Sunak warns “tragic projections” for unemployment
The UK’s Chancellor of the Exchequer Rishi Sunak has warned that there are “tragic projections” for unemployment in the months ahead in a dire reflection on the impact of the coronavirus pandemic on the UK economy.
UK car production down 95% as Covid “decimates” industry
A set of newly-released figures by the Society of Motor Manufacturers and Traders Ltd (SMMT) demonstrate the devastating impact that the coronavirus pandemic has had on the automotive manufacturing industry.
Car production was down 95.4% in May 2020 on the previous year, with just 5,314 cars produced compared to 116,035 during the same month in 2019. Exports have also taken a hard hit, down 95.5% to just 4,260 from last year’s 93,860.
The report emerges in the wake of The UK in a Changing Europe’s analysis from earlier this week, predicting that Brexit will have a “negative and significant” impact on the manufacturing sector – which is still scrambling to recover from the market paralysis due to lockdown restrictions and social distancing measures.
The coronavirus crunch
Strict lockdown measures during the peak of the pandemic left the manufacturing industry at a stand-still with millions of workers on furlough and production mostly on hold between March and May. The SMMT previously warned that up to 1 in 6 jobs may be at risk when the government’s furlough scheme wraps up in October, if the industry does not receive any additional financial support during the weaning process. Many automotive factories across the UK have reopened in June with reduced output. But 6,000 job cuts have been announced this month already, and with 1 in 3 staff from the industry still on furlough, the SMMT is calling for the government to reduce VAT as the sector falls into “critical need” of extra funds to prevent further job losses.Brexit’s long shadow
Beyond coronavirus, the looming threat of Brexit casts a long shadow over the automotive sector. The SMMT’s figures show that the EU makes up a 54.8% market share of UK car exports. With swirling rumours that PM Boris Johnson is leaning towards a no-deal scenario, the manufacturing industry is preparing itself for more hardship down the line once the metaphorical rug is swept out from beneath its feet. Peter Barnes, Insurance Partner and Head of Automotive at global legal business DWF, commented on today’s SMMT’s manufacturing figures for May 2020: “While the world has quite correctly been focused on the impact of the pandemic, which has consumed every inch of capability and capacity in the automotive market, the issues which would be created by a hard Brexit in the automotive sector remain extremely real in these unprecedented times”. He joins the chorus of professionals in the automotive industry urging the government to implement further measures after the furlough scheme terminates later this year. “Given that the UK automotive sector is fundamentally stable with a skill set admired globally, the unprecedented vital government assistance which has been provided to keep many businesses afloat needs to go further. “There remains hope that a car scrappage scheme enticing those with older vehicles back to car showrooms combined with a cut in VAT could make all the difference”. However, the industry’s future very much depends on the outcome of UK-EU negotiations, as the deadline for a Brexit deal approaches on the 31st of October. The ideal scenario for manufacturers would involve a free trade agreement with the EU, extending the current “no friction” trade with the continent and enabling a full recovery with output back to pre-crisis levels by 2025. “It is hoped that the results of such negotiations will secure a comprehensive free trade agreement with the EU that maintains tariff and quota-free trade”.A world-class industry
It is not all doom and gloom though, as Barnes emphasises that the the industry has every chance to make a full recovery given the right aids. “The automotive sector in the UK has been hit with extreme uncertainty over the last few years as a result of both the withdrawal from the European Union and the global pandemic of COVID-19. However, the sector is truly world-class. It is hoped that, with appropriate support and financing from the government, the figures released today from the SMMT will continue to demonstrate a rise month on month as output levels and demand increases”.Intu shares dive 55% on administration fears – 17 shopping centres at risk
Shopping centre landlord Intu (LON:INTU) saw its shares go into free-fall as it announced on Friday that it had put KPMG administrators on standby. It follows the company’s failure to reach a ‘standstill’ agreement with its lenders, which it had hoped to have achieved by Wednesday.
The company operates 17 major shopping centres around the UK – including the Trafford Centre in Manchester, the Lakeside complex in Essex, and Braehead in Glasgow – but sees itself at risk of losing parts of its portfolio in something of a perfect storm.
The company has accrued £4.5 billion of debt from its lenders, and has struggled to pay off that sum, let alone the backlog of interest payments. The ‘standstill’ agreement would have seen these interest payments temporarily halted, however the proposal of such an agreement was denied by the lenders.
The impact of Coronavirus, though very real in its effects, should not be seen as the catalyst of the group’s current woes. The declining popularity of high street shopping – or at least the shift in market share to online transactions – has been on ongoing trend. While the effects of Coronavirus have not only sped up this process, but nullified high streets, the rejection of the ‘standstill’ agreement by lenders would suggest that they think the decline of shopping centres will be less of a temporary hold-up, and more of a perpetual trend.
As retail expert Katie Hardcastle told BBC Breakfast, Intu’s debt isn’t proportional to their portfolio’s potential returns. The value they have put into their estate simply won’t be reciprocated, as shopping centres continue to lose value.
Shopping centres, “just aren’t worth the value they once were”, said Harcastle.
That being said, another very real impact of Coronavirus has been a loss on rent payments. While only a handful of essential shops were allowed to remain open, the majority of its estate saw rent freezes for outlets such as Topshop and Debenhams. In March, the company received only 29% of its anticipated rent revenue, as most companies opted for payment holidays to withstand the effects of lockdown.
The likelihood of administration proceedings also puts an estimated 132,000 jobs at risk, including 3,000 in-house workers and thousands more hired by shopping centre tenants. Intu warned that administration could see entire sites close, though until proceedings begin, it is expected that centres will remain open.
The full list of at-risk shopping centre sites include:
- intu Braehead Glasgow
- intu Broadmarsh, Nottingham
- intu Chapelfield, Norwich
- intu Derby
- intu Eldon Square, Newcastle
- intu Lakeside, Essex
- intu Merry Hill, West Midlands
- intu Metrocentre, Gateshead
- intu Milton Keynes
- intu Potteries, Stoke on Trent
- intu Trafford Centre, Manchester
- intu Uxbridge
- intu Victoria Centre, Nottingham
- intu Watford
- Manchester Arndale
- St David’s, Cardiff
- The Mall, Cribbs Causeway
Responding to Intu and the plight of shopping centres
Discussing Friday’s announcement and the challenges high street shopping will face going forwards, Adrian Palmer, professor at Henley Business School, commented: “Intu’s troubles are indicative of problems affecting the retail property sector which has been having a bad time during the COVID-19 pandemic. Similar to other troubled sectors, many of its current problems were firmly trending before the pandemic.” “It is not just High Streets that have been suffering, but the owners of the biggest out-of-town shopping centres have seen the value of their property valuations and share prices tumble. The share price of Intu, has fallen by nearly 90% in the past year,” Palmer added. “COVID-19 exacerbated cash-flow problems for retailers of non-essential products whose store-based sales came almost to a halt, while they still had to pay for arriving stock. Consequently, the process of retailers closing stores and setting up CVAs has accelerated. To make matters worse for retail property companies’ cash flow, the number of retailers deferring payment of their quarterly rent rose sharply.”Investor insights
Following the update, the company’s shares fell 54.96% or 2.15p, to 1.76p per share 26/06/20 13:06 BST. This is below the company’s consensus target share price of 5.00p per share, and far below the 34.00p share price seen in December 2019. The majority of brokers hold either a ‘Sell’ or ‘Strong Sell’ stance on the company’s stock. The group’s p/e ratio is 13.03, its dividend yield stands at 256.27%.Tesco books 8% sales growth as Coronavirus leads online shopping boom
British supermarket chain Tesco plc (LON:TSCO) announced on Friday that it had booked impressive first quarter financials, led by significant growth in online activity and deliveries.
The company said that first quarter sales rose 8.2% across the UK and Ireland, and up 7.9% across all of its operations, up to £13.38 million. It added that food sales had increased by 12%, while its clothing sales dropped by a fifth.
The real headline, though, was the progress made by its online business and deliveries services. Its UK sales saw the most modest increase, up 48.5% during the quarter and 90% during May. Meanwhile in the Republic of Ireland, the company saw online sales rise 50.9% across the quarter, and in Central Europe, online sales spiked by a notable 106.3% across the first quarter.
The latter figure, however, shows that the transitions to online shopping have been far from plain sailing. While online sales in Central Europe bounced over 100%, total sales were only up by 3.9% during the quarter, which would suggest that other areas of the businesses regressed heavily as online sales grew.
One sector of its business which faced challenges was its banking arm, as stated by Edison Group Research Director, Neil Shah,
Further, Tesco Chief Executive, David Lewis, admitted that the cost of adapting to new ways of life had borne a “very significant” cost. Between 47,000 staff needed to cope with increased demand, safety measures and sick pay, the cost of adaptation was toward the company’s upper expectations, at £920 million.
“On the banking side however, the company’s results weren’t as positive, announcing they had increased its position for bad debts at Tesco Bank, and now expect a loss of around £200m.”
The challenges posed by a transition to more online shopping, have nonetheless proven fruitful for Tesco. During the quarter, the company’s delivery slot capacity more than doubled from 600,000 to 1.3 million per week. It added that 590,000 vulnerable customers had added to its customer base, and its online shopping now accounts for 16% of its total supermarket sales, up from 9%. Tesco said it expected to see its full-year online sales bounce from £3.3 million, to £5.5 billion, year-on-year.
Tesco response to strong sales
In a mixed but ultimately positive set of quarterly results, soon-outgoing Chief Executive David Lewis stated:“Through a very challenging period for everyone, Tesco colleagues have gone above and beyond, and I’m extremely proud of what they’ve achieved. Their selfless efforts, combined with our embedded strategic advantages in stores and online, have helped to ensure that everyone can get the food they need in a safe environment.”
“In just five weeks, we doubled our online capacity to help support our most vulnerable customers and transformed our stores with extensive social distancing measures so that everyone who was able to shop in store could do so safely.”
“The costs of doing this have been significant and only partly offset by business rates relief and increased volume. We see the balance as an investment in supporting our customers at a time when they need it most.”
Investor insights
Following the update, Tesco shares rallied 0.98% or 2.21p, to 228.61p per share 26/06/20 12:08 BST. This is comfortably below the company’s consensus target share price of 280.00p, with the majority of brokers opting for a ‘Buy’ rating on the stock. The company’s p/e ratio is 12.34, its dividend yield stands at 4.00%. Friday’s update is certainly a positive one, however Neil Shah still questions whether Tesco is a safe bet for wary investors:“Investors will have clearly noted the improvement in recent results, and considering their relevance during these uncertain times, could start looking at the retailer as a defensive stock. However, investors should keep a close eye on the company, since the group operates in a crowded market with retailers Aldi and Lidl continuing to gain market share and current results might not be replicated when the UK is lifted from lockdown.”
It should be noted, though, that Tesco’s loss of market share has slowed down since it committed to price-matching with its German competitor, Aldi.Waitrose boss joins chorus calling for post Brexit food standards protection
The new boss of Waitrose, James Bailey, says any post Brexit regression in food standards would represent an “unacceptable backwards step”. Bailey joins David Lewis of Tesco in ruling out the introduction of chlorinated chicken and hormone-injected beef to their supermarkets, while Morrisons and Sainsbury’s were not willing to offer the same guarantee.
Bailey, who joined from Sainsbury’s in April, said that Waitrose would not sell any products that did not meet its own standards.
“It would be simply wrong to maintain high standards at home yet import food from overseas that has been produced to lower standards. We would be closing our eyes to a problem that exists in another part of the world and to animals who are out of our sight and our minds. I feel sure customers will share our view,” he said.
According to findings of a recent Which? survey, Bailey’s assumptions are correct. Of the 2,000 people interviewed, some 86% were worried about currently-banned products entering the UK after a Brexit free trade deal with the US. Additionally, 74% of respondents were against importing food produced using these methods and 95% of those questioned said that it was important for current UK standards to be maintained – which includes bans on chlorine-washing, growth and many pesticides used in the US.
The Waitrose boss’s comments join a chorus of existing opposition to what appears an inevitable ‘race to the bottom’ in standards after Brexit, in order for the UK to take advantage of cheap goods and remain competitive in a less regulated environment.
Previously, more than a million people signed a petition calling for a ban on cheaply produced imports in post Brexit trade deals.
The National Farmers’ Union also tried, and failed, to secure Commons amendments to the Agriculture Bill last month, to protect UK farmers from US imports. MPs stated that the business was not relevant to the Agriculture Bill, and instead was a matter to be raised in amendments of the Trade Bill, which is currently under Parliamentary scrutiny.
While free trade and anti-welfare advocates argue that British shoppers may benefit from a greater range of choice and potentially lower prices, UK farmers state that they will not be able to compete with overseas producers.
Ultimately, UK producers and consumers have gotten used to creating and consuming produce of a certain standard. While a minor issue to some, the debate over food standards is in fact paradigmatic. Whether we opt for lower quality and cheaper goods, or we attempt to maintain our current standards and protect British businesses, one gets the sense that the outcome of this scuffle will set the tone for what we can expect from future trade deals.
As a people, the UK should not accept these regressions. If implemented widely, they inevitably contribute to a lower quality of goods, of employment and overall, a lower quality of life. This needn’t be an eventuality of Brexit – or at least we cannot accept that it is.
“Eye of the storm” for Pret as sales plummet 80%
UK favourite sandwich shop Pret A Manger has told landlords it is in “the eye of the storm” as it faces losses of “tens of millions of pounds” due to the coronavirus pandemic and prepares to pay only 30% of its quarterly rent.
In a letter sent to landlords this week, Pret chief executive Pano Christou revealed that sales had fallen below 20% of normal levels for this time of year. The company declared that it has insufficient funds to pay its rent bill, even after resorting to executive pay cuts in an effort to reduce costs.
Bought by German-owned investment group JAB Holdings for £1.5 billion in 2018, Pret has surged in popularity over recent years after “following the skyscraper” with its office-based target audience and convenient take-away lunch and coffee products.
The company has taken a hard hit from the coronavirus pandemic, however. With the majority of office workers being told to work from home or being put on the UK government’s furlough scheme, Pret turned to banks in a plea for €100 million in emergency funding and appointed advisory firm Alvarez & Marsal to help direct its business model through the recovery process.
Pret intends to pay 30% of its quarterly rent bill over the next 3 months in 10% instalments, as the company quietly announces that it may be reviewing jobs in July.
Phil Reynolds, a partner at the restructuring advisory firm FRP, said that central London-based chains that rely on office workers and weekday trade are now starting to face a “big issue”.
“We are looking at how businesses will shape up after lockdown and [what happens] if lockdown might come in again if we have a second wave”.
Pret has already reopened 320 of its 434 UK stores, but the path ahead is all but clear.
In the letter to landlords, Christou candidly revealed: “We feel strongly that the Pret brand has every reason to believe it will thrive again, but we are currently in the eye of the storm. The mid to long term remains very unknown for us at Pret”.
Oil prices slip amid swelling stockpiles and coronavirus fears
Oil prices slipped below $38 per barrel on Thursday as US crude stockpiles swell and fears of a second wave of coronavirus mount across the pond.
US benchmark West Texas Intermediate (WTI) dropped to $37.57 at GMT 12:30, having tumbled from a high of $38.46 during the early hours of the morning. Its decline was mirrored by Brent crude, which also slipped down to $40.03 just one day after soaring to its highest price since the beginning of March, before worldwide lockdown measures came into force and a Saudi-Russian price war emerged to compete over dwindling demand.
On Wednesday, US government data revealed that crude stockpiles had risen to a record 1.4 million barrels, driven by lack of demand and ongoing restrictions on the travel industry. The last few days had seen prices recover from the unprecedented slump across April and May, but it appears that caution has once again gripped the oil market as coronavirus infections in the US surge and fears of a second wave paralyse the industry.
A rise in reported infections has led New York, New Jersey and Connecticut to impose a 14-day quarantine on people travelling from the states where cases are rising. Earlier this week, top infectious disease expert Anthony Fauci commented that there was a “disturbing surge of infection” across many southern and western states, insisting that Americans take heed of social distancing rules to help prevent further spread of the virus.
American crude inventories have already risen to record levels over the past 3 weeks, and with the IMF reporting a deeper recession than it initially predicted, OPEC and its partners face a steep uphill battle to balance supply and demand as they continue to slash production to gain control of the market.
Ole Hansen, head of commodities strategy at Saxo Bank, weighed in: “If the economy doesn’t pick up, that will become a drag on crude oil demand just when OPEC+ has to make a decision about what to do next”.
Wirecard shares dive 76% as payments giant files for insolvency
German payment processing and financial services company Wirecard (ETR:WDI) saw their shares plummet over 95% so far during trading this week, with the company announcing on Thursday that it had filed for insolvency.
The move comes as the company finds itself in the midst of an accounting scandal, with a €1.9bn hole in its finances. It follows the arrest of Wirecard’s former Chief Executive Markus Braun on suspicion of falsifying accounts at the company, which processes tens of billions of euros-worth of credit and debit transactions each year.
German media stated that Braun was arrested after presenting himself to police. He has since been bailed from custody after posting a €5m deposit on Tuesday.
Briefly speaking on its insolvency on Thursday, a Wirecard statement read:
“The management board of Wirecard AG has decided today to file an application for the opening of insolvency proceedings for Wirecard AG with the competent district court of Munich (Amtsgericht München) due to impending insolvency and over-indebtedness.”
Since the update, Wirecard shares nosedived by 75.96% or €9.34, down to €2.96 per share 25/06/20 12:50 CEST. This comes just over a week after the group’s shares hit €104.50 per share on the 17th of June. Trading in the company’s shares have since been suspended from trading in Frankfurt.
Royal Mail to slash 2,000 jobs
Royal Mail (LON: RMG) is the latest company to announce a series of job cuts in response to the Coronavirus pandemic.
The group said on Thursday that it will cut one in five management roles in IT, finance, marketing, and sales. The decision to cut the roles will save up to £130mn.
The changes, accelerated by the pandemic, are due to shift towards a 2% increase in parcels and 8% fewer letters that are being sent across the UK.
Keith Williams, the group’s interim chief executive, said: “Covid-19 has accelerated those trends, presenting additional challenges.”
“We are committed to conducting the upcoming consultation process carefully and sensitively. We will work closely with our managers and their representatives during this difficult period, including supporting them as they transition into the next stage in their careers,” he added.
“We are going to continue to tackle the challenges posed by Covid-19. We are implementing a range of immediate cost control activities and reducing capital expenditure in a measured way. Regrettably, one of these measures could see around 2,000 of our managers leave our business.”
Williams is stepping in for Rico Back, who left the group in a surprise move last month.
In the year to March 2020, pre-tax profits fell by 25.3% to £180m.
It is the latest in a string of companies to announce job cuts amid the Coronavirus pandemic. Earlier this week, Swissport announced plans to cut 53% of its UK workforce.
Royal Mail shares were down 6.6% in Thursday morning trading.
IMF says coronavirus crunch worse than predicted
The International Monetary Fund (IMF) has announced that the global economy will suffer a $12 trillion hit as a result of the coronavirus pandemic, according to new analysis released as part of the organisation’s June 2020 World Economic Outlook update.
Some of the report’s grim projections include a 4.9% shrink in the global economy over the course of the year and a prediction that it will take 2 years before world output returns to the levels sustained towards the end of 2019. Earlier this year in April, the IMF projected a 3% decline in global growth – notably less than the June update – and warned that the slump in output could rival that of the infamous Great Depression.
The new figures demonstrate that the IMF’s predictions significantly undershot. Governments around the world have been forced to step in with unprecedented measures to keep their economies afloat as lockdown measures caused businesses to shut and record numbers of people fell into unemployment.
Recovery is also expected to be a disappointingly slow process. The UK government’s furlough scheme is scheduled to come to an end in October, but the IMF has warned governments to think twice before removing financial support as economies are expected to continue to struggle at least until the end of the year. Global growth is forecast to sink to 5.4% in 2021 – down from 5.8% in April – but could even plummet to zero in the event of a second wave of the pandemic.
The UK economy is predicted to shrink by 10.2% this year, with an 8% slide in GDP. Almost 1 in 3 British workers have already been furloughed in the first half of 2020, but criticism of the government is beginning to mount as the scheme’s deadline fast approaches in the autumn and a number of businesses face the awkward reality of not being able to afford to pay wages at normal levels.
IMF chief economist Gita Gopinath said that coronavirus was an unprecedented and indiscriminate crisis: “No country has been spared. Emerging market [and] developing economies and advanced economies have all been very badly hit”.
That being said, the UK appears to have emerged worse off from the pandemic than other comparable countries. The UK economy’s 10.2% shrinkage is considerably more than Germany’s 7.8%, Japan’s 5.8% and the USA’s 8% – even though the USA has counted the greatest number of coronavirus infections and experienced a record amount of unemployment benefit applications.
The (sort of) good news is that the UK has not been the worst-hit nation. France, Spain and Italy have all suffered immensely as a result of coronavirus, both in terms of the pressure on their healthcare systems and on their economies. The IMF has predicted France’s economy will slip by 12.5%, while Italy and Spain are set to plummet by 12.8%.
So the UK economy may not struggle as much as its European neighbours’, but the path towards recovery is still looking rather steep. The IMF’s 10.2% projection is way beyond its initial forecast of 6.5% from April, in the same month that the UK economy saw a record 20.4% drop.
In order for the global economy to get back on track, the IMF has urged for “multilateral cooperation on multiple fronts”. Economies the world over will need liquidity assistance as consumer demand looks set to be slow for the rest of the year and advanced countries reconsider their foreign aid programmes in light of financial difficulties at home.
According to the IMF, the world faces a unique opportunity to capitalise on the record drop in greenhouse gas emissions during the lockdown, and policymakers should “implement their climate change mitigation commitments and work together to scale up equitably designed carbon taxation or equivalent schemes”.
Despite the hardship caused by the pandemic, the IMF is insistent that there are lessons to be learned in the event that a second wave of the virus emerges in the coming months.
“The global community must act now to avoid a repeat of this catastrophe by building global stockpiles of essential supplies and protective equipment, funding research and supporting public health systems, and putting in place effective modalities for delivering relief to the neediest”.