Weekly Financial News Roundup.
The week opened with the news that the worsening financial crisis worldwide had forced the European Commission to massively downgrade its forecast for European economies. According to the Commission, economies in the eurozone – the geographical and economic area including those European Union countries which have adopted the single currency – may contract by as much as 4% during 2009, and may not start to recover until the second half of 2010. Unemployment may also rise to 11.5% during 2010.
Elsewhere, international sports broadcaster Setanta was reported to be holding negotiations with its rights partners – including the Football Association (FA), to whom it was expected to pay £35 million next week – in an effort to solve its cash flow problems. Concerns had been raised by investors that Setanta had only been able to secure rights to 50% of the Barclays Premier League games in its current schedule, but Director of Sport, Trevor East, was keen to point out that there was no question of the company defaulting on its commitments. He told the Independent newspaper, "We've been in productive talks with our rights partners including the FA and they have all been terrific, without exception."
Major U.S. banks were being stress tested by the U.S. Federal Reserve this week, to see if they had sufficient capital reserves to cope with any worsening of the recession. The results of the testing were due to be published on Thursday, but there was optimism on Tuesday that they would not be as bad as originally anticipated, and U.S. banks would not be facing a huge shortfall in the amount of capital they need to raise. This optimism was reflected by the U.K. banking sector, with share prices in Royal Bank of Scotland (RBS) up 13%, share prices in Standard Chartered Bank up 12% and the FTSE 100 index, as a whole, up 120 points or nearly 3% at 4,363 points by noon on Tuesday.
There was less heartening news for airport operator BAA, however, which reported that passenger numbers at its three London airports – Gatwick, Heathrow and Stansted – had fallen by an average of 10% during the first quarter of 2009. Heathrow, where passenger numbers were down nearly 8%, year-on-year, fared better than Gatwick and Stansted, where numbers were down nearly 15% compared with the same period last year. BAA reported an increase in pre-tax losses, to £316.2 million from £55.6 million a year earlier with the recession largely to blame, although depreciation in value of Terminal 5 at Heathrow, heavy snowfall in February, and a late Easter this year were all cited as reasons for the differences in year-on-year figures.
Birmingham-based van maker LDV was originally expected to be placed into administration on Wednesday, in turn placing 850 jobs within the company and thousands more, elsewhere, at risk. Negotiations between LDV, the Malaysian firm Weststar and the British Government – which had offered LDV a loan of £5 million for four weeks – with a view to a takeover were continuing on Tuesday night, however, and any moves to place the company into administration were adjourned until next week pending the outcome.
More pessimistic data regarding the recession was released in midweek with the National Institute of Economic and Social Research (NIESR) predicting that the current recession in the U.K. could be the worst since the Great Depression of the early Thirties, with the economy contracting by 4.3% in 2009, before resuming growth in 2010. The NIESR said in its economic review that, "There is a real possibility that GDP will fall more this year than in 1931." The latest survey of U.K. housing prices conducted by the Halifax – now, of course, part of the Lloyds Banking Group – revealed that prices fell by a further 1.7%, taking the cost of the average U.K. property to just under £155,000, down a little over £33,000 or 17.7%, compared with a year ago.
According to figures released by the Office of National Statistics (ONS) towards the end of the week, producer output price inflation – inflation at the British factory gate if you like – fell to 1.2% in April from 2% in March. The latest figure represents a 5-year-low, and was far greater than most analysts had predicted, but is a further indication that inflation is coming into line. Cheaper raw material prices are now offsetting the weakness of Sterling and its effect on import costs, and this has been instrumental in the survival of struggling manufacturers. The current economic climate has meant that savings have been passed on to the consumer, and passed on faster because of reduced cost pressures.
In other news, a report to the British Government by the Financial Services Global Competitiveness Group (FSGCG) – a group of top financial professionals co-chaired by Chancellor, Alistair Darling and Sir Winfried Bischoff, former chairman of Citigroup – warned that Britain must not be complacent in its approach to financial matters and its position within the global financial community, if it is to retain its competitive edge. The report proposed a number of policies and initiatives to be implemented over the next 10 or 15 years if Britain is to remain a world leader in financial services.
Elsewhere, Centrica, which owns British Gas, was reported to be on the brink, finally, of signing a deal with EDF for the purchase of a 25% stake in British Energy. The two firms originally agreed a £3.1 billion deal, in principle, as long ago as last Summer, but volatility in electricity prices in the interim has lead to final signing of the deal – which could be completed as early as Monday this week – being delayed. British Energy is already responsible for eight nuclear power plants in the U.K., with two more in the pipeline. The likelihood of expansion, in light of government plans for an increased commitment to nuclear energy production, make British Energy an attractive proposition, according to analysts.