As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on the rise in inflation, the UK’s weakness in productivity, and employment & GDP.
The anniversary of the UK’s decision to withdraw from the European Union has now passed, and who could have imagined the political fallout that would ensue?
One year on, the formal Brexit negotiations have only just begun, yet the nature of those negotiations and their ultimate destination remain unclear.
Despite all this uncertainty, it is remarkable how well business sentiment and the economy has held up.
The resilience of the UK economy however, and UK financial markets, has prompted a very different response from the Bank of England than the one that followed the EU Referendum.
While the bank came out ‘all guns blazing’ last summer, the focus now is on when it will start to take that stimulus away.
Doves taking flight?
Bank of England officials have signalled that above-target inflation may not be tolerated for much longer.
Even Governor Carney – one of the more dovish members of the UK rate-setting committee – has rowed back a little on his earlier stance, suggesting that if the balance between growth and inflation continues to shift, ‘some removal of monetary stimulus’ is likely to be necessary.
The markets now have the August MPC meeting in their sights. That is when the Bank of England takes another detailed look at its GDP and inflation forecasts.
By then, not only is inflation likely to be much higher that the bank was previously forecasting in May, but the committee may also have to factor in the risk of some loosening in fiscal policy.
The decision will come down to the MPC’s assessment of the trade-off between growth and inflation.
BoE Deputy Governor Broadbent noted in a recent interview that there were many ‘imponderables’ and that he was ‘not ready’ to support a rate hike.
Meanwhile, Ian McCafferty underscored his credentials as the most hawkish member of the BoE’s rate-setting committee, arguing not only for an immediate quarter-point rise in interest rates, but also for the BoE to consider reversing its money-printing programme earlier than planned.
The productivity problem
While all eyes are on Brexit, it is easy to miss what is arguably an even bigger challenge for the UK – the weakness of productivity.
UK productivity (as measured by output per hour) contracted by 0.5% in the first quarter of this year, leaving it at its lowest since before the 2008 financial crisis.
By any measure this is a shocking performance.
There are various explanations for the UK’s disappointing productivity, and some are more benign than others.
Part of the reason may be simple mismeasurement. Recording the productivity of economies such as the UK with large service-sector industries, particularly financial services, is inherently difficult.
As the UK’s official statistics indicate, productivity in some sectors, including financial services, has performed significantly worse than other non-financial service sectors over the past decade. But this does not tell the whole story.
Productivity may have also deteriorated due to changes in the composition of capital and labour.
Since the financial crisis, low wage growth and heightened economic uncertainty may have encouraged more companies to hire new workers to drive output growth rather than undertake productivity-enhancing capital investment.
Going for growth
The rise in the UK’s GDP over the past decade has been driven, almost exclusively, by increases in employment and hours worked.
The UK’s latest labour market data underscores this point. Total employment grew by a stronger-than-expected 175,000 in the three months to May, while the unemployment rate dropped to a new multi-decade low of just 4.5%.
At the same time, pay pressures remain benign, with annual growth in overall pay slipping from 2.1% to 1.8% - the first time it has been below 2% since February 2015.
Based on current data, GDP is likely to have expanded by 0.3% in the second quarter, while total employment is predicted to have risen by 0.3%. As a result, productivity growth is projected to be zero.
The combination of a tightening labour market, weak productivity growth and benign pay pressures pose a major dilemma for the Bank of England.
For now, we expect the Bank to keep its powder dry, but it won’t take much further sign of economic strength to persuade it to reverse last August’s quarter-point rate cut.
As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on volatility in the uncertain market and the prospect of a hike in interest rates, both in the UK and the US.
Clearly, the last two weeks have seen political shocks with potentially far-reaching consequences for the UK’s economic outlook.
The aftermath of the General Election has introduced new uncertainty over the implications for Brexit though, so far, financial markets have taken it in their stride.
However, until there is a clearer sense of what the new minority government can achieve, UK financial markets and the pound are likely to be prone to sharp bouts of volatility.
Three wishes
The outlook for the UK’s Bank Rate seems to be changing by the moment.
The surprisingly close June vote on interest rates by Bank of England policymakers saw three of the rate-setting committee back a rise.
Governor Carney seemingly attempted to put a lid on the discussion by stating that now was not the time to raise rates. However, Andy Haldane, the Bank’s Chief Economist, subsequently said he was now close to voting for an interest rate hike.
This is particularly significant as, until now, Haldane was considered to be the arch dove amongst the Bank’s rate setters. Moreover, it is the first sign of a divergence in views between the current permanent Bank employees on the committee.
Up until now it’s only been the so called external members who have voted for a hike. Is that about to change?
Markets certainly think there is something new in the air, as can be seen by the implied probability now put on a 2017 interest rate hike. That has gone up from below 10% just over a week ago to about 50%.
What is most surprising about this sudden shift in expectations is that economic conditions are arguably little changed. Once you also factor in political uncertainty, including the unexpected result of the general election, then on the face of it, the case for staying put seems strong.
But the hawks amongst Bank rate setters had previously indicated that they have limited tolerance for above-target inflation.
Close to the limit
Two factors suggest that the limit may be close to being breached.
First, Kristin Forbes, one of the hawks, has noted in recent research that the effects of an exchange rate generated inflation shock can persist. This questions whether the Bank is right to prioritise domestic pressures.
Second, the eventual impact on wages of what looks to be an increasingly tight labour market remains a concern. The UK unemployment rate is now at its lowest level since the mid-1970s and there are signs that this is having an impact.
On balance, we expect the Bank to keep interest rates on hold for now. Nevertheless, this is a closer call than for some time.
Over the next few weeks, markets will be paying particular attention to any comments from those Bank policymakers who have yet to make their position clear.
It will be an interesting run up to the next policy announcement on 3rd August.
Fed up again
In the US, a quarter-point rise in interest rates was widely expected, and subsequently delivered.
The Federal Reserve also stuck to its previous ‘dot plot’ forecast to raise interest rates, anticipating another quarter-point rise this year, and three more in 2018, with the key policy rate expected to settle around 3.0% in 2019.
In pre-announced plans, the Fed intends to start unwinding its balance sheet. For the moment, it anticipates deflating its asset holdings by $10bn a month from later this year, rising in small increments every three months to $50bn
Despite this, US financial markets may have other ideas – as they continue to pretty much ignore the Fed’s guidance. The markets are only fully priced to one more quarter-point rise by the end of next year.
With signs of more mixed growth emerging recently and a weakening of core inflation, the markets clearly think the Fed has got it wrong.
This misalignment can only last so long. Either the Fed will have to eat humble pie, or the US, and by extension global, bond markets could be in for a much more testing second half.
John Orlando is the Executive Vice President and CFO of Centage Corporation - a leading provider of automated budgeting and planning software solutions. With his previous experience concentrated on Financial Planning and Analysis, John has now been with Centage for over 13 years. Here he introduces Finance Monthly to the company and the services that it offers and discusses the relationship between business decisions and technology.
Could you tell us about the Company’s ethics and priorities toward its clients?
Centage has been providing budgeting and planning software solutions for over 15 years. We understand that the most important aspect of your job is to develop accurate and timely budgets and forecasts that help you drive the growth and profitability for your company. Everything we do at Centage, from a client perspective; product technology, functionality; through to training, services and support, is dedicated to making the client experience unique. That is our number one priority.
Tell us more about the Budgeting and Forecasting services that Centage offers.
Budget Maestro by Centage is an easy-to-use, scalable, cloud-based budgeting and forecasting solution that eliminates the time-consuming and error-prone activities associated with using spreadsheets. It is designed for small to mid-market companies to support a comprehensive Smart Budgets approach to corporate planning. Its built-in financial and business logic allows users to quickly create and update their budgets and forecasts and never worry about formulas, functions, links or any custom programming. It is the only solution in the market that offers synchronized P&L, balance sheet and automatically generated cash flow reporting. Today, Budget Maestro serves more than 9,000 users worldwide.
How has Centage developed into the company that it is today?
The company was created because the founders saw a need for a budgeting and forecasting solution that was more automated than what existed in the marketplace at the time. We respected the people and the processes that go into creating accurate and timely budgets and forecasts and thought there was a better way. We understood that giving financial professionals a tool that had all the financial and operational logic pre-built was crucial. This went against the traditional formula-based applications that were in existence. Additionally, Centage developed a full set of synchronized financial statements that included a Pro Forma Income Statement, Balance Sheet and Cash Flow that were automatically generated.
The CFO role in general is important to any company because it brings operational and financial discipline to the organization. I am involved with and required to be familiar with every facet of the organization from financial accounting to operations to human resources, etc. I believe these responsibilities, along with my experience in the FP&A arena building many budgets and forecasts over the course of 25+ years, has helped Centage to build the best budgeting and forecasting application that we could.
What is the role that technology plays in transforming data for better business decisions?
Technology and business decisions are inexorably linked. All the advances in business over the past 50 years have been related to technology. It has given us the ability to take massive amounts of information from accounting systems, CRM systems and operational systems, condense them in one place and give businesses the ability to instantly review the information for trends and make informed decisions in a much shorter timeframe with little need for manual intervention.
In the case of a CRM system such as Salesforce.com, once you start to use the application it is difficult to fathom how you would have run your sales organization any other way. There are too many pieces of information to keep track of and too many data points could be missed.
Centage similarly has used technology to make our product, Budget Maestro robust and agile by eliminating all the mundane work associated with preparing budgets and forecasts. We specialize in building out all of the financial and operational finance logic so that the client, as the user, only needs to concentrate on building a set of good business assumptions. Our reporting solution, Analytics Maestro, gives our clients the ability to take the data in Budget Maestro or their resident accounting system, and manipulate and analyze the data very quickly, so that more informed business decisions can be made.
What do you anticipate for the sector in the near future?
One thing that has become clear over the past 2-3 years is that budgeting and forecasting is moving from the realm of isolated 12-month timeframes and annual budgets and forecasts, to more of a rolling budget / forecast approach that takes into account anywhere from 18- 36 month timeframes. This allows the user to plan for a much longer horizon.
Secondly, customers have been asking for budgeting and forecasting systems to reach out to other sub
ledger systems such as Salesforce, Payroll etc., to gather information, eliminating the need to manually intervene in the data gathering process.
Visit us at www.centage.com , follow us on Twitter, or visit the Centage Blog for the latest insights on budgeting and forecasting strategies.
Email: jorlando@centage.com
Phone: (508) 948-0024
Artificial intelligence is shaping the future of retail. Smart algorithms and data analyses are creating sustainable performance benefits across all levels of the retail supply chain.
With its Omnichannel ePOS Suite, Wirecard AG is the first payment provider to offer a fully integrated solution for self-learning analyses based on payment data in combination with other data sources. The evaluations substantially support e-commerce and high-street retail in implementing the following central growth concepts: increasing customer conversion, reducing customer attrition rates, predicting future consumer behaviour and linking points of sale with e-commerce.
Jörn Leogrande, Executive Vice President Mobile Services at Wirecard: "Using our data evaluations and analyses, merchants can increase their metrics in important performance areas. Our previous experience has shown that sales increases in the double-digit percent range are realistic."
Wirecard's turnkey solution generates insights into customer segmentation and cohort analyses, for instance, to optimise marketing efficiency. This revolves around the concept of a data-supported, real-time view of a retailer's customer behaviour in its entirety and increasing the customer lifetime value - optimal customer retention.
Insights into customer attrition (otherwise known as customer churn) behaviour are another unique selling point of the Omnichannel ePOS Suite. Complex evaluations enable merchants to identify customers who may potentially shop elsewhere. By introducing appropriate marketing measures, the churn rate can be significantly reduced.
Analyses on anomalies, trends and sentiment, peak detection and time series based on country-specific data as well as cohort analyses to assess the efficacy of marketing measures are additional beneficial tools. The Omnichannel ePOS Suite can be used in pre-existing systems without incurring large expenses.
Markus Braun, CEO of Wirecard: "The Omnichannel ePOS Suite is the first step towards large-scale digital transformation in the retail sector. Over the next few years, data analyses using artificial intelligence and machine learning will play an increasingly important role in their business area. Based on our analyses, we are able to reduce risks and increase the chances of success for our partners. This means that all parties involved can gain a significant competitive advantage, which is why the omnichannel ePOS suite marks a decisive step for the future of payments."
(Source: Wirecard)
