February 2025 Accounting Bites

In this video, Paul and Kirsty discuss:

• Bank of England rate cuts

• The impact of US tariffs

• Future rate change predictions

Paul Surtees: Hey! How are you, Kirsty?

Kirsty McGregor: I'm good. I'm good. What are you talking about today? Then?

Paul Surtees: Well, we've obviously got to talk about the banking rates. There's been a big recruiter survey that's come out US tariffs, I mean. Obviously, that's blasting the news at the moment, and then thinking a little about borrowing costs.

Kirsty McGregor: So lots of news globally. But let's start with the UK. Shall we? So you said the Bank of England. They made the decision last week, which gave us all some cheer. But I suppose the devil is in the details. So what were the key points?

Paul Surtees: Well, I've got 2 words for you, Kirsty. Catherine Mann.

Kirsty McGregor: Auntie Catherine.

Paul Surtees: Auntie Catherine exactly. Mann flipped from being the most hawkish, ie. Looking for weight heights to being the equal, most dovish, ie. Looking for the most cuts. The Monetary Policy Committee voted 7 to 7 for a 25 basis point cut and 2 voted for 50 basis points or half a percent. So Swati Dingra, a relatively newbie to the Mpc. And the key dove was joined by Catherine Mann.

So for those of you who have listened to the account, invite me. Speaking at talks, I previously said that Catherine Mann is going to be the canary in the coal mine. She is an activist. She's the swing vote. It doesn't mean that she's right, but she has been very right on inflation over the last couple of years.

 The Bank of England also released their policy minutes. And there were 2 key points that came out. The Bank of England cut their growth rate for 2025 from one and a half percent to 3 quarters of a percent. So that's a huge drop and given the tax and spending autumn budget. Of course, this is going to be very unwelcome in Number 11, with all headroom evaporating importantly, they've also significantly uptake their inflation prediction for the year from 2 and a half percent to 3.7%. So for quite some time the Bank of England have been pointing to this bounce in inflation going into next year, and we've talked about it, Kirsty accounting bites in the last sessions.

But when the Governor was interviewed, given earlier mistakes on predicting inflation being transient, he spoke in slightly more subtle terms about looking through inflation. So yes, it's going to go back up, but they're comfortable looking through it and cutting rates.

So the 2 of these points, higher inflation but also cutting rates, are obviously crucially important. And it's seen our swing voter man, who was the most concerned about inflation, is calling for the earliest hikes, the highest hikes, the slowest to cut. To move half a percent is a really big statement.

Kirsty McGregor: Yep. So, Auntie Catherine, given such a big move. Why do you think she's changed her view? And why are you putting so much emphasis on this as inflation?

Paul Surtees: Well, Catherine Mann thinks that companies are going to struggle to raise prices because she believes that there's a softening coming in employment, and indeed, we are experiencing it. And that's going to lead to weaker consumer demand.

So some of the budgetary impacts and labor coming in, you know, we've seen higher minimum wage. We've obviously seen the employer and I are coming to take the majority of the tax burden. We've got greater employee protections coming through. So man sees a non linear drop in employment. It's obviously not the clearest language, but expectations must be for a significant drop in employment. And that's obviously giving her pause in her view.

Yesterday, Kpmg. And the recruitment and Employment Confederation. Their 1st survey of the year actually kind of added great weight to her view, it was the most negative sentiment. Since Covid 10 billion, the lowest since June 2020 the survey has also reported a significant fall in vacancies. Of course, that's positive for inflation. You know that labor tightness is starting to kind of come out of the market. but it is indicative of future unemployment headlines, and it also points to fewer employment employers paying a premium for new starters despite seeing internal demands for pay rises. So these concerns that Catherine Man is talking about, you know, we can see coming out in surveys from recruiters. So while she sees a nonlinear drop in employment, it's this drop that's going to call demand. And ultimately that means that businesses are not going to be able to pass on their inflation. And that means she sees us returning to a 2% target within 12 months, which is contrary to the wider Bank of England view. So lower growth is obviously going to impact all estimates. But if there's 1 call to action out of that little segment, of course. Make sure you're thinking about your recruiters because they are absolutely feeling the pinch.

Kirsty McGregor: Isn't it handy? That last month we wrote a guide for our subscribers on supporting your recruitment agents.

 So there we go. Let's turn back to it. Now then, let's jump across the pond and go across the States. So do we have any clue? What's happening over there? We are just to to set the scene we are recording on Tuesday morning. It might have changed by Wednesday. But do we know what the implications are for? What's going on?

Paul Surtees: I think. Look, it's difficult for us to really jump into the details, because, as you say, Kirsty, it's changing all of the time and Trump manages to keep us all on our all on our toes. with the spotlight so firmly on Canada, Mexico, and China. The UK seems to be preparing, but so far not directly impacted. But, of course, just the last day or so we've seen recent announcements of a 25% blanket tariff on aluminium and steel into the US. And that will impact the UK. So the UK, for instance, exports 400 million pounds of steel to the US. And whilst that represents just 6% of the total exports that we are making globally.

There is, of course, a much bigger impact that will start to come into the UK economy, and that is that there's going to be a surge of steel and aluminium looking for a new home where there isn't a 25% surcharge. So there's going to be this kind of collateral supply. Would it be going to the US that is now potentially available elsewhere? And that's obviously going to impact all of our steel producers. But you know you're thinking, well, I don't have many steel producers in my portfolio, and of course trade wars are well above our pay grade, but closer to home. It is going to impact our clients. So all of your construction companies, the engineering and metal fabricators, any company with heavy machinery and those in industry. Anybody in the renewable energy supply chain packaging and containers, I mean, think, cans. For instance, you know anybody making furniture homeware. So you've got to be helping your clients think about that impact of time. So where we've seen supply chain shifts in the past, notably energy. As a result of Ukraine. This has flowed through alkali based in our portfolios.

Let's think about what the larger companies are doing. We've spoken many times in the past about how the larger companies are. Often, you know, much more front foot. You know, they are stockpiling. They're finding alternative UK suppliers in case there's an impact on the UK supply chain, you know, and a little fact that you just passed to me pretty cool, Kirsty, was that actually warehousing in the UK is actually evaporating because there's so much demand for that stockpiling in the large companies. So SMEs are always slow to think about these. So there's a great opportunity to think about the impact of that supply chain.

Kirsty McGregor: Yeah, it'd be great a great thing for accountants to do to support their clients through those thought processes, and, you know, encouraging in them, encouraging them to do something about it, because, although our Smes are, you know, not importing directly themselves, they might be 2, 3, 4, 5 steps away from the importer, they are still. Ultimately they will see that impact in their supply chain, as you say, in due course, and that might be a matter of months away.

So let's just think further ahead now in terms of rates and borrowing what? What you, seeing, what you think is going to happen in terms of the cost of borrowing.

Paul Surtees: So that we're clearly demonstrating stagflationary symptoms here. You know, low growth, stubborn inflation, despite the Governor suggesting that we can look through it. My view of 1% reduction in rate still holds for the year earlier in the year. I implied that there's risks of additional rate cuts that's obviously good for borrowing, but it's clearly at risk from stagflation on a global basis, and the more Trump dumps his feet the more the trade wars are coming. So for the government at the moment, you know, rates are going down. That means cheaper borrowing that's going to be celebrated in Number 11. Given the recent guilt crisis, but that in turn will lead to cheaper Sme borrowing. But I just wouldn't be playing the market for rates at this juncture, so whilst we think rates might be falling. I wouldn't necessarily be holding out for cheaper rates, because if the trade wars kick in, borrowing could just as easily be more expensive. So if a company needs funds, think about the Roi, think about the forecasting, and then, if it's sufficient progress.

So, Kirsty, there's been a continuing fallout from the Chancellor's autumn statement. But is she going to be pleased about these interest rate cuts? What else is coming up.

Kirsty McGregor: Yes. Well, that national insurance rise has definitely had a ripple in effect, continuing, and we're still seeing press about it now. But all eyes are also turning now to the date of the spring statement, which is due on the 26th of March, a matter of weeks away. Now it's only supposed to be an update. In other words, not a fiscal event. We should not have any tax policy changes at this particular statement, and we'll also have new Obr forecasts due out on that day, however there are rumours that this all depends on whether her new stability rules are being met. If you remember those. Or if they're going off course, and the impact of the low growth over the past few months, and the worry of the forecast is that that could be a factor. She will be happy, however, with the interest rate cuts, because not only is it cheaper for SMEs to borrow, we hope it's also cheaper for the Government with their huge borrowing commitments.

So it is a bit of a fine line. But if these stability rules have been breached, then she might all she might choose to bring forward the changes that she was going to put into place with them anyway, next year. Or look, she might just change the rules again. So it is a balancing act between political credibility and also the impact of any decision she makes on the confidence of the markets. But you know it's all you know. Maybe she'll bring tax changes in March. We don't know.

So do you think there could be another budget?

Well, I'd say there was a small chance of an outside chance. But you know, we can't predict anything in politics anymore, can we? So who knows? But I just thought it was worth highlighting while we're on the call. Some of the key developments at our government's level which are affecting Smes. So did you know you've heard of the Doge that Elon Musk is responsible for in the States Department of Government efficiency? I think it's called. Well, did you know we have our own equivalent. At the end of last year. So before Trump was in power, the Treasury launched the office for value for money not quite as catchy, and that was tasked with finding, wasting, government spending.

And they're also asking for public input, so you can put your own ideas in. And then, once each Government department has created their new budget, which the Chancellor has instructed needs to be bottom up, 0 base, complete overhaul of all of their operations to form a new budget that's going to become part of her spending review, which she's due to announce in March, and then those are going to be scrutinised by a panel featuring some former senior executives from Lloyd's where the Chancellor used to work Barclays and the cooperative group. Okay, then I'll say no more. Don't let me say any more on that, poll. But a couple of weeks ago as well, Innovate UK pretty much shocked everybody in its ecosystem when it announced a pause in its smart grant funding whilst they reassess the needs and the strategy going forward. Now this is well timed, because we've had 2,134 applications in the last round, and yet only 44 have been funded. So this review is definitely needed. So they're going to start again with a new pilot program potentially in March. But we'll wait and see if they're on track with that, the Ukri which is the part which Innovate UK is part of, and the National Wealth Fund and the British Business Bank are also waiting to find out what budgets they have. As this is going to form part of their new Strategic Development Plan because their previous one ends this year.

And as the government is focusing on its 8 key growth sectors, which is part of its industrial strategy. We expect that these agencies are going to be really pivotal, pivotal in the quest for economic growth. So what we expect to see is a lot of collaboration between the agencies, but also with outside private commercial partnerships. So that's a real change of attack and also regionally, city regions and local authorities are still rolling out their own programs, which should become clearer soon. If you haven't heard of it in your own region. Yet what's on offer? So look, these changes are significant opportunities and also adjustments ahead for Smes around the country. There is lots going on.

I mean, the Government came to power over 7 months ago now, but unfortunately nothing moves very quickly. But there's lots in the works. So hopefully, we'll have a lot more to report next time we chat.

Paul Surtees: Fingers crossed Kirsty. We could do with a little kick so that we can get some positivity out there. I think that you know I personally am hating, you know, contributing to the malaise. That is this kind of economic view. I think we have to resort to you know, making sure that we're helping the businesses in our portfolio to understand what their capital needs are. Their forecasts are what their challenges are to just make sure that they are here in 1224, 36, 60 months out, and that, you know, we can actually contribute to a positive economy.

Kirsty McGregor: Yeah. And the accountants have got the power to do it and the skills to do it. So let's go and do it.

Paul Surtees: Go ahead!