Today Andy Silvester talks to Michael Hewson, Chief Markets Analyst at CMC Markets. They go through the latest IMF forecasts, which included downgrades and the worst growth forecast in the G7 for the UK; Germany’s exposure to energy price fluctuations, the mounting pressure to reduce its dependency on Russian oil and gas, and Angela Merkel’s legacy; and lower March consumer spending in the UK.
Andy also talks to City A.M.’s Energy Correspondent, Nicholas Earl. They discuss dire warnings from energy bosses in Parliament today, who warned of a severe impact in customer bills; and news of the collapsed energy firm Bulb’s CEO earning a £250,000 taxpayer-funded salary.
Episode transcript (auto-generated)
Andy Silvester 0:08 Good afternoon and welcome to the City View Podcast. I’m Andy Sylvester editor here at City and fresh from an Easter break spent predominantly at The Oval. I do hope you all had an equally enjoyable few days off, but it’s the grindstone we are though in a few minutes, I’ll be joined by Michael Hewson, Chief market analyst at CMC markets. We’ll look through the latest IMF forecasts none of which paint in particularly jolly picture for the future of the UK economy, at least in the near and medium term. But for now, I’m joined by Nicholas Earle our NG correspondent bits and pieces in the corporate news happening today, Nick, but nothing bigger than energy, feel like suddenly we start record even after Easter energy bosses up in Parliament today, one of whom was was bulbs, Hayden Wood, who will come back to in a minute, but for those companies that are still in business on their own two feet, rather than taxpayers, some pretty dire warnings of what’s to come.Nicholas Earl 1:03 Yeah, that’s right — Eon’s chief executive, Michael Lewis is well there’s gonna be a severe impact this October, and he’s actually estimating a 50% increase in overall debt on his books from customer bills, which is a seismic rise, of course. And you also had similar gloomy tidings from Centrica who said a 10% of their customers are already late in their payments. And to capital we had EDF spouse who said that he estimates one pound and 12 being spent on energy bills by policy users will go to one pound in six October. Andy Silvester 1:36 That’s going pretty grim. very grim. Indeed, for the economic recovery of the UK. Some of them are calling for a bit of a shift in government policy. Dangerous to ask for not quite a bailout but pretty close to a bailout for the energy companies will be paid to ordinary Brits. It does expose them at some point to a windfall tax rate, because we’ve got this slightly weird world where you’ve got shell and others being currently slammed for making huge amounts of money off commodity pricing beams, energy companies desperate for cash, you could see a world in which meddling politicians decided to meet those two together. And you’re all part that for now. Why don’t we talk quickly about bulbs Hayden wood to pharmacy while still the CEO of bulb. So just remind us before we talk about Hayden said today, reminders about the sorts of special circumstances of bulbs collapse, because there’s been more than 20 ng suppliers that have that have gone most of them have just folded their customers moved on to the supplier of last resort scheme, which in theory, at least means you know, if you turn your kettle on under one energy provider, by the time it finishes, it’s still you know, a new provider but your kettle still boils, slightly different vibe for Bulb. Nicholas Earl 2:49 So Bulb were in what’s called a special administration process, which essentially means that they are in the in the public hands, at least least for the time being. This happened last November because basically, they’re too big to go through the supplier of last resort process with 1.7 million customers and pretty much in that sort of too big to fail mantra, they have been given office Budget Responsibility estimates 2.2 billion pounds over the past five months to keep them over one government life support, essentially still operating as Angie firm, but with at the expense of the taxpayer on the calculation that if they just collapsed into obscurity, it’d be more expensive and more painful for the industry to recoup. And part of that continued functioning is that Mr. Wood is continuing to have his salary, in this case, 250,000 pounds per year paid for by taxpayers. Andy Silvester 3:41 Yeah, it’s a it was a pretty awkward appearance in front of the Select Committee today when he was forced to admit that but forced to admit it, he should have been around many failed companies where the CEO still walks away with 250 grand a year even in difficult circumstances. People I imagine thieved was there any sign that the sort of special administration might come to an end because presumably boulder not going to be able to get to a point where you know, in six months time they say actually turns out we’ve got the we’ve worked out how we can do this and we’re back in business. Routinely it will be sold or taken over at some point. But was there any sign of that today. Nicholas Earl 4:19 So the administrators remain very tight lipped over Bulb’s future and he wasn’t able to give any definitive answers. The latest sort of report suggests that there’s a good chance of bolts customers could be split up, essentially sold off piece by piece. I’m trying to sell off in one chunk, but wouldn’t be surprised what ends up being like Northern rail and extend for an extended period of time before someone actually buys it. Because after all, it’s pretty expensive business right now, onboarding new suppliers. It’s worth remembering of course that from the 28 suppliers since last September who’ve entered supplier of last resort process often has given them 1.8 billion pounds of public money to compensate them for the various costs of taking them on so You know, I can understand why there’s not been much movement that comes to ball when Teneo and interpack advisory have both been pretty tight lipped tight for it. Andy Silvester 5:07 Yeah, I can imagine they will be. We shall wait and see. So probably interesting markets be taking on that money supplies. Nicholas Earl, thanks for joining us. We’ll move straight on to discussing the economy, which is I’m afraid equally bad news, although perhaps one which is a little more light on than there was a few days ago new IMF forecasts out today. We’ll discuss that and plenty more with Michael Hewson, Chief Markets Analyst at CMC markets. Michael joins us every fortnight and he joins me again today. Michael, always pleasure to have you. Michael Hewson 5:39 Yes, good afternoon Andy. Andy Silvester 5:41 We haven’t necessarily come back to particularly good news IMF forecasts out just a few minutes before we’re speaking downgrades across the board, pretty much across the global economy. But let’s start with the UK. Because some fairly dramatic downgrades, I suppose from one perspective, at least. Michael Hewson 6:01 Yes, indeed. I mean, I think the picture for the UK economy is probably not as bleak as I would have expected it to be the IMF cutting forecasts from 4.7% to 3.7%. But I think they’re expecting some real pain to really kick in next year, they’ve cut the growth forecast to 1.2%, which is the worst in the g7. Now I have concerns about the predictability of that number given obviously, the reliance of countries like Germany, and their reliance on Russian oil and gas, but also on Chinese demand. But parking that to one side, the IMF have said that because of the UK economy is very much services based architecture. The fact of the matter is rising energy prices is likely to crimp consumer spending next year, and probably less so this year. I mean, whatever your reasonings behind the rationale for the IMF forecast, ultimately, it does paint a bleak picture, whether you believe therefore costs over the World Bank. Andy Silvester 7:07 Yeah, end. I mean, yeah, exactly. Neither of them particularly cheering. I think, why don’t we just zoom in a bit on that point about about whether the UK will be the worst performing g7 economy next year, because again, forecasts are forecast, but it does look as a as you said that, like, on the one hand, you’ve got Yes, inflation and your price, etc, are going to eat away at a consumer based economy. But there are other economies significantly more exposed to what we will for the sake of a euphemism called geopolitical troubles. Right. Michael Hewson 7:41 Absolutely. I mean, you know, I mentioned earlier that, obviously, Germany is very, very exposed to energy prices, and gets 50% of its oil and gas from Russia. And they are coming under increasing pressure from other countries to stop their consumption of oil. And guess particularly from Francis Bruno Lemaire, earlier today, who suggested that in the wake of the fact that the Russians have opened a new front on the Donbass that is becoming, I think, increasingly difficult to justify the fact that Europe is funding Russia’s war on Ukraine, and ultimately, Germany will have to make a decision as to whether or not it’s ethical, I think, to continue to fund Putin’s war machine. I mean, at the moment, I think Italy is hiding behind Germany. It does, it also gets quite a good deal of its energy from Russia. But I think pressure is rising for an embargo to come sooner rather than later. And ultimately, if that does happen, that could push the German economy into a much deeper recession than it already I think it’s already in because the economy contracted in the fourth quarter of last year, it’s likely to contract again, this quarter. So what essentially does that mean for q2 and q3 and for the rest of this year? Andy Silvester 9:15 Yeah, it’s an interesting one, isn’t it? Because it’s only about three, four or five years ago, since we were you couldn’t pick up the an economist or New Scientist or dare I say NF T without being told that the Germans have got it right. And yet, here we are a few years later, and you see all of those warnings that were ignored when it came to their connections with Russia at all, you know, coming to the fore, and when, you know, without getting too much into politics, you know, when people really assess angler Merkel’s legacy, I think that, you know, it’s gonna look very different than it might have done when she stepped down as chancellor at the back end of last year in the in the aftermath of what we’ve seen in the Ukraine. Michael Hewson 9:54 Yeah, absolutely. I mean, I think we can look back to the Fukushima disaster. In Japan, for the foundations of the stakes in German, and probably more broadly, European energy policy, placing all your eggs in one basket, and really pushing to one side, key arguments for nuclear, which you can argue, is much safer. It’s not without risk. Absolutely no one is disputing now. But it’s much safer than it was, say, for example, 20 or 30 years ago, it was a mistake of epic proportions. And ultimately, I think when we look back at his legacy, it will certainly look an awful lot different than was the case, you know, as recently as a year ago? Andy Silvester 10:43 Yeah, well, I don’t think many people would disagree with that. The interesting thing, of course, will be to see and again, go down a little bit of a rabbit hole to see whether the new chancellor Schultz actually follows through with some of the things that he’s been talking about. There’s very strong rhetoric, because as you say, there does already seem to be a bit of backsliding on the speed with which they’re pushing for further sanctions and the fact that they are still I say, funding, you know, through the energy market, a pretty grim wall, Michael Hewson 11:09 I think he has to go down that route, because I think public opinion in Germany is really starting to shift. You saw those demonstrations in Berlin, you know, how much does a litre of blood cost relative to a litre of fuel? You know, and I think it’s, you know, it’s very easy for us to sit here, you and I sit here and talk about the fact that Germany needs to do this. But Germany is reluctant to impose the very same costs that it imposed on countries like Greece, Spain, Italy, and Ireland, at the height of the sovereign debt crisis. But yet, it’s not prepared to leave Europe, when it comes to a trade off between funding for war on its doorstep. You know, at a time when, you know, Europeans are essentially dying at the hands of a Russian, the Russian who appears to have no qualms about bombing civilians. Andy Silvester 12:08 Yeah, it does seem that we’re moving to that that new phase, I guess, what we’re seeing is bits and pieces of the Russian playbook in Syria. Let’s change gear relatively significantly. I think it’s fair to say, we talked right at the start of this about consumer spending in the UK, obviously, in influencing those forecasts. We’ve got retail sales at the retail sale figures at the end of this week in the UK. Those are for March has been a bit of a bit of a roller coaster. I suppose spending rebounded quite significantly in January, slowed in February, I’m assuming. Are you expecting things to look equally challenging in the March numbers? Michael Hewson 12:46 Yeah, I think that’s probably the way of it. I mean, we did see a strong rebound in January. But that was in the aftermath of a nought point 4% slowdown in December. So we saw a 1.9% rise beginning of this year, in February, we slipped back on awkward three, if we look back at the British retail consortium, retail sales numbers there for March shaver like black sales declined, nought point four. So we’re already seeing signs that consumers are already starting to hold back their spending. There’s a pace in the tea this morning that streaming subscribers in the UK, have been cut by by around about one and a half million, which suggests to me that people are becoming much more discerning about consumer discretionary spending, if you like. And if you look at all the options that are you’ve got put box, you’ve got Apple TV, plus, you’ve got Disney Plus, you’ve got Amazon Prime, obviously, you’ve got Netflix, and they’re releasing the numbers later tonight. So I think it’ll be very interesting to see whether or not we see a significant slowdown in subscriber growth going forward, given some of the price rises been seeing from companies like say, for example, Sky who raise prices by 8%. Starting in April. Andy Silvester 14:03 Yeah, I got my Netflix price hike email this morning. Your results are after the bell in the states this evening, I suppose just very briefly on Netflix, that the likelihood is that we’ll still see subscriber growth, but it is, as you say, it’s that challenge of where that subscriber growth is, are investors going to ever really see the profitability that perhaps they might have expected two, three years ago? Who’s to say, while we leave it there, we’ve certainly taken a bit of a tour around global politics as well as Mark it’s always a pleasure. Michael will speak to you again in a fortnight I’m sure. Michael Hewson 14:42 Cheers Andy. Andy Silvester 14:44 Brilliant. That was Michael Hewson, Chief Markets Analyst at CMC Markets, one of the nominees for our Analyst of the Year category at the City A.M. awards coming up next week. So if I have a sore throat on Friday, next week, you’ll know why. That’s all from us for today, though. We’ll see you again tomorrow.