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Sunak's Tax Cut Agenda Highlights a Weakness in the UK Economy – BNN

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(Bloomberg) — Chancellor of the Exchequer Rishi Sunak’s plea for businesses to boost investment highlights a key weakness in the UK economy that company executives have long complained about.

Britain has fallen behind other advanced economies in the Group of Seven when it comes to the amount businesses are investing in everything from research and development to improving technology and equipment.

The gap has widened since the vote to leave the European Union and is one of the issues holding back the long-term growth potential of the UK economy. Sunak this week vowed to cut taxes to spur investment. While that won’t do much to address the cost-of-living crisis hitting consumers, it’s an idea embraced by business executives.

“He has a very good point,” John Browne, the former chief executive officer of the oil major BP Plc, said in an interview. “We need to invest more in innovation and more in R&D. Industry is not spending enough. The balance is too much government spending.”

Business investment is crucial because it increases productivity, which also is lagging in the UK. Boosting it would help Prime Minister Boris Johnson deliver on a pledge to lift living standards in poorer parts of the country under his “levelling up” agenda.

The debate comes at a critical juncture both for the government and executives. Many UK companies are sitting on significant cash piles after pausing dividends and capital investment plans at the height of the pandemic. 

Many management teams are now choosing to return much of this surplus cash to shareholders, rewarding their patience after a tough two years of intermittent lockdowns amid a global supply chain crisis and surging inflation.

Buybacks vs Investment

Businesses including Burberry Plc and Compass Plc and most of the large banks have announced significant share buybacks in recent weeks. Oil company BP Plc’s decision to boost its share repurchase program means that FTSE 100 companies are now collectively planning an all-time high of 37 billion pounds of share buybacks this year, according to AJ Bell.

It’s not just the big banks and oil companies returning cash either, according to Adrian Gosden, investment director at GAM. 

“I have in my fund some small companies that are also buying back their shares because their shares are valued at maybe half times their asset value. So why not?” Gosden said.

Recommendations

The CBI, Britain’s biggest employers group, has called on Sunak to stimulate investment by cutting taxes in a way that will encourage businesses. The lobby group notes that the allowances tax authorities grant for offsetting capital investments is much less generous than in other countries, especially the US.

“We will need to ensure that there is economic growth in the pipeline to avoid any downturn in our economy that could worsen or prolong the cost-of-living crisis,” CBI Director General Tony Danker said. “It will ensure that any firm pausing on investment now, will be bold, decisive and back their original plans.”

UK investment has suffered a series of blows in recent years. The uncertainty created by Brexit, the pandemic and the cost-of-living crisis means that firms are spending no more than they were seven years ago, and less than at end of 2019 — just before the pandemic struck. Business investment is around 10% of GDP in the UK, the lowest of any Group of Seven nation.

In 2021, Sunak introduced an incentive that hands firms 25 pence off their tax bills for every £1 they spend on qualifying plant and machinery. The so-called super-deduction was expected to supercharge investment as companies released billions of pounds of cash accumulated during the pandemic to take advantage of the tax break before it expires in 2023.

The Office for Budget Responsibility, the independent body that oversees forecasting for the government, in March predicted a 10.6% surge in investment, making it a key driver of growth this year. The Bank of England had been even more bullish in its assessment a month earlier.

A criticism of the super-deduction is it will merely bring forward investment, only for firms to rein in spending when it no longer available. In fact, companies face a double hit next April. On the day the allowance ends, the tax rate on corporate profits is due to jump by 6 percentage points, part of Sunak’s efforts to bring down government borrowing.

Companies want a permanent replacement, and the Treasury has opened a consultation about how to reform the capital allowance regime to “drive and sustain growth” into the future.

“Simple actions such as expanding the scope of business rate relief to help more companies, such as those in the automotive sector, would enable more businesses to invest and grow,” a spokesman for the carmaker Aston Martin in a written response to questions. 

With the economy facing a possible recession, the war in Ukraine disrupting supplies and trade tensions escalating between Britain and the EU, doubts are growing over whether investment will get the boost that had been anticipated. 

Earlier this month, the BOE trimmed its forecast for this year and said it saw almost no investment growth in 2023. Meanwhile, the CBI this week said manufacturers had scaled back their plans for investment in plant a machinery and expect to reduce spending on buildings. 

©2022 Bloomberg L.P.

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Charting the Global Economy: Factories Slow Down From US to Asia – BNN

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Manufacturing from the US to Asia is very much in a slowdown as factories continue to struggle with supply snarls, labor shortages and elevated materials costs.

A measure of US manufacturing activity weakened in June to a two-year low, and several regional Federal Reserve surveys indicated business activity shrank. Factory purchasing managers’ gauges across Asia eased, with South Korea, Thailand and India among those showing the biggest declines, according to S&P Global.

Similar indexes in Poland, Spain and Italy also showed weaker activity compared to May.

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:

US

Consumer spending fell in May for the first time this year and prior months were revised lower, suggesting an economy on somewhat weaker footing than previously thought amid rapid inflation and Fed interest-rate hikes.

Regional Fed manufacturing surveys have taken on a grimmer tone, with four of five indicating business activity shrank in June. Separately, a measure of overall manufacturing slid to a two-year low as new orders contracted, restrained by lingering supply constraints and some softening in demand.

The pandemic housing boom is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high.

Europe

Confidence in the euro-area economy slipped as households become more pessimistic amid fears a Russian energy cutoff will spark a recession. At the same time, they’re less worried about inflation than they were a month ago, though there’s a split between core and peripheral euro-area countries.

After suffering from unprecedented shocks in recent years, the UK is succumbing to more intractable problems marked by plodding growth, surging inflation and a series of damaging strikes.

Asia

China’s economy showed some improvement in June as Covid restrictions were gradually eased, although the recovery remains muted. That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge returned to the neutral level after deteriorating for two straight months.

Japan’s factory output shrank at the fastest pace since the height of the pandemic as the lagged impact of China’s virus lockdowns continued to disrupt supply chains and economic activity in the region. The weakness in manufacturing extended across Asia, particularly in South Korea, Thailand, India and Taiwan.

Emerging Markets

Colombia’s central bank delivered its biggest interest rate increase in over two decades. Policy makers are bracing for another spike in annual inflation that’s already above 9%. 

Two years after Argentina emerged from its latest default, a debt crisis in brewing once again. This time, the immediate trouble is in the local bond market, where creditors have become reluctant to roll over maturing government bonds.

Zambia’s inflation rate dropped below 10% for the first time in almost three years in June, bucking a global trend of record consumer-price growth. Optimism over the nation’s economy since the election of Hakainde Hichilema as president in August, a potential debt restructuring and a $1.4 billion bailout package from the International Monetary Fund has seen a rally in the local currency, which has helped contain prices.

World

Differences in underlying inflation trends call for different policy outlooks among the world’s top central banks, according to Bloomberg Economics. The Fed will have to go well into restrictive territory, the Bank of England may go a little above neutral and the European Central Bank might not even get that far.

©2022 Bloomberg L.P.

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Quarterly Investment Guide 3Q 2022: US economy on shaky ground – CNBC

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Minister Of The Economy Franz Fayot On Luxembourg’s Transition Towards A Green Economy – Forbes

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Just last week, Luxembourg’s Minister of the Economy, Franz Fayot, came to the cities of Toronto and Montreal as part of an economic mission organized by the Luxembourg Chamber of Commerce in close cooperation with the Ministry of the Economy. I had the opportunity to sit down with Minister Fayot at the InterContinental Toronto Centre, and get some insights into the Grand-Duchy’s economic transition towards sustainability.

A transitioning economy

With up to one-third of its GDP related to the finance sector, Luxembourg’s economy is widely dominated by the financial sector. However, the past 20 years have been characterized by a push for economic diversification, and increased transparency and regulations following the financial crisis, said Minister Fayot.

“What we are trying to do is diversify [the economy] even more into new sectors to make us less dependent on the financial sector and adaptable to new circumstances,” he said. “We are also more and more developing a green finance sustainable finance sector, which is doing very well.”

A green state responsibility

Minister Fayot, whose guiding principles are a strong welfare state and sustainability, firmly believes that the government must assume its pivotal role in shifting the economy towards sustainability — “both in terms of environmental sustainability, but also social sustainability,” he added.

In June 2020, an international consultation was launched to gather strategic spatial planning project ideas considering the climate-related challenges and social issues, and support for the country’s ecological transition towards a zero-carbon territory by 2050.

“We need to understand that we have to help businesses innovate, and invest in the future,” said Minister Fayot.

A rising startup ecosystem

Luxembourg has seen a steady growth in startups over the past decade.

Earlier this year, the Ministry of the Economy launched a strategic initiative aimed at providing a thorough understanding of the startup ecosystem based on data analysis and interviews with key stakeholders.

Luxinnovation, the national innovation agency, identified over 500 active startups offering innovative digital and data-driven solutions in its latest mapping.

These assessments will also provide relevant comparisons with international markets, and aim to identify the necessary next steps for development opportunities in the upcoming years.

“Our innovation agency is there to guide startups, but also other more established businesses, to get access to grants,” explained Minister Fayot. “We have a state aid framework in Europe which we have to comply with, but the main message is that there is an obvious need to co-finance innovation, particularly in times when we are in this transition towards a more green economy.”

Going above the limits of territory

Surrounded by Belgium, France and Germany, Luxembourg is one of the smallest countries in the world — slightly smaller than Rhode Island. Yet, despite its dependence on its neighboring countries’ energy supplies, it is making continuous efforts to increase its share of renewable energy by also investing in projects across its borders, said Minister Fayot.

“We don’t have that much sun in Luxembourg, and we don’t have an unlimited space to build wind power,” he said. “It’s a bit of a limiting factor, but it shouldn’t excuse anything.”

“We are investing a lot into energy efficiency,” he added. “We are trying to get people to e-mobility and pushing for geothermal heating and energy in new constructions.”

A growing space sector

Luxembourg might not be the first to come to mind when we think of space, but, the country owns one of the world-leading satellite operators, and is increasing its investment into space resources.

“The SpaceResources.lu is an initiative that we launched about six years ago, and it is very much focused on the space resources segment of the space industry,” he said. “We are not launching anything in space out of Luxembourg, but focusing on services like space traffic management.”

As part of the economic mission, a group of space companies participated in a distinctive program set up by the Luxembourg Space Agency in collaboration with the Canadian Space Agency. This included on-site company visits, workshops and B2B opportunities that led to the signing of a Memorandum of Understanding between the two national space agencies.

Stephanie Ricci contributed to this story.

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