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Gordon Polson – Director
FOB
Bank of England Agents’ summary of business conditions May 2018 Update
- Consumer spending growth slowed markedly, in part due to adverse weather.
- Recruitment difficulties became more broad-based; total labour cost growth rose
- Consumer spending growth slow: The adverse weather in February and March contributed to a marked slowdown in retail sales values and consumer services growth . Store-based retailers reported significant sales declines. Consumer services, such as restaurants, cinemas and hotels, were also badly affected, and most did not expect to recoup sales lost as a result of the weather disruption. Car sales had fallen in March, mainly due to strong year-ago comparisons and uncertainty about the tax policy for diesel cars. Domestic manufacturing output growth had been affected by the weather and weaker activity in the construction and automotive sectors. Some manufacturers benefited from some reshoring of sourcing to the UK, exporters generally outperformed firms focused on the domestic market. Goods export volumes to the EU remained strong, with limited evidence of reluctance to award longer-term contracts to UK companies. There were concerns about a rise in trade protectionism. Investment intentions remained modest, reflecting continued uncertainty around Brexit. Investment intentions were positive in business services and manufacturing, and some firms planned to invest in expanding capacity for exports, as well as in automation to counter rising labour costs. Consumer services firms’ intentions remained weak. Investor demand in commercial real estate had continued to outstrip supply, particularly for logistics premises. Retailers had continued to reduce their shop premises and the resulting increase in vacant units had depressed valuations in the sector. Capacity utilisation in manufacturing had risen, following increases among exporters and some domestic manufacturers, particularly where demand for substitutes for imports had increased. Business and professional services firms reported some capacity constraints but there was excess capacity in the retail sector. Growth in total labour costs had edged up, reflecting slightly higher pay settlements than in 2017 and the increase in employers’ pensions auto-enrolment contributions. Pay settlements had typically been in the 2½–3½% range, with higher awards targeted at retaining staff with key skills.
- Recruitment difficulties had broadened across skills and sectors, which was reported to be partly due to reduced availability of EU migrant workers. Employment intentions had ticked up in manufacturing but remained weak in consumer services, due to higher labour costs and weak sales.
- Housing market activity remained subdued overall. Demand had softened in the secondary market, where supply was also weak, whereas demand had been robust for new-build homes, supported by the Help to Buy scheme. There was some excess supply in the south and excess demand in the north: on balance there was a modest excess of supply overall. Lending conditions continued to be very favourable. However, slim margins on standard mortgage products had led some lenders to focus on more profitable niche segments of the market.
- Corporate demand for credit remained subdued, reflecting strong cash balances and/or heightened uncertainty. There had been demand for finance to support M&A activity, and some firms had undertaken pre-emptive refinancing ahead of Brexit. Supply of credit had tightened slightly for small firms.
- Construction output growth had slowed further. That was largely due to the poor weather, but some projects had been delayed following the collapse of Carillion. Contacts expected to make up weather-related delays, but some would not be able to do so until after Q2 due to capacity constraints.
- Business services growth remained moderate. There was a slight pickup in insolvency and restructuring work, robust growth in asset management and firm demand for IT services. However, discretionary spending by corporates, e.g. on events and hospitality, remained weak. Services exports continued to be boosted by inward tourism and growth in UK retailers’ overseas online sales. UK-based professional services firms saw growth in demand for Mergers & Acquisitions (M&A) advice from overseas clients. Demand for services from the oil and gas sectors edged up.
The effect of past sterling depreciation on imported goods and material costs had been waning but was being partially replaced by global commodity price inflation. Consumer goods price inflation had eased slightly (Chart 6), and consumer services inflation was broadly stable.
PHE-Sugar Reduction: Tomorrow, Tuesday, Public Health England will publish its report on the one year 5% sugar reduction target. There will be a Technical Briefing for trade associations and health charities tomorrow morning at 9am. At the same time an executive summary will be circulated to all stakeholders embargoed till 2.30pm.
ASDA/Sainsburys Merger-CMA Press release: This merger is likely to be subject to review by the Competition and Markets Authority (CMA).
In major mergers, it is typical for the companies to engage in ‘pre-notification’ discussions with the CMA to ensure they are supplying the information it will require before a formal investigation can begin. These discussions can last for a number of weeks. Once the CMA’s formal investigation begins, an initial, ‘Phase 1’ review then runs for up to 40 working days.
During a Phase 1 review, the CMA would assess whether the deal could reduce competition and choice for shoppers. After this first phase, the merger could be cleared or, if a potential reduction in competition is identified, it would be referred for an in-depth, Phase 2 investigation lasting up to 24 weeks – unless the merging parties offered immediate proposals to address any competition concerns identified.
Companies can also request to ‘fast track’ the referral of merger cases to Phase 2.
A Phase 2 investigation can result in a merger being cleared, prohibited, or allowed to proceed subject to ‘remedies’ such as the sale of parts of one or both businesses.
Preliminary invitation to comment: On 30 April 2018, J Sainsbury PLC (Sainsbury’s) and ASDA Group Limited (ASDA and, together with Sainsbury’s, the Parties) announced that they have entered into an agreement to combine their operations (the Proposed Merger).
The Competition and Markets Authority (CMA) will be considering whether it is or may be the case that the Proposed Merger, if carried into effect, will result in the creation of a relevant merger situation under the merger provisions of the Enterprise Act 2002 and, if so, whether the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom (UK) for goods or services.
The CMA is keen to ensure that all interested parties have the opportunity to make their views known and present all relevant evidence to the CMA. The CMA is therefore issuing this preliminary ‘invitation to comment’ asking all interested parties to submit to the CMA any initial views on the impact that the proposed merger could have on competition in the UK. Any such views should be provided to SainsburysAsda@cma.gsi.gov.uk by no later than 5pm on Monday 4 June 2018.
This invitation to comment is the first part of the CMA’s information-gathering process, in advance of the CMA’s formal investigation starting. The CMA is also likely to proactively contact companies and organisations that are active in the markets affected by the Proposed Merger, or have valuable insights or evidence that could assist the CMA’s investigation, such as suppliers, competitors, industry bodies and consumer organisations.
Further opportunities to engage with the CMA’s investigation are likely to be provided by a consumer survey (to engage directly with the customers) and by a series of hearings and roundtable meetings with interested third parties.
All updates on significant case developments will be available on the CMA’s case page: https://www.gov.uk/cma-cases/j-sainsbury-plc-asda-group-ltd-merger-inquiry
FDF Launches Health Report: FDF published an updated Health and Wellbeing Report, “Feeding Change” last week. The report highlights the progress industry has made over the last few years to help people make healthier choices, and includes multiple case studies from members showing examples of this work.
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