Economic Review

From electric cars to lower water bills, M&A gives a breakdown of the highs and lows of the UK economy in the last month


From electric cars to lower water bills, M&A gives a breakdown of the highs and lows of the UK economy in the last month

From electric cars to lower water bills, M&A gives a breakdown of the highs and lows of the UK economy in the last month

Automotive

In some welcome news for the under-fire UK motor sector, Japanese car giant Nissan has announced that its Wearside factory will start producing batteries for electric cars in a move creating 350 brand new jobs.

Nissan’s plant, located near Sunderland, fended off competition for the £200 million investment, which Gordon Brown described as ‘great news for the local economy’, from other Nissan factories in Europe.

Sector followers say the move could pave the way for the production of electric vehicles at the North East plant in the near future. As Gordon Brown said, ‘Sunderland could now be a strong contender to produce electric vehicles for Nissan in Europe and we will continue to work with Nissan to ensure this happens.’

The significant investment from Nissan will be spread over five years and the new plant, set to make lithium-ion batteries, will also create and secure additional jobs in the related supply chain.

According to Michael Steventon, automotive research head at KPMG, this latest announcement represents a nod of confidence in the car giant’s Sunderland-based workforce

‘Batteries are only part of a vehicle but they are an expensive, logistically significant part,’ he said. ‘It does mean that Nissan is more likely to manufacture electric vehicles in the UK than elsewhere in Europe.’ However, he explained that if the UK really wants to capitalise on the move towards hybrid vehicles, it will need to splash more cash on research and development.

Though welcomed, the announcement from Nissan, which cut 1,200 jobs at the factory earlier this year, created ambiguity, since the company failed to say whether or not existing jobs at Sunderland are secure.

Finance

Reckless lending may have been one factor in the recent banking crisis, but it is the banks’ stubborn refusal to lend to businesses on any but the most savage terms which is now vexing the government. Chancellor Alistair Darling, backed up by Business Secretary Lord Mandelson, has been arm twisting Britain’s banking chiefs and even threatening a possible reference to the Office of Fair Trading, though it seems with scant initial effect

Lloyds Banking Group, in which the state took a hefty stake to tide it over from the impact of its ill-starred takeover of Halifax Bank Of Scotland, has been popular in the stock market of late. However, institutions were not thrilled by the appointment of City veteran Sir Win Bischoff, former chairman of troubled US financial giant Citigroup, to take the Lloyds chair.

The recent weakness of the US dollar has not been good news for London market non-life insurers, much of whose business is denominated in the greenback. FTSE 250-quoted Beazley, for example, saw interim profits, which had risen 52 per cent before currency adjustments, halve to £20 million because of a weaker dollar, despite a healthy increase in premium rates.

Media

Confidence is returning to the UK advertising industry, with marketing spending in 2009’s second quarter having fallen at a slower rate than in the previous quarter.

Industry body the Institute of Practitioners in Advertising’s latest quarterly Bellwether report has found that the rate of decline in marketing spend has eased for the second quarter in a row. Spending was reduced for all marketing categories in ‘Q2’, although, in an encouraging sign, the rate of decline slowed. Budgets for main media advertising and ‘all other’ advertising, including PR, event sponsorship and market research, remained the hardest hit.

However, the rate of decline remained severe and there is a high risk that marketing spend will continue to shrink. Ian Crick, head of digital at media auditing business Billetts, part of AIM-listed ebiquity, offers a more careful view, without the optimistic bluster of many industry insiders. ‘The marketing community view the consistent increases in budgets that we saw over the past ten years as the natural growth line. In my opinion, the declines we are seeing are actually a readjustment to something more realistic, based on UK real incomes devoid of excess credit, and therefore the end of the decline may not signal the beginning of growth.’

With price inflation ‘inevitable’ due to rising energy costs, as well as public sector cuts and tax increases likely after the next general election, recovery won’t come easy according to Crick. This could mean that Western media jobs or agencies are replaced or long-shored to cheaper ‘but just as qualified’ overseas expertise. ‘So yes, we might see some signs of “green shoots” in the short term,’ he concludes, ‘but I would be very cautious in predicting that the good times are on the horizon.’

Resources

Traders who believe a global economic recovery is poised to gain momentum – or who believe others will come to think it is – have been piling into copper. After a prolonged period of weakness, the metal has been rallying this year and has lately been testing new 2009 highs.

Bulls have been pointing, in particular, to a rapid rise in demand from China for copper concentrates to feed smelters to produce refined copper. This has caught suppliers on the hop.

Gold, meanwhile, has been showing resilience at around $950 an ounce. Renewed concern over the US dollar has brought in buyers.

Oil touched $70 a barrel at one stage, on reports that crude production from Mexico, a key supplier to the USA, had fallen 11 per cent in June. October raw sugar futures have touched a three-year low of 18.57 cents a lb, as rains have affected the outlook for production in Brazil and imports into India.

Technology

Fuelling hopes that the worst of the doom and gloom may be behind
the tech sector, two NASDAQ-traded bellwethers have cheered investors with upbeat results.

Global chipmaker Intel announced better-than-expected second-quarter net profits of $1 billion (£610 million).

While Q2 revenues of $8 billion were 15 per cent down year-on-year, the performance from Intel still represented an encouraging 12 per cent advance compared with the first quarter and came in ahead of analysts’ $7.27 billion prediction.

The encouraging second-quarter figures, said CEO Paul Otellini, reflected improving conditions in the PC market. Furthermore, the numbers represented the group’s strongest first to second quarter growth since 1988 and leave Intel well placed for the seasonally stronger second half.

Microprocessors made by Intel are used in over three-quarters of the globe’s personal computers, so the US tech giant, lately hit by the recession and IT spending slowdown, is truly a barometer for the sector. With PC sales having already reached their nadir in Q1 and the industry returning to seasonal business patterns, the future for Intel looks brighter.

In other good news for the sector, computer giant IBM upped its earnings forecasts and announced second-quarter profits to June that were ahead of expectations, despite a fall in sales.

IBM said it expects to earn at least $9.70 (£5.80) per share for 2009, up from an earlier $9.20. This followed news that, thanks to cost cutting and a shift to higher-margin business, quarterly profits increased by 12 per cent year-on-year to $3.1 billion.

Utilities

Cash-strapped households will benefit from a £14 fall in average water bills to £330 (before inflation) over the next five years, water industry regulator Ofwat has decreed.
The fall was unveiled in the utility watchdog’s ‘draft determination’ on price limits for water and sewerage costs in England and Wales for the 2010-15 period.

Water companies were hoping to push through price hikes for the period (business plans were submitted to the regulator back in April). But Ofwat has (as it does for England and Wales every five years) now set the limits for prices due to come into effect in April 2010, while also suggesting investment levels for each water group.

Stripping out inflation, the Ofwat proposals would see the average bill in England and Wales fall to £330 a year by 2015, which contrasts with the rise to £375 that water ventures were lobbying for.

The regulator says the proposals will enable them to invest £21 billion in improving services over the next five years.

However, the water companies claim that customers could suffer as a result of its plans. ‘Initial indications,’ said David Owens, Thames Water CEO, ‘suggest that the draft determination may not allow us to deliver what our customers want in the future.’ Pointedly, he added, ‘For example, this means we will not be able to reduce leakage at all over the next five years.’

A consultation period now follows, ahead of a final decision in November. Meanwhile, shares in the sector’s quoted constituents came under selling pressure early on following the news, with Severn Trent giving up nearly seven per cent, United Utilities six per cent and South West Water-owner Pennon almost four per cent.

Nick Britton

Lexus Ernser

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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