Geopolitical risk to the fore

14 October 2024

Geopolitical risk to the fore

  • We have released the latest Deloitte survey of UK chief financial officers this morning. The full report is available at:
  • Optimism among the UK’s largest businesses edged lower in the third quarter following a strong bounce in the wake of the general election in July. Nonetheless, confidence and risk appetite are still running at above average levels.
  • The survey closed shortly before Iran’s missile attack on 1 October and encompassed a period of greater tension in the Middle East. As has been the case for the last five quarters, CFOs say that geopolitical developments represent the greatest external risk to their businesses. Concern about the risk of a potential hard landing in the US has risen sharply and this ranks as joint second greatest risk alongside weak UK productivity.
  • Unlike the period following the invasion of Ukraine in 2022, when CFOs’ worries about energy supply and prices spiked in tandem with geopolitical concerns, CFOs today are relatively sanguine about the risks around energy, in part, perhaps because of decline in the oil price between July and late September.   
  • The CFO survey has mapped CFO perceptions of external uncertainty since 2010. The third quarter survey registered a modest increase in perceptions of uncertainty, but the absolute level remains low by the standards of the last eight years.
  • The UK labour market has softened since the start of the year and CFOs expect wage growth to slow markedly, from 4.6% in the last 12 months to 3.2% in a year’s time. With a waning of inflation pressures CFOs expect the Bank of England to cut interest rates from the current 5.0% to 4.0% by next September. Credit conditions are improving, with CFOs reporting that credit is cheaper than at any time in the last two and a half years.
  • Our special question this quarter shows that the overwhelming majority of CFOs expect to raise spending on digital technology and assets, such as software, IT and AI, both over the next 12 months and on a five-year view. Investment in business performance and workforce skills emerge as lesser, though significant focus areas, especially in the longer term. CFOs are most cautious on spending on real estate, machinery and other physical assets.    
  • The UK economy saw an unexpectedly strong recovery in the first half of the year, with GDP growth outstripping that in any other G7 economy. The latest CFO Survey points to a continued growth ahead, albeit probably at a slower pace than in the first half of the year.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.3% at 8,253.

Economics

  • US inflation slowed slightly to 2.4% in September. Financial markets expect the US Federal Reserve to cut interest rates by 0.25 percentage points in November
  • US weekly jobless claims increased to 258,000, above market expectations with analysts attributing some of the increase to the impact of Hurricane Helene
  • Hurricane Milton hit the coast of Florida, leaving more than two million homes and businesses without power and at least 16 dead
  • US consumer sentiment weakened in October, according to preliminary indicators by the University of Michigan
  • The US federal budget deficit in the 2024 fiscal year grew 13% compared with the previous year to $1.83tn, driven by rising spending on social security, Medicare and interest payments on debt
  • The non-partisan Committee for a Responsible Federal Budget forecast former president Donald Trump’s economic plans would increase federal debt levels by approximately double that of vice president Kamala Harris. It warned that the rising national debt increases the “risk of an eventual financial crisis”
  • UK GDP grew 0.2% on the month in August, in line with expectations and after weakness in the two prior months when activity was flat
  • UK house prices increased by 4.7% in September, the strongest annual increase since November 2022, according to Halifax
  • The Royal Institution of Chartered Surveyors reported a “sustained improvement” in UK housing market activity, with positive readings for demand, sales volumes and new listings
  • The UK population grew by 1% to 68.3m in the year to mid-2023, the fastest annual pace since 1971, driven by net migration
  • Trade groups across the UK energy sector warned ministers against potential reforms to split Great Britain into regional wholesale energy price zones, saying it could raise manufacturing costs and dissuade investment
  • The spread between UK and German 10-year bond yields rose to its highest levels since August 2023 amid concerns of increased UK borrowing in the upcoming budget
  • Directors of UK-listed companies increased their sale of shares by approximately £17m per week since the election amid speculation about an increase in capital gains tax rates in the upcoming budget
  • Asset management company Liontrust reported that its investors withdrew £1.1bn, in part due to low investor confidence amid “speculation and uncertainty around changes to taxation and reliefs” in the forthcoming UK budget
  • The German government has downgraded its 2024 GDP forecast from 0.3% growth to -0.2% amid low consumer demand and delayed investments
  • German consumer price inflation was 1.6% in the year to September, the lowest inflation rate for more than three years
  • French prime minister Michel Barnier 2025 budget included cuts to public expenditure and increased taxes on large corporations
  • Japan recorded its highest number of bankruptcies since 2013 during March – September this year, with rising costs and labour shortages cited as the main causes

Business

  • The US Department of Justice is “considering behavioural and structural remedies” against Google after a court case in August ruled Google violated US antitrust laws to maintain its monopoly on internet searches
  • US venture capital firms provided over 65% of investment in European defence technology start-up firms this year, amounting to €458m, the FT reports
  • The US FBI created its own cryptocurrency in an operation to tackle fraud and manipulation of cryptocurrency markets, resulting in charges against 18 individuals and entities
  • US dock workers have ended a three-day strike after reaching a tentative agreement which includes a 62% pay increase over six years
  • Aerospace company Boeing has withdrawn its latest pay offer to its 33,000 striking workers
  • Canadian bank TD was fined more than $3bn by US regulators and forced to limit growth of its US operations over charges of failing to properly monitor money laundering, The Wall Street Journal reports
  • UK bank TSB was fined £10.9m by the Financial Conduct Authority for “failing to ensure customers who were in arrears were treated fairly”
  • Researchers at Oxford University who have carried out the largest global study of teenage health have reported a “linear relationship between higher rates of anxiety and depression and time spent networking on social media sites”
  • UK transport secretary Louise Haigh confirmed the High Speed 2 rail project from Birmingham to London will end in London’s Euston station, instead of the cheaper alternative of Old Oak Common in North West London
  • Mining group Rio Tinto agreed to buy lithium mining company Arcadium Lithium in a $6.7bn deal
  • Joint venture Everyone TV, owned by the BBC, ITV, Channel 4 and Channel 5, agreed a deal to stream its live and online television services using Amazon’s Fire TV systems
  • London City Airport is increasing its share of leisure flights to approximately 50% this year amid a weak recovery in business flights since the pandemic, the FT reports
  • Car manufacturer Volkswagen Group reported a 7% fall in global car deliveries in Q3 2024 compared with last year against a backdrop of what it described as a “particularly intense” Chinese market
  • Europastry, the Spanish frozen baked goods group, delayed its initial public offering for a second time citing market instability due to international geopolitics

Global and political developments

  • The UK government unveiled its Employment Rights Bill, comprising 28 employment reforms that includes day one rights for paternity, parental and bereavement leave
  • The director-general of the UK domestic intelligence service, Ken McCallum, said Russia’s intelligence agency is “on a sustained mission to generate mayhem on British and European streets” amid rising threats facing the UK
  • The Ministry of Housing, Communities and Local Government has proposed an 18-month deadline for housing developers to start work on fixing dangerous cladding
  • James Cleverley was knocked out of the latest round of voting in the UK Conservative Party leadership contest, leaving Kemi Badenoch and Robert Jenrick as the final two candidates
  • The EU has approved a €35bn loan to Ukraine to fund its defences against Russia
  • Spain submitted a proposal to allow three or more EU member states to undertake joint initiatives in a bid to encourage greater financial integration of the bloc
  • Portugal’s latest budget included proposals to offer tax breaks for workers aged under 35 to slow the outflow of young people from the country
  • China will impose provisional tariffs on brandy imports from the EU after the EU’s recent approval to increase tariffs on Chinese electric vehicles
  • Chinese authorities demanded public sector employees, including schoolteachers, hand in their passports to prevent overseas travel as part of a “personal travel abroad management” plan, the FT reports
  • India’s finance minister Nirmala Sitharaman called the EU’s Carbon Border Adjustment Mechanism (CBAM), which will implement tariffs from 2026 on embedded carbon emissions of imported goods, a “trade barrier” that would damage India and other developing countries

And finally… a lift mechanic working in a Dutch museum threw away artwork that resembled empty beer cans, mistaking them for litter. The hand-painted artwork, titled “All The Good Times We Spent Together”, was eventually found in a rubbish bin - ale’s well that ends well