29 April 2024: 500k businesses are “in trouble”

A business survey published recently showed that close to five hundred thousand small and medium-sized enterprises are “in trouble”, meaning that they are facing financial stress. Although the survey didn’t consider the cause of the stress, the current level of interest rates is certainly the primary cause.

The Monetary Policy Committee meets next week and although there have been some mixed messages recently from its members, it is considered highly unlikely that they will agree to a cut in interest rates.

With the Prime Minister facing pressure to announce the date of the General Election and the economy slowly gaining traction, a cut in the level of interest rates would create a major feel-good factor for voters. However, it is doubtful that such an event would “turn the tide” in favour of the present government.

Rishi Sunak is facing a defeat similar to 1997, when Tony Blair won a landslide victory, leading to a 179-seat majority.

This would dwarf the majority gained by Boris Johnson in 2019, which was driven by Johnson’s charismatic personality and his levelling-up agenda. Ironically, Blair, followed by Gordon Brown, led the Labour Party to thirteen years in Government, which is just one year less than the Conservatives who have ruled since 2010.

The MPC is fiercely independent, although it is expected that its mandate will be altered under a new Government. Liz Truss’s Chancellor, Kwasi Kwarteng, wanted to amend the Bank’s authority but wasn’t in the job long enough to change its accountability.

The Construction Sector, along with many independent retailers are feeling the stress of continuing high interest rates, as well as the issues that they still face from Brexit.

The survey by Bigbie’s Traynor, a corporate recovery specialist, took a snapshot of the health of SMEs over the past fifteen years.

It showed that the pace at which problems have developed has been at its highest over the past twelve months. 20,000 businesses are expected to move from significant financial stress to Critical over the next twelve months.

The Company’s Chairperson commented We are three months into 2024 and the considerable economic challenges facing many companies up and down the UK show no immediate sign of abating. The macroeconomic conditions that made last year so difficult have continued to exert unrelenting pressure on corporate balance sheets.

Last week, the pound continued its recent run of three gains, climbing to a high of 1.2541 and closing at 1.2491.

This week will be dominated by the U.S. employment report for April and the FOMC meeting. There is no tier-one economic data due for release, and no members of the MPC are scheduled to make speeches.

The FOMC will need to inject a clear level of certainty into the market’s perception of when the first rate cut will take place following its meeting that concludes on Wednesday.

While there is considered no chance that a cut will be agreed while the level of new jobs created is averaging more than 200k per month, there is a concern that the April figure that is due for publication on Friday will be the lowest for a considerable time.

It is well known that the headline non-farm payrolls number is notoriously unpredictable since it bears little or no correlation with any of the other data on the overall state of the jobs market that will also be released this week.

Over the past couple of weeks, there has been an underlying concern that the economy is showing the first signs of a slowdown, and it may well be that Jerome Powell could acknowledge that fact following this week’s meeting. Were that to happen, it would reignite expectations of a rate cut as soon as June.

The FOMC is not allowed to have advanced sight of the employment report, although its economists no doubt model various scenarios which will give its members a significant amount of confidence that the data will be close to their expectations.

It comes down to how proactive the FOMC wants to be since a cut in rates at some point in this year is a “done deal”. There has never been a rate cut announced when the economy is growing at, or even close to, its current level.

That having been said, the change in economic conditions has accelerated considerably over the past twenty-five years. This means that a cut in rates while the economy looks to be in “good shape” cannot be ruled out.

It may well be that the economy is simply going through a “flat” period and will resume the rate of growth it has seen over the past six months. This will mean that a cut in rates may be delayed until September or possibly well into the fourth quarter. That would have a significant effect on the strength of the dollar, since other G7 nations are expected to cut long before that, with the first cut(s) expected to take place in June.

As well as the three-monthly employment reports and the weekly jobless claims data, house price data, and manufacturing output are due for release as well as the outcome of the FOMC meeting.

While it may be glib to say that this week has the potential to be a watershed for the U.S. economy and the dollar, there can be little doubt that the level of volatility may increase substantially.

The ECB continues to second guess about the economic conditions that will allow it to cut interest rates at its next meeting, which takes place on June 6th.

That date is significant in Europe since it will mark the 80th anniversary of D-Day, which saw the beginning of the end of the Second World War.

The slowdown in euro-zone inflation may have stalled in April for the first time this year, just after a quarter when the economy shook off the shallow recession it suffered in late 2023. Consumer prices probably rose 2.4% from a year earlier, matching the outcome for March.

This, coupled with the expected delay in rate cuts taking place in the U.S., which would place the Euro in peril, has been cited as a reason a rate cut may be postponed.

An opposite view was provided by the Italian representative on the ECB’s Executive Board last week.

The Board’s newest member, Piero Cipollone, spoke last week of his belief that rather than “waiting for the Fed”, the ECB may need to perform more cuts to interest than has been predicted.

His comments show that he may be prepared to vote for a rate cut at the central bank’s next meeting if data on inflation and wages show that price pressures continue to fade in line with the ECB’s expectations.

He believes that if wage increases fall too quickly, workers in the Eurozone may be faced with a decline in their purchasing power, putting downward pressure on productivity and possibly inflation.

The ECB wants to see inflation back at its target level of 2%, although it also wants to guard against price rises falling too far below that level.

It seems to have either temporarily or permanently abandoned its policy of using an average rate of 2% returning to the absolute rate of 2%.

The ECB is holding a “retreat” on May 22nd in Ireland. This is ostensibly to “brainstorm” how it may adopt more green policies, but with the next meeting of the Governing Council following quite quickly afterwards, it will be an opportunity to get its “duck in a row” before a possible cut in early June.

This week will see the publication of the preliminary inflation report for April. There will also be individual inflation reports published, as well as both GDP and employment data for Germany.

The euro appears to be in a temporary upward trend. Last week, it closed higher for the second week in succession. It reached a high of 1.0752 and closed at 1.0693.

Have a great day!