8 December 2024

I attended a 3-day virtual event with the FT Global Boardroom. The first session was an interview between Andrew Bailey, the Governor of the BoE, and Chris Giles, FT finance journalist. The main points were as follows:

• The past 5 years have been exceptionally volatile for the UK and the world. In fact, the past 15 years have been terrible for the UK in terms of economic growth and productivity. The financial crash in 08/09, followed by a deep recession, political unrest, the European debt crisis, Brexit, COVID, Russia-Ukraine war and cost of living crisis, has taken a significant toll on the UK population, their optimism, and their future prospects.
• However, there are strong signs things are starting to settle. Inflation is coming down, all-be-it slowly, towards the BoE's 2% target and political certainty for the next few years is helping the BoE's to forecast more confidently.
• The Governor stated that they have run a variety of scenarios to produce a distribution of outcomes and responses. At the good end, we have inflation continuing to fall, followed closely by interest rates. At the bad end, inflation is stuck in the system and structural issues e.g. with the labour market, make it permanent. Hence interest rates will need to remain high.
• The likely scenario, as always, is somewhere in the middle. Inflation will be sticky but will reduce slowly. Hence, rates will be cut slowly, with expectations of four quarter-point fall in rates expected in 2025, if its outlook for the UK economy bears out: “[Inflation] has come down faster than we thought it would.”
• The FED and ECB may cut faster since the UK has much stickier inflation due to structural issues with the economy and labour market. Moreover, fragmentation in the global economy will continue to cause uncertainty.
• The NI changes in the UK budget, enacted in April 2025, are also causing uncertainty as it is not yet clear how businesses will respond: pass it on through to increased prices or lower salaries or absorb it and accept lower margins.

In summary, there are some positive signs, but the BoE will not be pressing too hard on the accelerator, instead taking a cautious but optimistic approach. Other pertinent points for treasurers from the 3-day FT Global Boardroom event:

• Speakers discussed the real business impact of generative AI. Mashreq chief executive Ahmed Abdelaal said “a cultural shift”
  was required to encourage adoption of the technology, to show people that rather than it being a threat, it is there to “take away the boring parts of their job".
• The CEO panel on crisis management highlighted the growing importance of strategic preparation in responding to external risks.  “There are people who say, well, why make scenarios? And that it is some kind of voodoo magic. I always say the beautiful thing with scenarios is that they are precisely wrong but generally right.” They stressed the dual necessity of having robust incident response plans and business continuity strategies.
• A session covered ESG trade-offs and how to maintain the pace of the green energy transition.  “Today the energy transition is far more a corporate pull than it is a government push. And corporate demand continues to accelerate".  "There are a lot of companies that are still committed to their ESG and sustainability goals, but they are really being held to account as to whether they are meeting their measurable milestones and whether, in doing so, it’s actually accretive to shareholder value."
• A session on geopolitical risk is summed up by the quote: “The things that have really, really changed the world … tends to be the things we didn’t see coming"
• A session on how the EU will deliver growth, "What I like about the US is the significant increase in productivity, probably related to AI [personally disagree; I think it is due to more dynamism and inherent culture]. Then on the other hand we have Europe: Germany has stagnated right now …The shining light for the big economies in Europe is Spain.”
• Session on systemic risks concluded with the following: “It looks like there is going to be deglobalisation…This volatility is here to stay, and its impact will be felt on the world economy.” “A risk resulting from deglobalisation is diverging regulations… If they diverge too much, this is going to inflate the risk of doing business across different countries.”

18 November 2024

It has been almost 2 weeks since the delivery of the first Labour budget for almost 15 years, the last being in March 2010 by Alistair Darling - the eyebrows guy. The consequences are just beginning to be realised, and business furore is growing. The costs of the NI increase to 15%, plus lowering of the starting threshold to £5,000 from £9,100, and the minimum wage increases all add significant pressure to businesses already feeling the strain from the cost volatility and unpredictability experienced over recent years under a conservative government. Layering in the likelihood that the additional spend by the government will keep inflation higher than it would have been, resulting in interest rates not falling as quickly as originally hoped. Finally, the lack of growth and opportunities adds to the growing list of issues that these businesses will have to suffer over the next five years. 

What does this mean for treasurers?

Noting that the changes announced in the budget do not come into force until April 2025, there are certain things that treasurers can do now to prepare:

• What is the cost impact: check calculations performed for the budget impact on your organisation and ensure liquidity forecasts are updated. Are there any holes created or spending plans that need to be revisited? 
• Similarly for growth estimations, inflation, and interest rates in a cash forecast or/and for valuations and investments
• Consider the impact on any planned M&A activity. Will this still go ahead or do the changes scupper those plans, say for example from increased costs?
• Talk to your banks, investors and liquidity providers regarding how you plan to absorb the costs or/and discuss if there is a need to increase facility headroom.
• Working capital and the impact on customers and suppliers: Will they stay in business? Will they continue to buy at the same volume? Can they still be relied upon to fulfil your orders?

Getting ahead of the game here will stand treasurers in good stead for the preparation of the inevitable questions around possible liquidity impacts from the budget.e sed.