potential impacts.”
He said most shipments via the area were now taking at least 10 days longer, as they could not go via the Suez Canal, and Sainsbury’s was carefully planning shipments to try to maintain availability and keep costs down.
Tier and Dott to merge, forming Europe's largest e-scooter rental firm
In other transport news, two e-scooter rental firms are merging.
Tier Mobility and Dott are combining to form the largest European operator.
The combined entity will operate e-scooter rental services in 20 countries with annual revenue of €250m, and keep operating both brands.
Tier and Dott offer rides in many cities including Berlin, Brussels, Dubai, London, Paris and Rome.
The merger may require some regulatory approval and the two companies said it was subject to several conditions being met.
Costs of a major building project also increase as constructors get into the detail of the design, HS2 Ltd executive chairman Sir Jon Thompson added, telling MPs:
“If you say to a builder, can you give me a quote for an extension, they walk around and say ‘it’s £50,000-something’.
“But then you get into the detailed design, you know exactly how big it is, what surfaces you want, how much concrete needs to be poured. Unsurprisingly you get a better number.
“That’s the situation here. The situation with HS2 in my opinion is the estimate was poor, the budget was set too early, and then when you get further into it, you get much better information.
“Then on that basis, you can cost it out with more accuracy and then you discover it’s higher.”
Why has the estimated cost of HS2 continued to climb, and climb, over the years, from a first estimate of £33bn for the full line in 2010?
According to HS2 Ltd executive chairman Sir Jon Thompson there are several reasons – inflation is clearly a factor, but also the original budgets were too low, there have been changes to the scope of the line, and poor delivery.
Thompson told MPs this morning:
“This is a systemic problem. It’s not just about HS2, it’s about large projects that the Government funds.
“The budget needs to be set early on in order for an outline business case to be approved by the Government, sometimes by Parliament.
“At that point, people think OK the original estimate for Phase 1 was £30 billion-something.
“That is based on very, very immature data. You don’t have a design, you haven’t procured anything, there is no detail on which you can cost anything.”
My colleague Gwyn Topham looked into this issue last year, showing how soaring prices of construction materials and labour shortages had driven up costs, while many tunnels had been build along the HS2 route as a concession to MPs in Conservative marginal seats.
Cost of HS2 from London-Birmingham jumps to £66bn
The estimated cost of building the HS2 rail link between London and Birmingham has soared by up to £10bn to as much as £66.6bn, MPs have heard this morning.
HS2 Ltd executive chairman Sir Jon Thompson told told the Transport Select Committee that the estimated cost for Phase 1 is between £49bn and £56.6bn at 2019 prices.
However, adjusting the range for current prices involves “adding somewhere between eight and 10 billion pounds”, Thompson explained (PA Media reports), reflecting the impact of inflation on the line’s cost.
He went on:
“It is the Government’s long-standing policy that infrastructure estimates are only updated at Spending Review points, that’s my understanding of it.
“So that’s why we’re still working to 2019 prices and the whole conversation about 2019, which is to be frank with you an administrative burden of some significance in the organisation.”
Back in October, Rishi Sunak cancelled the northern leg of HS2 from Birmingham to Manchester, but the government is pressing on with the London-Birmingham link, the first phase of the line.
Updated
Geopolitical tensions in the Middle East are another global risk.
Asked about this, Carolina Klint, chief commercial officer for Europe at Marsh, warns that we can expect the attacks on traffic in the Red Sea to continue, as there are no signs of the situation calming down.
Klint told reporters in London:
It is becoming almost impossible, taking container ships now through the Suez Canal without risking the lives of the crew, and without putting them in harm’s way.
Of course that is a critical point because it’s not only about protecting a big ship or protecting the containers but first and foremost, of course, it’s the human lives at risk.
Ealier today US and UK warships repelled a barrage of 20 Houthi rockets, drones and cruise missiles fired at ships in the Red Sea.
Updated
91% of risk experts are pessimistic about 10-year outlook
Around 17% of the experts surveyed for WEF’s Global Risks report fear the global outlook will be ‘stormy’ over the next decade, with global catastrophe risks rising.
Nearly half of the 1,400-strong panel predict turbulent times, bringing upheavals and an ‘elevated risk’ of global catastrophes.
Just 1% believe there’s a negligible risk of global catastrophes in the next 10 years, as this chart from today’s report shows:
John Scott, head of sustainability Risk at Zurich Insurance Group, says:
“The world is undergoing significant structural transformations with AI, climate change, geopolitical shifts and demographic transitions. Ninety-one per cent of risk experts surveyed express pessimism over the 10-year horizon.
Known risks are intensifying and new risks are emerging – but they also provide opportunities. Collective and coordinated cross-border actions play their part, but localized strategies are critical for reducing the impact of global risks. The individual actions of citizens, countries and companies can move the needle on global risk reduction, contributing to a brighter, safer world.”
Scott has also told reporters in London this morning that the rise of misinformation means we will need “some sort of arbiter of truth” so people can understand, both individually and collectively, what is real and what isn’t real.
Scott says:
And I think that’s where tech is going to go. And that means there’s going to be more governance in that space.
X (formerly Twitter), for example, has brought in ‘Community Notes’, to encourage its users to fact-check claims.
The World Economic Forum’s Global Risks report also warns that the coming years will be marked by “persistent economic uncertainty” and growing economic and technological divides.
Lack of economic opportunity is ranked as the sixth largest risk in the next two years, by the experts quizzed for its report.
And in the long term, WEF warns that barriers to economic mobility could build, locking out large segments of the population from economic opportunities.
The report adds:
Conflict-prone or climate-vulnerable countries may increasingly be isolated from investment, technologies and related job creation. In the absence of pathways to safe and secure livelihoods, individuals may be more prone to crime, militarization or radicalization.
Speaking to reporters in London now, Saadia Zahidi, managing director at WEF, says that concerns over slowing living standards has been rising for some time.
Inequality is on the rise and for some people, that means that their living standards have started to fall, Zahidi points out.
Longer term trends will depend, for example, on whether developing economies will receive the finance they need to be able to adapt to the effects of climate change.
Otherwise, she warns, some parts of the world could be asked to essentially freeze their outlook, even though there hasn’t even been basic electrification for 600 to 700 million people in Africa.
WEF: Misinformation and disinformation are biggest short-term risks,
Newsflash: Misinformation and disinformation driven by artificial intelligence are the biggest short-term risks facing the global economy, the World Economic Forum is warning this morning.
But in the long term, extreme weather and critical change to Earth systems are the greatest concerns.
That’s the topline finding from WEF’s Global Risks Report 2024, which has just been released, ahead of its Annual Meeting in Davos next week.
The survey polled more than 1,400 global risks experts, policy-makers and industry leaders.
It found concerns over the persistent cost-of-living crisis and the intertwined risks of AI-driven misinformation and disinformation, which could lead to increased societal polarization.
And this misinformation threat comes in a year when more than 40 countries will hold national elections, where there will be an opportunity for bad actors to create false information or ‘deepfake’ videos.
WEF says:
The nexus between falsified information and societal unrest will take centre stage amid elections in several major economies that are set to take place in the next two year
Carolina Klint, Chief Commercial Officer for Europe at Marsh McLennan, which helped produce the report, explains:
“Artificial intelligence breakthroughs will radically disrupt the risk outlook for organizations with many struggling to react to threats arising from misinformation, disintermediation and strategic miscalculation.
At the same time, companies are having to negotiate supply chains made more complex by geopolitics and climate change and cyber threats from a growing number of malicious actors.
It will take a relentless focus to build resilience at organizational, country and international levels – and greater cooperation between the public and private sectors – to navigate this rapidly evolving risk landscape.”
Cyber insecurity and interstate armed conflict also appear high on the short-term risks identified by WEF’s experts.
But the longer-term threat table is dominated by environmental issues, including the risk of biodiversity loss and shortages of natural resources.
Updated
Full story: Greggs enjoys bumper Christmas period as it hails easing inflation
Greggs has hailed easing inflationary pressures after the UK’s biggest bakery chain rang up bumper Christmas sales amid less travel disruption and enthusiasm for seasonal specialities such as festive bakes and chocolate orange muffins.
The company said sales at established stores had risen 9.4% in the three months to 30 December as it attracted more customers with extended opening hours and by offering online ordering.
Better weather and fewer transport strikes than in the same period in 2022 also contributed to growth, the chain said, as did higher prices on some items – although at a lower rate than earlier in the year.
It said extending its ranges had also helped sales, with its festive bakes, chocolate orange muffins and Christmas lunch baguettes “in high demand”, while pizza sales continued to perform strongly.
Greggs enjoys bumper Christmas period as it hails easing inflation https://t.co/7aPSPskmQN
— Guardian Business (@BusinessDesk) January 10, 2024
Greggs’ strong sales growth last year shows that the chain is resilient to the problems hitting the UK economy.
Victoria Scholar, head of investment at interactive investor, explains:
“Greggs reported like-for-like sales up 9.4% in the fourth quarter. Full-year total sales rose by 19.6% to £1.81 billion, ahead of forecasts for growth of 18.1%. Shares in Greggs are surging today, extending gains off the October lows, helping to reverse some of the declines from the highs at the start of May.
Investors are cheering its impressive period to wrap up the year with strong demand for its festive products such as the Christmas lunch baguette and the Festive Bake, partly thanks to fun marketing with the return of Greggs’ own novelty Christmas jumper. It is also benefitting from the recent disinflationary trajectory that has helped to reduce its cost pressures.
Its low price point makes Greggs resilient to the macroeconomic headwinds, cost-of-living pressures and the consumer slowdown. Its range of value hot and cold comfort food and drinks appeal to a wide customer base including a vast number of workers who are on the move throughout the day.”
Completed home sales at Persimmon drop by a third, but beat expectations
Persimmon is the first listed housebuilder to publish accounts this year, and this morning’s numbers reflect the difficult trading conditions for the housebuilding sector in 2023, my colleague Jack Simpson reports.
The number of new home sale completions for Persimmon fell to 9,922 for the year, down by a third on the 14,868 completed in 2022.
However, despite the sluggish numbers, this was actually ahead of Persimmon’s forecast from March last year, which predicted completed sales to be between 8,000 and 9,000 in 2023.
This was largely driven by a strong fourth quarter, when Persimmon completed 4,234 homes – nearly as many as the 4,249 homes completed in the first six months of the year.
Looking ahead, the housebuilder said that market conditions remained highly uncertain, particularly for first-time buyers.
Persimmon says:
We anticipate market conditions will remain highly uncertain during 2024, particularly for first-time buyers and with an election likely this year.
However, it said that there were positive signs with mortgage rates beginning to ease and build costs beginning to moderate both benefiting completion numbers.
Commenting on the results, Aarin Chiekrie, equity analyst at Hargreaves Lansdown, says:
“Market forecasts are suggesting a 35% fall in revenue for 2023. Coupled with the effect of lower volumes and build cost inflation remaining more stubborn than the group had anticipated, operating profit margins look set to roughly halve year-on-year to around 14%.
“While that’s not ideal, it’s a picture that’s largely being repeated across the sector.”
Greggs set to keep prices on hold as inflation eases
Greggs says it does not plan to hike prices over the year ahead, thanks to the easing inflationary pressures it reported this morning.
However, actual price cuts seem unlikely, with Greggs pointing out that rising wages are adding to its costs
Roisin Currie, chief executive of Greggs, told the PA news agency she has “no plans currently” to increase prices across it ranges as it expects a more stable cost base over the year ahead.
However, she said it would be “a long time before we see deflation” that would allow the group to start reducing prices, with retailers among those facing higher wage bills due to increases in the national living wage.
But she said rising wages was also “good news as it puts more money into consumers pockets”
Sainsbury’s shares have dropped by 5% to the bottom of the FTSE 100 leaderboard, to a one-month low of 290p.
Investors are unimpressed, even though the company reported sales growth over Christmas and is sticking with its profit forecasts.
Michael Hewson, analyst at CMC Markets, says Sainsbury’s numbers show “a solid performance”, but the City may have expecting a little bit more given “recent declines in the cost of living and the big jump in UK retail sales seen in November”.
Hewson says:
It is clear from today’s numbers from Sainsbury that consumers prioritised their spend over the Christmas period towards food and drink, eschewing more discretionary spending on bigger ticket items, even as the pressure on the cost-of-living continues to ease.
On a more positive note, Sainsbury did maintain its full year guidance for adjusted pre-tax profit of between £670m and £700m and free cash flow of £600m, however the shares have slipped back on disappointment that there was no upgrade to its full year guidance.
Greggs shares jump to five-month high
Shares in Greggs have jumped to a five-month high at the start of trading in London, as investors hail its sales growth.
Greggs shares have risen by 9% to £2,698, their highest level since 1 August.
That makes them the top riser on the FTSE 250 index of medium-sized companies listed in London.
Greggs shares on a roll today 👀
— Michael Hewson 🇬🇧 (@mhewson_CMC) January 10, 2024
Like for like sales up 13.7%
Total sales for FY 23 +19.6% at £1.81bn
2023 was a year of “real progress” for Greggs, says Matt Britzman, equity analyst at Hargreaves Lansdown, after a “solid final quarter”
Britzman explains:
Double-digit growth in like-for-like sales was down to extended opening hours, more delivery options, improving supply chain capacity and a fresh new suite of tasty treats.
Festive Bakes and Chocolate Orange Muffins lead the way over Christmas but bears may point to sales growth slowing over the year, and the fourth quarter was the lowest of 2023. That’s largely because Greggs was able to limit price hikes as inflation cooled.
Longer-term, that’s a net positive. One of Greggs’ key strengths is offering a lower value treat and keeping that proposition intact is key, especially when consumer incomes are stretched. The most important thing is to see volumes trend higher, and that remains the case.
Greggs to open up to 160 new stores this year
Greggs says it plans to increase its store numbers by up to 160 this year.
The bakery chain says it ended last year with a cash position of £195m, which it will invest in growing its shop estate and also its supply chain capacity.
In today’s financial results, it says:
The pipeline of new shop opportunities remains strong, and we expect to open between 140 and 160 net new shops in 2024.
It currently has 2,473 shops trading, after opening 220 new shops in 2023, closing 33 and relocating 42 (giving a net increase of 145 last year).
Roisin Currie, chief executive of Greggs says:
“We enter 2024 with plans to continue to invest in our shops and expand supply chain capacity to deliver the growth strategy, supported by our strong balance sheet.
Updated
Introduction: Greggs sees inflation pressures reducing; Sainsbury's sales rise
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK bakery chain Greggs has declared that inflation pressures are “reducing”, as it reports a strong rise in sales last year.
Greggs, which sells steak bakes, sausage rolls, doughnuts, wraps and breakfast rolls, has posted like-for-like sales of 13.7% for the last year.
Total sales jumped almost 20% to £1.8bn, boosted by a flurry of store openings – a net increase of 145 last year as Greggs targeted retail parks and travel hubs.
Inflation has pumped up retailers’ sales growth in the last couple of years. Greggs’ sales growth slowed in October-December, though, with like-for-like sales up 9.4% – due to a “reduced contribution from price inflation”.
That slowdown in price rises should continue, Greggs suggests, in a boost to consumers.
Greggs says:
As expected, inflationary pressures are reducing and with good forward cover on food, packaging and energy we anticipate a more stable cost base in the coming year.
Wage inflation remains, although higher rates of pay across the economy will also provide support to consumer incomes.
Official data has shown that consumer price pressures slowed last year, with inflation slowing to 3.9%.
Greggs also reports high sales of its Festive Bake, Chocolate Orange Muffin and Christmas Lunch Baguette in the fourth quarter of last year, while pizza sales continue to grow too.
We also have Christmas trading figures from supermarket chain J Sainsbury this morning. And they also point to easing inflation pressures.
Sainsbury’s has reported a jump in sales over the key Christmas period, with improved grocery sales volumes as food and drink inflation slowed.
Grocery sales in the last 16 weeks rose by 9.3%, while sales over Christmas were 8.6% higher. Sainsbury’s says stronger volume growth offset lower inflation, and is sticking with its existing profit forecasts.
Sainsbury’s says:
Our consistent focus on delivering great value, innovation, quality and service has driven sustained sales growth despite significantly lower inflation, with volume growth ahead of the market every week since March.
However, the firm witnessed a drop in trade for clothing and in its Argos business.
Sales at Argos, the catalogue business, fell by 4.2% in the six weeks over Christmas (to 6th January), suggesting consumers cut back in the cost of living squeeze.
Also coming up today
The World Economic Forum will release its latest Global Risks report this morning, highlighting the most serious threats which global leaders must tackle.
This afternoon, MPs on the Treasury Committee will question senior officials from the Bank of England, about the threat to financial stability posed by interest rate rises.
The committee is likely to examine the impact of recent UK interest rate rises on the UK’s economic resilience and financial stability.
The committee says:
The decision to increase and then hold the Bank Rate has seen UK households and businesses face rapidly increasing running costs while borrowing also becomes a more costly option.
Members of the Committee are likely to probe whether these pressures could have implications for the UK’s economic resilience.
The agenda
9.30am GMT: World Economic Forum releases its Global Risks Report 2024.
2.15pm GMT: Treasury committee to quiz Bank of England governor Andrew Bailey and senior colleagues
Updated
