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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK factories plan price hikes; IMF backs support over energy prices – as it happened

United Kingdom International Monetary Fund United States Royal Mail Omicron US Federal Reserve GE Ukraine Germany Nvidia
A worker on the production line at Nissan's factory in Sunderland.
A worker on the production line at Nissan's factory in Sunderland. Photograph: Owen Humphreys/PA

Closing post

Time to wrap up.. here’s today’s main stories.

Goodnight. GW

Back on Wall Street, stocks remain bogged down.

The S&P 500 index has stuck in the red all morning, now down 1.86% or 82 points at 4,328 points.

The tech sector is leading the selloff, followed by consumer discretionary stocks, communications, materials, and industrials. Only energy is higher.

Walid Koudmani, market analyst at financial brokerage XTB, sums up the situation:

“Markets are increasingly uncertain as contrasting signs continue to emerge and add to the already noticeable volatility perceived across a variety of asset classes.

While one of the main concerns continues to be rising inflation and the imminent monetary policy decision due from the Fed on Wednesday, rising tensions on the Russia-Ukraine border and some disappointing earnings in this latest Wall Street season have added fuel to the fire and caused even bigger moves.

While the instability seen across indices and stock markets may appear to be a technical correction, there is a risk that there might be more to come if these complex situations are not addressed in the appropriate manner.”

Other European markets have also closed higher tonight, but it’s a very modest recover.

Germany’s DAX and France’s CAC have gained 0.75%, after falling around 4% in yesterday’s stock rout.

The pan-European Stoxx 600 is 0.8% higher, after falling to its lowest since October last night.

David Madden, market analyst at Equiti Capital, says:

The markets have seen a lot of volatility in the past two sessions as mounting tensions about a possible war between Russia and Ukraine, along with chatter the Federal Reserve will issue a hawkish update tomorrow has been driving sentiment.

European stock markets suffered major losses yesterday as the possibility of an invasion of Ukraine rocked sentiment. The DAX and the CAC have pulled back some of the ground that was lost yesterday, but today’s gains are very small when compared with yesterday’s declines – which underlines the muted buying appetitive. While the headlines persist about a possible conflict in Eastern Europe, German, French and Italian markets might find it difficult to retest the peaks that were registered at the start of the month.

The prospect that the Federal Reserve reaffirm its hawkish position tomorrow, and plan to hike interest rates several times this year, is worrying investors, he adds:

It is widely believed the Fed will hike interest rates this year, but traders remain divided over how many rate hikes we might see, some predict three hikes, while others are forecasting four increases. There are concerns that if the Fed adopts an overly hawkish strategy, and raise rates too high too quickly, it could put pressure on the economic recover.

Here’s Naomi Rovnick of the FT:

FTSE 100 closes 1% higher

The UK stock market has managed a modest recovery after its worst day in two months.

The FTSE 100 has closed 74 points higher tonight at 7371 points, up 1% -- which only claws back less than half of Monday’s 2.6% slide.

Online grocery tech business Ocado led the risers, up 5%. Oil companies also rallied, with BP up 4.3% and Shell gaining 3.6%, tracking the recovery in crude prices.

Financial stocks also had a good day, with Asia-Pacific focused bank Standard Chartered (+5%), asset manager Abrdn (+4.5%), HSBC (+3.5%) and NatWest (+3.4%) higher.

The FTSE hit a two-year high earlier this month, before being caught up in anxiety that the US central bank will withdraw its stimulus measures rapidly to tame inflation.

The FTSE 100 over the last month
The FTSE 100 over the last month Photograph: Refinitiv

Oil has rebounded from yesterday’s losses, with Brent crude up 1.3% at $87.43 per barrel.

That takes it back towards last week’s seven-year highs, over $89 per barrel, lifted by rising geopolitical tensions and higher demand.

Investment banks are predicting that oil will keep climbing this year, which would add further inflationary pressure to the global economy.

Craig Erlam, senior market analyst at OANDA, explains:

Oil got caught up in the sell-everything panic at the start of the week, sliding more than 3% at one stage before recovering a little. There wasn’t much sense behind the move, but the fact that the dollar was strengthening and crude was already seeing profit-taking after peaking just shy of $90, probably contributed to it.

The market remains fundamentally bullish and conflict with Russia does nothing to alleviate supply-side pressures. If anything, the risks are tilted in the other direction, not that I think it will come to that. Nor does the market at this point, it seems.

Still, it was only likely to be a matter of time until oil bulls poured back in and prices are up again today. The correction from the peak was less than 5% so that may be a little premature, but then the market is very tight so perhaps not.

After that early dive, stocks on Wall Street are recovering a little ground.

The Dow is now down 1.2%, or 435 points, while the tech-focused Nasdaq is 2.3% lower. So not a turnaround - but another volatile session.

American Express has jumped 7.3% after beating profit estimates in the last quarter, while IBM are up 2.2% after posting its best sales growth in 10 years last night.

Big tech are weaker, though. Microsoft, which reports results after the closing bell, are down 2.8% while Apple are 1.8% lower.

US consumer confidence fell in January

US consumer confidence has ebbed, in another sign that Omicron and rising inflation have knocked the economic recovery.

The Conference Board’s consumer confidence index has declined this month, after three months of gains, with Americans’ growing less optimistic about short-term economic prospect.

The index dipped to 113.8 this month, from 115.2 in December.

The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—improved to 148.2 from 144.8 last month. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—declined to 90.8 from 95.4.

Lynn Franco, senior director of economic indicators at The Conference Board, explains:

“The Present Situation Index improved, suggesting the economy entered the new year on solid footing. However, expectations about short-term growth prospects weakened, pointing to a likely moderation in growth during the first quarter of 2022. Nevertheless, the proportion of consumers planning to purchase homes, automobiles, and major appliances over the next six months all increased.

Meanwhile, concerns about inflation declined for the second straight month, but remain elevated after hitting a 13-year high in November 2021. Concerns about the pandemic increased slightly, amid the ongoing Omicron surge. Looking ahead, both confidence and consumer spending may continue to be challenged by rising prices and the ongoing pandemic.”

Here’s a video from the IMF explaining how supply chain disruption and rising energy costs are hitting growth and pushing up inflation:

Traders on the floor of the New York Stock Exchange today.
Traders on the floor of the New York Stock Exchange today. Photograph: Brendan McDermid/Reuters

Wall Street falls again

The US stock markets has fallen sharply at the start of trading, after Monday’s turbulent session.

All three major indices are deep in the red, having rebounded from heavy losses yesterday.

  • The Dow Jones Industrial Average: down 782 points or 2.3% at 33,581 points
  • S&P 500: down 122 points or 2.8% at 4,287 points
  • Nasdaq Composite: down 414 points or 2.99% at 13,440.27

Anxiety that the US central bank will tighten monetary policy sharply to rein in inflation is sweeping Wall Street again, with the Ukraine crisis also a key worry.

Raffi Boyadjian, lead investment analyst at XM, says traders are concerned that the Fed could hurt the recovery, which may already be faltering:

The US Federal Reserve starts its two-day monetary policy meeting today and although no change is expected at tomorrow’s announcement, speculation is running high that Fed chief Powell will flag a sharp removal of accommodation at the next meetings.

Markets are now in no doubt that policymakers need to act quickly to get a grip on inflation. But there are worries that the Fed has fallen so behind the curve, it won’t be possible to bring inflation back under control without choking off growth.

Yesterday’s flash PMIs out of the US have already raised question marks about the strength of the economy as they pointed to stagnating growth in January.

IMF says UK should consider 'well-targeted' action on energy prices

The IMF has called on the UK government to consider more support for the poorest households who face a big increase in their energy bills when the price cap is next lifted in April.

“Very targeted, well-targeted support is important,” IMF deputy managing director Gita Gopinath said at a news conference today when asked if Britain’s government should provide more support for low-income households.

Presenting the Fund’s latest growth forecasts, Gopinath explained:

“This should be well-targeted support to highly vulnerable households who are having to face very high cost increases ...

That would be useful. These energy costs are going to go up in April further.”

Analysts have predicted UK energy bills could rise by 50% in April, following the surge in wholesale gas and electricity prices recently.

The International Monetary Fund says it cut its forecast for British economic growth this year due to disruptions from the Omicron variant of the coronavirus and supply constraints, but raised its estimate for growth in 2023.

The IMF said it now expected British gross domestic product would expand by 4.7% in 2022 and by 2.3% in 2023, compared with its previous forecasts - made in October - of 5.0% and 1.9%.

The new forecasts were made in an update of the IMF’s World Economic Outlook. The cut to Britain’s expected growth rate in 2022 was the smallest among the Group of Seven economies with the exception of Japan.

“In the United Kingdom, disruptions related to Omicron and supply constraints - particularly in labour and energy markets - mean that growth is revised down.”

Updated

Inflation and Omicron will dent world growth in 2022, says IMF

The International Monetary Fund has sharply cut its growth forecast for 2022 with a warning that higher-than-expected inflation and the Omicron variant have worsened the outlook for the global economy.

In a quarterly update to predictions made in October 2021, the IMF said it anticipated growth of 4.4% this year – down 0.5 percentage points – and emphasised the risks were of a weaker performance.

The Washington-based organisation blamed the downgrade on rising cost pressures and the rapid spread of Omicron, and said while the 2022 outlook was markedly worse for the world’s two biggest economies – the US and China – few countries would be spared a slowdown.

The UK is expected to grow by 4.7% in 2022, a cut of 0.3 points to the IMF’s forecast in its October 2021 World Economic Outlook.

Despite the reduction, the IMF anticipates the UK growing faster this year than the other six members of the G7 industrial nations – the US, Japan, Germany, France, Italy and Canada.

“News of the Omicron variant led to increased mobility restrictions and financial market volatility at the end of 2021. Supply disruptions have continued to weigh on activity”, the IMF said, noting bottlenecks had shaved between 0.5% and 1% off global growth in 2021.

“Meanwhile, inflation has been higher and more broad-based than anticipated, particularly in the US. Adding to these pressures, the retrenchment in China’s real estate sector appears to be more drawn out, and the recovery in private consumption is weaker than previously expected.”

In the shipping world, the Baltic Exchange’s dry bulk sea freight index has dropped again today, for the 13th session running.

That shows that the cost of transporting cargoes has dipped again. It could be a sign that supply chain problems are easing.

After an extraordinary rebound yesterday, Wall Street stocks are on track to open lower in an hour’s time.

Unions to fight Royal Mail job cuts

Union has vowed to fight Royal Mail’s plan to axe 700 managerial jobs.

Unite says its members were being made the scapegoat for the bosses’ failure to maintain deliveries during the pandemic. The threat of an industrial action ballot was now on the cards, it warns.

Mike Eatwell, Unite national lead officer for the CMA sector, says:

“Unite managers were no more immune from the risks of the pandemic than anyone else, but that did not stop them helping on delivery rounds when postal operatives numbers were severely depleted.

The current leadership team’s fixation on headlines to shore up the share price is behind this latest attack on our members’ job security and we need to respond accordingly.”

General Electric has missed Wall Street’s sales expectations, as supply chain problems hit the conglomerate which is splitting itself into three.

GE, which announced break-up plans last November, reported that revenues fell 3% year-on-year in the last quarter of 2021 to $20.303bn, below forecasts.

Although its Aviation division posted a 4% rise in revenues, healthcare revenues fell 4%.

Its renewable energy arm saw a 6% drop in revenues, and a 23% tumble in orders, which GE blames on “production tax credit uncertainty delaying investment in U.S. Onshore Wind equipment”.

GE made a pre-tax loss of almost $3.5bn in the last quarter, compared with a profit of $2.58bn a year ago. But on an adjusted basis, earnings were 92 cents a share in the period, more than the 84 cents predicted by analysts.

Chairman and CEO Lawrence Culp, who is splitting GE into separate jet engine, hospital equipment and power machinery businesses, says:

“2021 was an important year for the GE team, marked by significant strategic, operational, and financial progress. We delivered solid margin, EPS, and free cash flow performance in 2021, exceeding our outlook.

Orders for the year were up double digits, supporting faster growth going forward, while supply chain challenges, commercial selectivity, and uncertainty surrounding the U.S. wind production tax credit impacted our top-line.

GE also forecast that organic revenues and adjusted earnings will growth this year, partly due to a commercial market recovery in aviation.

But it also predicts continued inflation challenges, with the most adverse impact expected in Onshore Wind.

Earnings news: credit card operator American Express has beaten expectations, after seeing record spending by its customers.

American Express has posted net income of $1.7bn, or $2.18 per share, for the last quarter, up from $1.4bn, or $1.76 per share, a year ago.

That exceeded expectations of $1.87 per share.

Stephen J. Squeri, Chairman and Chief Executive Officer, says:

“Our investment strategy enabled us to reach record levels of Card Member spending, maintain customer retention and satisfaction above pre-pandemic levels, increase new Card acquisitions, grow our loan balances, and deepen our digital engagement with customers, producing revenue growth of 30 percent in the fourth quarter and 17 percent for the full year.

UK manufacturers plan biggest price rises since 1977 amid skills shortage

UK factories are planning to raise their prices by the most since 1977, fuelling the cost of living squeeze, after being hit by surging costs and shortages of skilled labour.

The CBI’s latest industrial trends survey has found that UK manufacturing sector continues to face intense cost and price pressures.

Firms reported that their average costs in the quarter to January grew at their quickest rate since April 1980, and they don’t see any let-up soon -- with costs expected to grow at a similar pace over the next three months.

As a result, the balance of firms expecting to hike domestic prices this quarter, rather than lower them, rose to 66% - the highest reading since April 1977.

The export prices expectations balance was the highest since January 1980.

Rain Newton-Smith, CBI chief economist, warns:

“Global supply chain challenges are continuing to impact UK firms, with our survey showing intense and escalating cost and price pressures.

Manufacturers also raised prices sharply over the last three months, close to the previous quarter’s record pace.

Factories are also being hit by staff shortages -- the share of firms saying skilled labour shortages will limit their output next quarter hit the highest level since October 1973.

Tom Crotty, group director at chemicals producer INEOS, says:

“It is no surprise that manufacturers remain acutely concerned about the impact of labour shortages on their business. Alongside this, manufacturers continue to face rising energy costs and broader inflationary pressures amid ongoing supply chain disruptions.

The government must work together with businesses to tackle these challenges as we begin to feel the effects of the cost-of-living crunch.

There was a small fall in the proportion of firms saying shortages of materials and components would limit growth, but it remained elevated by historical standards.

UK manufacturing output volumes in the quarter to January grew at a slower pace than in December, though growth remained firm compared with the long-run average.

Output increased in 10 out of 17 sub-sectors, with headline growth mostly driven by the food, drink & tobacco sub-sector. A majority of manufacturers expect output growth to increase in the next quarter.

Updated

Bloomberg: Nvidia preparing to abandon acquisition of Arm

Bloomberg are reporting that tech giant Nvidia is preparing to abandon its purchase of UK chip designer Arm, after struggling to win approval for the deal.

Here’s the story:

Nvidia Corp. is quietly preparing to abandon its purchase of Arm Ltd. from SoftBank Group Corp. after making little to no progress in winning approval for the $40bn chip deal, according to people familiar with the matter.

Nvidia has told partners that it doesn’t expect the transaction to close, according to one person, who asked not to be identified because the discussions are private. SoftBank, meanwhile, is stepping up preparations for an Arm initial public offering as an alternative to the Nvidia takeover, another person said.

The purchase -- poised to become the biggest semiconductor deal in history when it was announced in September 2020 -- has drawn a fierce backlash from regulators and the chip industry, including Arm’s own customers. The U.S. Federal Trade Commission sued to stop the transaction in December, arguing that Nvidia would become too powerful if it gained control over Arm’s chip designs.

The acquisition also faces resistance in China, where authorities are inclined to block the takeover if it wins approvals elsewhere, according to one person. But they don’t expect it to get that far.

The deal for the Cambridge-based chip designer has also faced scrutiny in the UK. In November, the government ordered an in-depth investigation that could result in the deal being blocked.

The “phase 2” investigation was ordered on public interest grounds, due to competition and national security concerns.

European stock markets have pushed this morning, although anxiety over the Ukraine crisis and tomorrow’s Federal Reserve meeting are still high.

The FTSE 100 is now up 60 points, or 0.8%, recovering around a third of Monday’s fall.

Germany’s DAX (+1.2%) and France’s CAC (+1.4%) are also staging a moderate rebound.

The pan-European Stoxx 600 hits its lowest since October yesterday, meaning some stocks now look more attractive.

As Victoria Scholar, head of investment at interactive investor, puts it:

“Stocks are on sale and European traders and investors are bargain hunting. Demand for shares at discounted pricing is driving today’s mini rally after a cocktail of concerns around the Fed and geopolitical tensions sparked the worst day for European indices since June 2020.

Although Wall Street staged an impressive comeback into the close last night, swinging from losses to gains, the positive energy failed to permeate the Asian session which saw the Shanghai Composite shed more than 2.5%.”

Japan’s Nikkei also had a tough session, hitting its lowest levels in over a year.

Wall Street is expected to open lower after first sliding then recovering yesterday.

Investors are anxious to hear from the Fed chair Jerome Powell tomorrow - for details on how it plans to unwind its stimulus programme, and whether interest rates will probably rise in March.

The European Union’s securities watchdog has warned that the “gamification” of the financial markets has introduced a new generation of retail investors who may not be aware there are few protections in assets like cryptocurrencies, Reuters reports:

Gamification refers to using smartphones to trade, a trend which took off on Wall Street during the coronavirus pandemic with apps like Robinhood, and has spilled over into European markets.

“We want investors to engage more in financial markets and not just keep their money under the mattress,” Verena Ross, chair of the European Securities and Markets Authority, told a Forum Europe financial services conference.

But gamification also presents significant risks, creates speculation and leaves investors not realising there are protections when trading markets like cryptoassets, she said.

Social media has also allowed the spread of unauthorised trading advice and the bloc is due this year to revamp its “retail investor” strategy to reflect the rise of digital finance, Ross said.

“We are looking at how to raise awareness and warn investors what they are letting themselves in for,” Ross said.

The bloc has already proposed banning “payment for order flow” in the retail market.

More here: ‘Gamification’ in financial markets under scrutiny, says EU watchdog

[Payment for order flow is the controversial process where market makers pay a fee to receive retail investors’ orders. It gives them a better view of the market, and allows retail trading apps to offer zero-commission, but regulators fear it creates conflicts of interest.]

Royal Mail shares have jumped 5%, leading the FTSE 100 risers this morning.

But the company should be careful not to go too far with its cost-cutting programme, warns Russ Mould, investment director at AJ Bell.

Royal Mail’s latest update showed the firm is continuing to drive efficiencies with plans to cut a further 700 management jobs.

“The decline in parcel volumes year-on-year is only to be expected given tough comparative figures to beat as a year earlier nearly all retail stores were shuttered thanks to Covid restrictions, meaning demand for online orders soared.

“Perhaps more important is the fact the company maintained its share of a highly competitive market and it remains confident that, as we emerge from the pandemic, the amount of parcels being sent will remain permanently higher, thanks to a structural shift in the way people buy goods.

“It’s not all positive news. Royal Mail has seen a substantial increase in the number of complaints as deliveries have faced big delays in recent weeks.

“In fairness at least some of this can be attributed to a factor entirely out of its control as the Omicron variant left many of its workers sick and unable to work.

“In streamlining the business, Royal Mail needs to ensure it doesn’t go too far and diminish its operational capability or spark widespread industrial action, the threat of which has hung over the business in the past.

“Outside of the UK, Royal Mail’s GLS international parcel courier division continues to make solid progress, and perhaps at some point suggestions that this part of the group might be spun off could be revived.”

Germany still risks falling into a recession, despite the pick-up in business confidence this month.

Germany’s economy is expected to have shrunk in the final three months of 2021, and could stagnate, or worse, in January-March too.

Carsten Brzeski, global head of macro at ING, says:

The German economy went into hibernation at the turn of the year. When the first official estimates are released on Friday, it will require a small miracle for them not to show a contraction in the economy in the final quarter of 2021. And despite today’s improvement in sentiment, the risk of Germany being in an outright recession has not disappeared.

Even with some temporary relief from exports and industrial activity, the Omicron wave in Asia and the Chinese New Year clearly argue against a steep short-term improvement in supply chains. Consequently, global supply chain frictions, the impact of the current social restrictions on leisure, hospitality and retail, and the impact of high energy prices on private consumption do not bode well for the short-term outlook for the German economy.

However, such a technical recession would be mild and short-lived and is unlikely to harm the labour market, he adds [although the Ukraine crisis does also threaten the recovery].

On the contrary, we stick to our view that the German economy will stage an impressive comeback in the spring. Admittedly, geopolitical risks could still spoil the growth party but the end of social restrictions and significant relief in global supply chains should combine to give the German economy an enormous boost.

German business morale brightens

German business morale improved in January for the first time in seven months, in a sign that Europe’s largest economy could be turning the corner.

The IFO institute’s business climate index has risen to 95.7 this month from an upwardly revised 94.8 in December, with company bosses more upbeat about the outlook.

Ifo President Clemens Fuest said.

“The German economy is starting the new year with a glimmer of hope.”

Yesterday’s survey of German purchasing managers showed that the supply chain problems that have hurt factories for many months have started to ease.

Unilever to cut 1,500 management jobs

Jobs are also being cut at Unilever.

The Marmite maker Unilever has just announced it plans to cut around 1,500 senior and junior management roles as part of a global restructuring plan.

The FTSE 100 company, known for brands such as Dove soap, Hellmann’s mayonnaise and Ben & Jerry’s ice-cream, announced the cuts as it comes under mounting pressure from a US activist investor and other shareholders to improve its performance.

Unilever employs about 150,000 people worldwide, including 6,000 in the UK and Ireland.

The chief executive, Alan Jope, has been under pressure for months to revive sales growth as the company missed its profit margin targets. In recent days it emerged that the US activist investor Nelson Peltz has built a stake in the troubled company.

Unilever says it will reorganises its operations around five Business Groups: Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.

The proposed new organisation model will result in a reduction in senior management roles of around 15% and more junior management roles by 5%, equivalent to around 1,500 roles globally.

Changes will be subject to consultation. We do not expect factory teams to be impacted by these changes.

Jope says the move will create ‘crystal-clear accountability for delivery’:

“Our new organisational model has been developed over the last year and is designed to continue the step-up we are seeing in the performance of our business. Moving to five category-focused Business Groups will enable us to be more responsive to consumer and channel trends, with crystal-clear accountability for delivery.

Growth remains our top priority and these changes will underpin our pursuit of this.”

Updated

Back in the markets, the Russian rouble has stabilised after a rocky Monday.

The rouble is 0.15% stronger against the dollar at 78.66, after hitting a 14-month low of 79.50 yesterday.

Overnight, US president Joe Biden insisted there was “total” unity among western powers after crisis talks with European leaders on how to deter Russia from an attack against Ukraine, as Downing Street warned of “unprecedented sanctions” against Moscow should an invasion take place.

Bethany Beckett, UK economist at Capital Economics, says:

Stronger tax revenues were just enough to offset big rises in debt interest costs in December. But we don’t expect this to last: further rises in inflation will mean borrowing soon overshoots the OBR’s forecast.

Even so, our forecasts suggest the Chancellor still has enough fiscal space to cancel April’s rise in NIC taxes.

Full story: UK government borrows almost £17bn in December as inflation soars

The government borrowed almost £17bn to balance its books last month – the fourth highest December total on record – as the public finances felt the impact of sharply rising inflation.

Rising tax receipts were partly offset by a surge in interest payments on the £2tn national debt, swelled by the emergency measures to support the economy over the past two years.

Prompting a warning from the chancellor of the need to reduce government borrowing, debt interest payments rose to a six-month high of £8.1bn after the sharp rise in inflation. Repayments on some of the UK’s borrowing is linked to the cost of living.

Despite the arrival of the Omicron variant, the Office for National Statistics said the UK’s budget deficit was £7.6bn lower at £16.8bn than in the same month a year earlier and came in below the £18.5bn expected by the City.

Tax receipts in December rose by £6.2bn compared with a year earlier, including a rise in corporation tax, stamp duty, income tax, VAT and fuel duty receipts.

Royal Mail to cut 700 managers

A Royal Mail van.
A Royal Mail van. Photograph: Joe Giddens/PA

Britain’s Royal Mail has announced plans to cut 700 managerial jobs as part of a reorganisation plan.

Royal Mail says it is engaging with unions on the proposals, which will cut costs by £40m per year.

It says:

We intend to further simplify and streamline our operational structures to ensure an improved focus on local performance, and devolve more accountability and flexibility to frontline operational managers.

The £70m cost of the restructuring means Royal Mail now expects adjusted operating profit for this year to £430m, down from £500m before.

Royal Mail also says it is “confident there has been a structural shift in parcel volumes since the start of the COVID-19 pandemic”.

Domestic parcel volumes in the last quarter of 2021 were 33% higher than two years ago, although 7% lower than in 2020, with 439m parcels handled during the quarter.

Covid-19 test kits accounted for around a mid-single digit percentage of total parcel volume since last April, it says.

Royal Mail also reveals the impact of the Omicron variant on its operations. Staff absence peaked at around 15,000 in early January, which disrupted service levels in some areas of the country.

In the City, shares have opened higher after Monday’s heavy losses.

The FTSE 100 index of blue-chip shares has risen by 50 points, or 0.7%, after shedding 196 points yesterday.

Rising inflation means the cost of servicing the national debt is likely to keep increasing in the coming months, undermining the recovery in the public finances, says Laith Khalaf, head of investment analysis at AJ Bell:

“Money flowing out of public sector continues to comfortably exceed the cash coming in, to the tune of £16.8bn in December. Despite the high figure, the dials are generally heading in the right direction from the peak of the pandemic, albeit not as quickly as the Chancellor might like.

“Central government tax revenues rose by 10% year on year, boosted by low levels of unemployment, even in the aftermath of the furlough scheme. Meanwhile expenditure came in lower than last December, but only just, because interest payments on government debt trebled compared to last December, to £8.1bn, a record for the month.

“That’s because higher inflation has pushed up the cost of government bonds that are pegged to RPI, costing the government £5.5bn in December 2021. With price rises still coming down the track, inflation is going to continue to bump up the coupons paid by the government to holders of RPI linked bonds, so this won’t be a flash in the pan.

“To add considerable fuel to the fire, interest rates are rising, which means the government will have to pay more interest on the £875bn of gilts held with the Bank of England. And if that were not enough, gilt yields have shot up, to over 1% on the 10-year bond, which means the government will also be paying more for freshly issued debt than before the pandemic.

UK public finances: what the experts say

The UK public sector finances fared better than expected in December following the identification of Omicron in November, says Richard Carter, head of fixed interest research at Quilter Cheviot:

Net borrowing sat at £16.8bn, down from £17.4 billion in November, and £7.6bn less than in the same month last year. Tax receipts were up to £68.5bn.

“As the impact of Omicron was not as bad as had been expected, growth was less negatively impacted than anticipated. This in turn increased the government’s tax take, therefore reducing the need to borrow, and resulted in a better debt to GDP ratio than might have been expected – 96.0% of GDP, 0.1% lower than in November 2021.

“These figures could have been worse, but the Omicron variant proved less impactful than many had initially feared. While the government did opt to move to its ‘Plan B’, the UK avoided major public health restrictions such as lockdowns and we have since returned to ‘Plan A’.

James Smith, Research Director at the Resolution Foundation, says chancellor Rishi Sunak has room to help cushion soaring energy bills:

“As we await further evidence of the impact of Omicron on economic activity, today’s figures suggest that the latest wave has not had a huge effect on the public finances so far, with borrowing in December broadly in line with the OBR forecast.

“Borrowing for the first nine months of the financial year is now £13 billion lower than the OBR’s October forecast, mainly reflecting the stronger-than-expected post furlough scheme labour market. This fiscal room for manoeuvre makes it inevitable that the Chancellor will set out a plan to deal with the cost of living crunch.

“With soaring energy bills set to push around six over families into fuel stress, a targeted package to limit the rise in energy bills is the top priority, with the majority of gains from a delayed National Insurance increase going to the richest fifth of households.”

Samuel Tombs of Pantheon Economics points out that December’s borrowing met the official forecasts, but that probably won’t stop the chancellor taking steps to ease pressure on households:

On the public finances, Chancellor of the Exchequer, Rishi Sunak says:

“We are supporting the British people as we recover from the pandemic through our Plan for Jobs and business grants, loans and tax reliefs.

“Risks to the public finances, including from inflation, make it even more important that we avoid burdening future generations with high debt repayments.

“Our fiscal rules mean we will reduce our debt burden while continuing to invest in the future of the UK.”

Introduction: UK public borrowing fell in December

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

UK government borrowing fell in December thanks to a rise in tax receipts, despite a jump in the cost of repaying the national debt.

Public sector net borrowing, excluding state banks, dropped to £16.8bn last month, less than expected. That’s £7.6bn less than in December 2020, as the economy recovers from the impact of the pandemic.

It’s the fourth-highest December borrowing since monthly records began in 1993 (the UK borrowed more in both December 2009 and 2010 during the economic downturn following the global financial crisis).

Tax receipts rose by £6.2bn year-on-year, including a rise in corporation tax, stamp duty, income tax, VAT and fuel duty receipts.

Government spending fell by £1bn, as the furlough job protection scheme and support for self-employed workers wrapped up last autumn.

Borrowing so far this financial year is still running below forecasts. The UK has now borrowed £146.8bn since April, £129.3bn less than a year ago and £12.9bn less than the official Office for Budget Responsibility forecast.

UK public finances to December 2021
UK public finances to December 2021 Photograph: ONS
UK public finances to December 2021
UK public finances to December 2021 Photograph: ONS

That could intensify calls for the government to make a dramatic U-turn on its planned national insurance tax increase, as the cost of living crisis worsens.

Yesterday, former Conservative cabinet minister David Davis threw his weight behind calls for the tax increase due to come in from April to be scrapped.

However, the interest payments on UK government debt tripled year-on-year in December, due to rising inflation.

Interest payments on central government debt hit £8.1bn in December 2021, a December record and £5.4bn more than in December 2020. That’s due to the jump in the RPI inflation rate, which pushed up the cost of repaying index-linked gilts (government bonds, whose interest rate is fixed to RPI).

Overall, the UK’s national debt was £2,339.9bn at the end of December 2021 or around 96.0% of gross domestic product -- the highest ratio since March 1963 when it was 98.3%.

UK public finances
UK public finances Photograph: ONS

Reaction to follow.....

Also coming up today

Global stock markets remain on edge, after a dramatic day’s trading on Monday.

Asia-Pacific markets have dropped, amid fears that Russia could invade Ukraine and worries that the US Federal Reserve would wind down its support for the economy faster than expected.

European markets slumped yesterday, but after joining the rout, Wall Street staged a rapid late recovery to finish slightly higher.

Michael Hewson of CMC Markets says:

Yesterday’s declines in European markets had more to do with events on the Ukraine, Russia border than with any other factors that have dominated sentiment over the past two weeks.

It appears that the penny has finally dropped with financial markets that events in eastern Europe have the potential to get even worse, after NATO announced it is putting additional ships and aircraft on standby for mobilisation, and that the US is considering sending troops to shore up its Baltic defences, in response to requests from the likes of Estonia for a greater US presence to deter a potential Russian escalation.

European shares are expected to open higher today, but the New York market is currently forecast to drop when it reopens. More volatility ahead.

The agenda

  • 7am GMT: UK public finances for December
  • 9am GMT: IFO survey of German business climate
  • 11am GMT: CBI’s industrial trends survey of UK manufacturing
  • 3pm GMT: US consumer confidence report for December

Updated

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