Market Loop - Sterling gets a pounding

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27th September 2022

Bite-sized business news from the UK and beyond
Good morning If you’ve used LinkedIn in the past five years then you may be one of the 20m users who have been analysed as part of a study into how people get hired. Research by the professional social media platform found that loose acquaintances aka your ‘weak ties’ more than your friends are pivotal in helping you land a job.
Today's stories
  • Sterling gets a pounding
  • Aldi drops profits but gains customers
ECONOMY
Sterling gets a pounding

 
What happened?
Yesterday the pound fell nearly 5% to a record low of $1.035 against the dollar after the chancellor followed the most sweeping tax cuts since 1972 on Friday with the promise over the weekend of more to come. The pound has since recovered slightly to around $1.08 but has now lost 20% of its value since January.

Financial markets have been seriously spooked by the government’s economic plan 
Investors are unconvinced that Friday’s £45bn “mini-Budget” tax cuts alongside a £150bn subsidy for energy costs for businesses and consumers will boost economic growth like the government says.

That’s because the plan relies on increasing government borrowing at a time when the public finances are already in a poor shape – national debt is almost 100% of economic output - and the Bank of England is struggling to rein in 40 year high inflation of 10% - five times its target. 

A weak pound means more expensive imports of dollar priced goods like petrol, gas and metals as well as making trips to the US more costly for Brits. On the plus side a weaker pound should help British exporters as their goods become cheaper for international buyers.

Pressure is mounting on the government and Bank of England to ease market fears
When a country’s currency is in a tailspin the central bank often steps in with an emergency rate rise to boost demand for savings deposits and hence support the currency. The Bank of England said it wouldn’t do this until its next scheduled meeting in November. Markets believe that that the Bank will have to raise interest rates to 6% by next May, up from 2.25% now, in order to cool inflation and help the pound. 

The government remained defiant that its plans were the right one and said the chancellor will publish a medium-term plan in November with forecasts of how government borrowing will decrease. The lack of this key detail from Friday’s announcement sent the cost of government borrowing up sharply yesterday. Rates on lending to the government over 10 years jumped above 4% for the first time in over a decade.

Zooming out: The pound isn’t the only currency weakening against the dollar. Major currencies including the euro, yen and Canadian dollar have all devalued as investors look to the US dollar as a safe haven in these uncertain times.
Other stories to keep you in the loop
  • Leading economies sliding into recession as Ukraine war cuts growth, OECD finds
  • Cost of charging an electric car surges by 42% - with prices nearing the same as petrol
  • Mortgage lenders pull deals for new customers amid market volatility
  • TikTok may be fined £27m for failing to protect children
  • Apple to make iPhone 14 in India in shift away from China
  • Global manhunt begins for crypto boss after stablecoin loses $45bn in value
RETAIL
Aldi drops profits but gains customers


What happened?
Yesterday the UK arm of German supermarket Aldi announced that pre-tax profits fell 86% in 2021 to £36m. But the company said that in the past 12 weeks 1.5m extra customers visited its stores.

How did we get here?
As households contend with food price inflation – which reached 12% in August - many are turning to discount retailers like Aldi to manage their budgets. Shoppers are economising by buying more own-brand products, with sales of value ranges up by a third compared to last year. More than 90% of products at Aldi are non-branded items.

This boom in popularity has led to Aldi becoming the UK’s fourth biggest supermarket overtaking Morrisons. Industry research body Kantar showed Aldi’s market share has reached 9.3% with only Tesco, Sainsbury's and Asda ahead.

However last year Aldi profits were hit by rising staff pay and continued pandemic-related costs. The supermarket’s commitment to low prices also reduced profitability with profit margins at just 0.3% compared to an average of 4% for Tesco and Sainsbury’s. 

Aldi has ambitious growth plans to take on the big three supermarkets
There are 970 stores with another 16 due to open before the end of the year. The company is targeting 1,200 stores by 2025 at a time when many traditional supermarkets are adding little, if any, new space.
Stat of the day

According to the OECD Russia's war in Ukraine will cost the global economy $2.8 trillion next year
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