Creditsafe Blog

What do breast implants have in common with the price of wheat…..the perils of inflation?

Inflation may have slowed in July, but it is still running at 3.1%, far in excess of the Government’s 2% target.  Given that in the last month we have seen the price of wheat soar, the economy appears to be facing ever greater inflationary pressures. The consumer price index has now exceeded the 2% target for eight consecutive months.  This pressure will be exacerbated still further in 2011 when the standard rate of VAT increases to 20% and rail travellers feel the full force of inflation busting fare rises, which could be as much as 5.8%. 

Some commentators argue that these inflationary trends are positive for the economy, particularly in relation to eroding the national debt.  However, many business owners will be concerned about the impact of rising costs and the pressure on their margins.  Employees, many of whom have endured pay cuts and freezes over the past two years, will start to demand substantial wage increases to ensure their income in real terms is not eroded further.  In addition, the pressure on materials and overheads keeps rising.  Many firms can ill afford a chill winter given the cost of heating bills, unless of course they operate in the retail sector where firms will be desperately hoping that people invest in a warming winter wardrobe.  While many firms were proactive and slashed costs prior to the credit crunch, which in many cases facilitated their survival, one has to wonder just how much more cutting of margins can continue. 

However, traditional solutions to inflationary pressures may also leave business owners with sleepless nights.  Traditionally reducing inflation has meant raising interest rates, which would be extremely worrying for many business owners and operators running loans and overdrafts.  The message for the business community is clear: assess your cost bases and double check your company forecasting unless you wish to face a winter of discontent. 

Do you believe inflationary pressures are negatively impacting the economic recovery?

Speculate to accumulate?

From rumours about David Beckham and Posh Spice’s sister, to tall tales of stolen kidneys and the world’s most expensive cookie recipe, the internet continues to provide a forum for falsehoods to spread like wildfire.  However, it is not just the world of celebrity that can be adversely affected; internet rumours and speculation can also negatively impact the business community. 

The so called ‘pumping and dumping’ of shares, hyping potential gains based on inaccurate information, has been ongoing from time immemorial.  The internet has provided a new and highly effective opportunity for unscrupulous investors to attempt to manipulate share prices by spreading rumours to turn a quick profit.  With thousands of pounds to be made in an instant from spread betting on equities, the temptation to influence share prices to move up or down by spreading falsehoods online is greater than ever before.

What is interesting is in an age where investors can so easily access business intelligence about the real-time performance of a company that so many are prepared to believe speculators on an internet forum.  One has to wonder what kind of investor believes a selfless, evangelist would go onto a forum to give others insight into their hot stock picks. 

Two small British oil firms are allegedly considering launching legal action against individuals they believe maliciously spread false rumours about them on private investor websites.  Nighthawk Energy and Nostra Terra Oil and Gas claim to have uncovered the identities of people who used pseudonyms to post untrue and damaging claims about them online and may sue for defamation.
From the gold rush to the internet bubble there will always be people hoping to strike it rich and make a quick buck.  What is worrying is that when claims can so easily be verified that people still follow the fool and blindly accept investment advice from anonymous sources on the internet. 

Some would argue that the impact of private investors is nothing compared to the influence hedge funds can wield over a share price, particularly when it comes to the practice of short selling.  While this may be true, the impact of rumours on share prices particularly amongst AIM listed stocks and penny shares should not be underestimated.  Simply look at the volatility of the share prices of AIM listed stocks even when the company has released no recent news updates or RNS announcements for evidence that pumping and dumping is alive and well.  

Do you believe investment forums should be more tightly regulated to prevent the artificial inflation of share prices?  

Is Protectionism on the rise?

Following a series of droughts and fires, Russian Prime Minister Vladimir Putin has imposed a temporary ban on the export of grain, which is set to last until the end of the year.  At the same time BP could be facing a ban on offshore drilling by the US; an action which the British Embassy in Washington has chosen to interpret as a form of protectionism rather than having been motivated out of environmental concerns. 

These moves are helping to fuel speculation that we are entering a new era of protectionism.  This view is supported by the ‘Buy American’ clause in the country’s stimulus packages during the economic crisis.  In the longer term if, as suspected, pressure continues to mount on the earth’s resources as a result of over-population and global warming, it’s likely that national leaders will increasingly look to adopt more protectionist measures to defend their own national interests. 

But where would all this leave British businesses?  Currently, eight of the UK’s 10 biggest import and export partners are members of the EU.  As a free trade area, this should leave it fairly well sheltered from a rise in protectionist behaviour.  However, with UK companies looking to take advantage of the growth potential presented by emerging markets such as China and Brazil, any rise in protectionist policies could stifle these opportunities.  Furthermore, as Europe is increasingly reliant on imports from outside of the EU higher tariffs would drive up the cost of these materials and therefore the cost of goods within the region.

Many British businesses rely on the global market and are reliant upon overseas trade, whether it’s importing goods from abroad or from exporting their wares to markets overseas. These enterprises would suffer markedly were protectionism to takeover.  Indeed, our own research shows that one in four UK companies with a group structure has a link to an overseas company.  When it comes to trade Britain is not an island, it is reliant on international commerce to thrive and prosper.  Any concerted move towards protectionist policies that makes British companies less competitive overseas could spell disaster for the business community.

Are you finding more barriers to your trade overseas?

Onus on the bonus

Much has been made of bonuses in the private sector since the banking crisis erupted in 2007. This week Vince Cable called on banks, especially ones where the state holds a majority holding, to be restrained when handing out the next round of bonuses.

While it's impossible to defend cases where bonuses are awarded regardless of success and even in the event of well-publicised failure, the issue is often more complicated than it first appears.

For example, employees working for a struggling bank may receive a sizeable bonus, even if the bank reported a loss that financial year. They may however work in a division of the bank that turned a profit, helping to make the bank's overall balance sheet less disastrous than it otherwise would have been.

It's easy to condemn megabucks bonuses, but the fact remains that ex gratia payments motivate staff and give them a stake in the success of the company they work for. While rewards for failure are unacceptable, a failure to reward success could see a slump in morale and a "brain drain" of the company's most talented staff.

Of course, there is an argument that organisations which are largely owned by the taxpayer should show restraint in the bonuses they pay with what is effectively public money. On the other hand, we need the best and the brightest minds working to repair our damaged banking sector.

What do you think? Should there be a cap on bonuses? Or do you think they are a price worth paying to incentivise and keep top-performing staff members?

Farewell Richard Lambert. Hello small business champion?

This week Richard Lambert announced that he will step down as head of the Confederation of British Industry (CBI) several months before his term was due to expire. Lambert is expected to quit early next year.

Lambert has been an enigmatic head of the employers' organisation, which represents the interests of some 240,000 UK businesses. Rather than the tub-thumping, business-above-all-else style of former heads of the CBI, Lambert is seen as a thoughtful, often deliberately careful commentator on business issues, whose circumspect pronouncements have sometimes led to accusations that the business's champion is sending out mixed messages.

The focus now is on who will succeed Lambert, who spent 35 years at the Financial Times, eventually becoming the paper’s editor. The CBI has not been headed by a true "dirty hands" industrialist since Sir Terence Beckett in the 1980s, who rose up the ranks at Ford. Since then, we've had Sir John Banham, a former FCO man; Sir Howard Davies and Lord Turner, both trained management consultants; then Lord Jones, who started out as a lawyer.

This is not to say that any of these white, middle-aged men did not have the credibility to represent the CBI’s members. But it will be interesting to see who is chosen, and whether the CBI will break the mould of recent appointment by choosing an old-fashioned “captain of industry”.

Creditsafe does not believe that a background in industry automatically makes someone more qualified to lead the CBI than, for example, a candidate from the law or publishing sectors. In a period of uncertainty and risk, however, British firms could well benefit from a CBI head who has firsthand experience of the issues that businesses are facing day-to-day.

From whatever background he – or she – turns out to be, Creditsafe hopes that they continue to champion UK business and to help the current government chart a course from recession to growth.

Let us know what you think - who should be the next head of the CBI? Is it important what background they come from?