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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

May 2019 Key Indicator – is there still a direct link between rising Brent crude oil prices and inflation?

Brent crude oil refineryThe Bank of England (BoE) governor, Mark Carney, has recently warned of growing inflationary pressures and potential interest rate rises sooner than was previously expected.
At the moment the UK’s inflation rate is at 1.9%, unchanged from the previous month and well below the ceiling of 2% after which the BoE would have to take action.
However, although the core basket of prices that influence the inflation rate is not seen as the problem, the rising cost per barrel of crude oil may be behind Carney’s latest warning.
The current price of Brent crude oil as of April 29, 2019 is $71.22 per barrel, although the monthly average so far this year has been calculated as $64.98. (Figures courtesy of https://www.macrotrends.net )
The idea of a direct correlation between oil price rises and inflation was cemented in the 1970s when the UK economy was hit by an oil embargo by the 1973 by Arab oil producers in response to Western support for Israel in the Yom Kippur war.
The 1970s inflation rate of more than 24% that toppled the government of Edward Heath and forced the BoE under the subsequent government of Harold Wilson to prop up Burmah Oil was arguably determined by oil prices. The resulting “stagflation” also c9ntributed to global food shortages and escalating Trades Union demands for wage increases to cope with the rising prices.
The link between crude oil prices and inflation was fixed in the minds of economists and central banks although it seems to have been forgotten.

So, should the current rising Brent crude oil prices be reason for concern?

This chart (again courtesy of macrotrends) shows the oil price picture over the last decade:
Brent Crude price fluctuationsThe chart highlights the volatility of oil prices with a 10-year high of £128.14 in 2012 and low of £27.88 in 2016.
At today’s price the future trend would seem upwards although most economists now argue that the direct link between price and inflation is no longer relevant because the world has changed significantly.
Firstly, the economists cite the many other oil producing countries outside of the OPEC cartel and why OPEC is no longer dictating prices. These include Iran, Russia, Brazil, China and Canada, with the US being self-sufficient now it produces its own oil.
Secondly, consumer demand for petrol when the oil prices rise does not reduce and some industries do not pass on the rises to consumers via their products.
Thirdly, they argue that the crude oil pricing model is not simply one of supply and demand because the price of oil is actually set by the oil futures market, which is determined by traders and market sentiments.

So where is the BoE warning of inflationary pressures coming from?

According to the Observer’s business leader at the weekend, the BoE latest quarterly review of the economy sees a combination of a reviving global economy and the UK’s ever-increasing workforce –increasing demand and keep up the pressure on prices. This is contrary to other evidence of a global bubble that is growing.
However, the BoE says: “the only reason that economic activity has picked up in the US, the eurozone and China is because their respective central banks have promised to tear up plans for interest rate rises”.
Despite the positive forecast, supply concerns may prop up oil prices due to the USA’s continued embargo on Iranian oil and its re-imposition of sanctions on countries that buy from Iran. It also has an embargo on Venezuela.
Also, concerns about contaminated oil coming via a pipeline from Russia have prompted European customers Poland, Germany and Ukraine to halt imports via the Druzhba pipeline are all contributing to the currently high price of crude oil.
Whether this will feed into rising inflation and the knock on effect of rising interest rates remains to be seen.
Alas, each generation tends to forget history and the 1970s seem a long time ago!

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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance Rescue, Restructuring & Recovery Turnaround

The latest insolvency figures reveal a worrying trend for some businesses sectors

Road sign to liquidation or insolvencySMEs in the supply chain sectors that particularly rely on consumer spending should pay heed to the latest insolvency figures, for January to March 2017.
While the figures released by the Insolvency Service at the end of April show a relatively small increase by 4.5% compared with the last quarter of 2016, the trend has been upwards now for three consecutive quarters.
There were 2,693 Creditors’ Voluntary Liquidations, 68% of 3,967 total insolvencies for the first three months of 2017, affecting particularly the construction and the wholesale and retail sectors.

Consumer confidence, inflation and import costs

As higher prices, particularly for food, have started to feed through into the shops, there have been signs of a weakening in consumer confidence and a slowdown in spending.
While the “headline” story since the New Year has been the demise of 28 large retailers including Jaeger, Agent Provocateur, Brantano and Jones Bootmaker, the implications are clear for those businesses involved in the wholesale supply chain, many of them relatively small SMEs.
Both KPMG and Begbies Traynor, have been monitoring the trends for companies in what they call “significant distress”.
Analysis by KPMG of notices in the London Gazette reveals that the numbers of companies entering administration are still relatively low, however Blair Nimmo, head of Restructuring, has identified a “steady creep in numbers that we’ve witnessed over the last 12 months”.
Begbies Traynor’s Red Flag Alert research for the first three months of 2017 has identified an increase in companies in distress, up by 26% on average over the past year in key sectors of the consumer-facing supply chain, with the Industrial Transportation & Logistics businesses up by 46%, the wholesale sector up by 16%, and the Food & Beverage Manufacturing sector up by 15%.

How do SMEs survive the growing insolvency headwinds?

Given the higher costs of raw materials imports due to the devaluation of £Sterling since the EU Referendum result, businesses will not be able to absorb all these costs and will have to pass them on to customers. This in turn is likely to reduce income for UK focused SMEs and lead to greater pressure on those that have high fixed costs.
As ever, it pays businesses to ensure they are as lean and fit as they can be and that means scrutinising their costs and reducing them wherever possible.
Regular monitoring of cashflow may reveal opportunities for cutting fixed costs and introducing efficiencies, for example outsourcing transport or automating activities such as accounting and invoicing. Another critical area for SMEs is to improve cash flow such as introducing more rigorous follow-up on late payments, and invoicing as soon as possible. Close attention to credit control and collaborating with other small suppliers can also help when dealing with larger customers and getting them to pay on time.
Above all, potentially vulnerable SMEs should not wait to get restructuring help and advice. An objective eye sooner rather than later and before a business is in crisis can make all the difference to survival.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Current post Brexit insolvency statistics are no guide to the future

solvent or insolventThe latest corporate insolvency statistics released by the Insolvency Service for Q3 (July to September) show 3,201 liquidations slightly increasing by 2.2% from the previous quarter while 75 CVAs show a significant decline by 30.6% from Q2. The number of liquidations is broadly at the lowest level over the last 30 years since the previous peaks of 5,110 liquidations in Q1 of 2009 and 6,332 in Q1 of 1992.
Despite the above statistics which might suggest businesses are doing well, research carried out in mid-October by Pinsent Masons among Insolvency Practitioners (IPs) and published in Insolvency Today found that two thirds of the insolvency profession believe Brexit will contribute to an increase in the number of business failures in the UK over the next 12 months.

Uncertainty about the future is not the only pressure looming over businesses.

Arguably, loose monetary policy and low interest rates maintained by the Bank of England post the 2008 Great Recession may have preserved the life of many zombie companies. But given the increase in inflation revealed last month, and the forecasts of more to come, it may be that there will be no further room for interest rate reductions. Indeed, interest rates look likely to start rising, which might benefit savers but not businesses. Indeed, rising inflation combined with declining profits that many businesses are reporting raise the spectre of stagflation. Insolvencies can’t be far behind.

What other factors may affect business insolvencies?

Recent criticism of Mark Carney, the Governor of the Bank of England, by some members of the Government has led to concern about their relationship which leads to further uncertainty. While the Governor has announced that he will stay on for an extra year beyond his 2018 term it isn’t the full three years option that would have reassured the money markets.
Business confidence is key for the economy since it is a prerequisite for medium and long term investment. Investment in turn improves productivity which in turn justifies higher wages which leads to a higher standard of living. The focus on employment has overlooked the quality of jobs and prospects for employees to share in the spoils of improved productivity.
It remains to be seen how the forthcoming Christmas trading period will unfold and whether this, combined with new business rates which come into effect from April 2017 will expose the retail and hospitality sectors and their dependence on people having a level of disposable income.
In our view the signs are not looking good for those UK businesses with high overheads and low margins and those that have hung on since 2008 but still have high levels of debt to service.

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General Rescue, Restructuring & Recovery Turnaround

UK Business Growth

There are indications of consumer confidence in the UK. One the sale of new cars where during the first three months of 2013 the sale of new cars in UK was up 7.4%, while elsewhere in Europe they were down in Germany 12.9%,  France 15.6%, Italy 13%, Spain 11.5% and Cyprus 41.6%. In March alone new car sales in UK were 394,806, against 281,184 in Germany, 165,829 in France, 132,020 in Italy and 72,677 in Spain.
This would suggest that we in UK are emerging from a long-term malaise if not depression while it would appear that Europe remains mired in a torpor with declining confidence.
So where is the engine for business growth? the above evidence would suggest it won’t be Europe which some eminent economists such as Professor Nick Crafts at Warwick University argue will be approximately 1% a year until 2030.
I don’t believe we want it to be driven by consumer confidence due to property inflation as this will become another bubble.
We need industrial, manufacturing, service and professional businesses that add value and we need export sales. These require investment in developing ideas, training people, building capacity and marketing them.
I would urge everyone to get this message across to every politician you come across as we need policies that stimulate and justify investment in such businesses.
As for the increase in car sales, how many UK manufacturers are benefiting from the new sales? The lack of a UK car industry is down to short-sighted and weak politicians who supported fundamentally flawed restructuring plans like the Phoenix Four’s failed attempt to save Rover.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery

Leadership, Restructuring and the Eurozone

The Germans and other northern members have benefited from the Euro effectively fixing the exchange rate that has made it easy and relatively cheap for them to sell their cars etc to southern members to whom they lent money to buy their cars. This is very similar to the banks lending money to customers who spent it.
The issue then is who takes responsibility for the debt and managing the Eurozone fallout. Do lenders write off debt, or do they lend more such as via Eurobonds or Quantitive Easing (QE) with terms that impose huge penalties. This latter route is similar to the reparations that planted the seeds of the second world war, a subject that has recently been put on the table. Or do lenders defer payments that allow for a fudge whereby loans are repaid over an extended period that effectively allows inflation to devalue the loans.
The UK has opted for the fudge route and will avoid banks defaulting through QE, low interest rates and using inflation to reduce the cost of repaying debt. While most borrowers will benefit, those with assets, savings and reserves will see them devalued while the debt overhang is cleared. Although this is regarded by many as a mistake, we saw in 2007 and 2008 what happens when banks default and are right to avoid bank defaults.
Europe however has yet to find a solution whether it is by managing southern member defaults, or providing more loans to avoid default. The problem facing European leaders is that they need to be strong and stand up to their electorates if the lessons of history are to be applied.
While European leaders find their backbone, in UK our political leaders are looking decisive, a tribute to both Darling and Osborne. Inspite of the decisions taken it will still take a long time to clear the debt overhang with a floating exchange rate and inflation to reduce debt and low interest rates to smooth the way.
Most UK companies that have undergone restructuring have much stronger balance sheets and are building reserves ready to take advantage of the Eurozone fallout. However there are still many more UK companies, that like many European members, have weak balance sheets and continue to struggle while they and their lenders put off the inevitible restructuring.

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Banks, Lenders & Investors Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

Are Estate Agencies Safer Businesses Now than they were in 2008?

The sub prime mortgage crisis that precipitated the 2008 global recession led to plummeting property prices, very limited mortgage lending, repossessions and to a dramatic slump in the housing and commercial property markets.
Estate agencies were among the first businesses to feel the effects of the crisis. By December 2008 an estimated 40,000 employees had lost their jobs while around 4,000 estate agency offices -approximately one in four – had closed.
The smallest agencies, of perhaps four or five branches or less, were worst affected particularly if they depended solely on property sales.
So is the worst over now for the estate agency business? Not if the most recent information on the housing market is any indication.
Gross mortgage lending declined to an estimated £9.8 billion in April 2011, down 14% from £11.4 billion in March and the number of mortgages approved for house purchases hit a new low in April, at 45,166, the lowest April figure since records began in 1992.
The Council of Mortgage Lenders predicts that the numbers of homes repossessed will rise from 36,000 in 2010 to 40,000 in 2011 and 45,000 in 2012 and the online housing company Rightmove reports that average unsold stock rose from 74 to 76 properties per branch, reaching the highest ever level for May.
Although the housing market varies significantly in different parts of the UK, with London booming and East Anglia holding steady while the north suffers there is also evidence that the demand for rented property and buy to let property is rising along with rent levels.
None of this suggests that the business of estate agency is likely to be any more secure for a few years yet.  If the High Street agents are to survive they need to revisit their business models, diversify their activities into letting, make use of online marketing and be sure they are up to speed on all the regulations governing landlords’ and tenants rights’ and other property letting regulations.

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General Rescue, Restructuring & Recovery Turnaround

The Current Conundrum Over Inflation and Interest Rates

The most recent inflation rates show that the Consumer Price Index (CPI) has risen to 4%, a surprise drop of 0.4% from February and the Retail Price Index (RPI) to 5.3%, also a fraction less than February’s 5.5%.
If times were normal these figures would nevertheless trigger a rise in the interest rate to 7 % to 8%, about 2.5% above the RPI.
However, times are still clearly not normal following the financial “tsunami” that was the 2008 Great Recession. Many businesses are still struggling to survive and grow in the face of reduced spending by consumers and clients and cope with soaring materials and commodity prices and volatile oil prices because of uncertainty over events in North Africa and the Middle East.
As a result the fear that an interest rate rise might push the economy back into a recession has led to interest rates being decoupled from inflation.  Inflation is a form of currency devaluation.  It means that every £1 buys less than it did when inflation was lower.  Interest rate rises help to correct this. 
I would argue that currently many businesses are operating with huge levels of debt and not doing all they could to reduce even though they can only survive because interest rates are currently so low.  But this current situation is only temporary.
While a viable business should be able to build a surplus of cash in this situation to provide itself with a cushion once interest rates start to rise again, a business in difficulty will not have this option. It therefore needs to think ahead and revamp the business model and restructure to survive and be ready for to what will happen when things are more “normal”.

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Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Businesses Should Prepare Themselves for the High Level of Inflation

One of the greatest worries in the predicted difficult conditions of 2011 for both businesses and consumers is price inflation thanks in part to the increase in VAT from 17.5% to 20% from January 4 but also to the rise in commodity prices including basic foods and oil. 
Coupled with rising energy prices and public sector job cuts, this is expected to lead to a drop in consumer spending on non-essentials.
Businesses therefore need to protect themselves to ensure their survival and consider whether to concentrate on profits in the short term rather than longer term growth.
A high inflation rate makes it difficult for businesses to set prices. Normally when the inflation rate is climbing too quickly or remaining consistently high, interest rates will be increased in an attempt to bring it under control and eventually reduce it.
However, in an interconnected global economy, where most countries are subject to the same external pressures from such things as commodity price speculation on basic foods, speculation on futures in oil and minerals that are the raw materials used by manufacturers, it is being argued that this will not work now.
Financial engineering is being carried out well outside the influence of the government and beyond any attempts by the Bank of England to use interest rates to bring inflation down.  The question is whether in fact inflation is something to be worried about in current circumstances.
A UK business trading only in the UK will face a tougher time than a UK business focused on export, which can target the emerging BRICs with expanding middle classes that provide capacity for economic growth.
UK focused businesses in 2011 are therefore likely to be caught between a rock and a hard place and it may be that businesses should consider carrying out a thorough review to identify any cost savings they could make before the going gets any tougher.