Weekly Financial News Roundup
The week opened with the news that the resignation of Sir Victor Blank, Chairman of Lloyds Banking Group, had been accepted, following continued criticism of the acquisition of Halifax Bank of Scotland in January. The deal, which was engineered by Sir Victor with the help of Prime Minister Gordon Brown, resulted in an institution that is 43% owned by the Treasury, after few shareholders bought new shares in the merged bank. Lloyds Banking Group predicted a 50% increase in corporate impairments in 2009, largely due to HBOS, a few weeks ago. Sir Victor will step down by June next year, ahead of the AGM, and Lord Leitch has been appointed Deputy Chairman with immediate effect, making him a strong candidate to succeed Sir Victor. Sir Victor himself was quoted on the BBC website, saying, "I believe it is the right time for the group to appoint a new chairman. I will continue working until my successor is appointed to ensure the successful integration of the two banks. This remains – in the medium term – a unique value-enhancing opportunity."
Elsewhere, the Government subsidised car scrappage scheme made a stuttering start, at least as far as Ford and Honda were concerned. The scheme, which allows cars that are more than 10 years old to be scrapped in return for a £2,000 discount – £1,000 provided by the Government, and at least another £1,000 provided by the motor industry – was supposed to start this week, but Ford and Honda have delayed their involvement. Ford suspended deliveries of vehicles to its dealers, expressing concerns over VAT arrangements, whilst Honda suspended registration of any vehicles under the scheme, seeking an explanation of the industry contribution and other administrative points. Both manufacturers said that they remained committed to the scheme, however.
Lloyds Banking Group was in the new again on Tuesday, as it announced the merger of its corporate and small business operations in the U.K. with the loss of 625 jobs, spread evenly across England, Wales and Scotland. In other news, figures released by the Office of National Statistics (ONS) revealed that annual inflation slowed in the U.K. in April, as energy and food prices continued to fall. The Consumer Price Index (CPI) fell to 2.3% from 2.9% in the previous month, reaching the lowest value for more than a year, whilst the Retail Price Index (RPI) fell to -1.2% from -0.4%, representing the largest fall since records began more than 60 years ago.
Retailer Marks & Spencer announced a fall in annual pre-tax profits, from £1.1 billion to £706 million, despite a 0.4% rise in total sales, to £9.1 billion. In a move that Marks & Spencer described as, "tough but necessary", the retailer cut its dividend by a third – to 15p a share, down from 22.5p a share the previous year – which was a little more than analysts had expected.
The minutes from the latest meeting of the Bank of England's Monetary Policy Committee (MPC) in May revealed on Wednesday that members voted unanimously to hold the Bank Rate at 0.5%. Not only that, but they also considered expanding the programme of so-called "quantitative easing" by £75 billion – the maximum amount allowed by the Government – before settling on a £50 billion extension to the programme.
Elsewhere, figures released by the World Gold Council revealed that demand for gold soared in the first quarter of 2009, as investors sought to safeguard their investments from future inflation in a climate of economic uncertainty. Demand for gold as an investment rose fully 248%, year-on-year, to 596 tonnes in the first three months of 2009, while total demand for gold rose 38%, to 1,016 tonnes. Gold jewellery, conversely, had been shunned by consumers in times of recession, with demand down 24%, year-on-year.
Major news was announced by ratings agency Standard & Poor's on Thursday, with the downward revision of the outlook for U.K. as Government borrowing soars. Government borrowing reached a record high in April, according to the Office for National Statistics (ONS), with public sector net borrowing rising to £8.46 billion, compared with £1.84 billion in April 2008, as a result of lower tax receipts and higher benefits payments in the recession. Standard & Poor's confirmed the U.K.'s "AAA" long-term rating, but revised its outlook to "negative" from "stable", based on the projection that the Government debt burden may approach 100% of GDP ("Gross Domestic Product").
Further figures released by the ONS on Friday revealed that the output of the U.K. economy fell by 1.9% during the first three months of 2009. Manufacturing output was down 5.5%, rather than the 6.2% previously predicted, but household spending fell by 1.2% – the largest fall for 29 years – and the only sector of the economy to make a positive contribution to growth was Government spending. The fall in manufacturing output still represented the largest quarterly fall since records began more than 50 years ago, whilst construction output fell by 2.4%, and the service sector by 1.2%.
The depth and breadth of the recession was further highlighted by the latest figures from the Society of Motor Manufacturers and Traders (SMMT) released on Friday. Car production in the U.K. fell 55.3% in April, as consumers continued to cut back on big-ticket purchases, forcing car manufacturers to cut production and reduce staffing levels.
British Airways (BA), too, posted its worst results since privatisation in 1987 on Friday reporting an annual pre-tax loss of £401 million, compared with a pre-tax profit of £922 million just one year ago. Higher fuel prices last summer, which led to £3 billion fuel bill, the weakness of Sterling, and reduced demand as a result of the recession were all contributory factors towards the loss. Management will forgo bonuses – Chief Executive Officer, Willie Walsh, amongst others, has offered to work without pay for the month of July – and a dividend will not be paid to shareholders, as BA seeks to stabilise its trading position.