There was a surprise fall in the UK consumer inflation rate in March.
CPI inflation fell to 4.0%y/y, from 4.4% in February. Price rises this
time last year helped keep the rate down, but so did food prices, which
fell 1.4%m/m. The retail price index (RPI), which includes housing
costs, fell to 5.3%y/y from 5.5% in February. Unscrambling the effects
of energy and taxes, UK inflation is lower than the headline figure
suggests. Core inflation (excl. energy, food and tobacco) was 3.2%y/y in
March, while CPIY (CPI excluding indirect taxes such as VAT) slowed to
2.5%y/y. The MPC will have been relieved to see some slowdown in price
rises, a result of belt tightening, but high oil prices remain a
challenge.

UK unemployment rate falls to 7.8%. The number of unemployed fell by
17,000 in the three months to February, bringing the rate back down to
7.8%. The Chancellor will have sighed with relief, although he will have
been less impressed that the numbers claiming jobseekers allowance
increased by 7,000. Growth in private sector employment (428,000) easily
outpaced a fall in public sector jobs (138,000) in 2010. This needs to
continue once the austerity measures bite, but with employment growth at
a two year high of 143,000 in the three months to February, and 140,000
of these full time jobs, we can probably afford to be cautiously
optimistic.

Still no sign of a pick up in wage inflation. More sighs of relief at
the Bank of England as average weekly earnings growth (including
bonuses) fell to 2%y/y in the three months to February, which was much
better than expected. Underlying earnings growth (excluding bonuses)
came in at 2.2%y/y. Households will be unhappy at the squeeze on their
real earnings, but continued weak wage growth gives the MPC comfort that
high inflation is not becoming entrenched. Pay is still growing faster
in the public sector than in the private sector, but with pay freezes
ahead and no sign of any pick up in private sector wage growth, the MPC
probably has more time to wait before changing interest rates.

UK house prices are broadly stable, but London pulls away. The official
measure of house prices used in the RPI shows prices increased by 0.3%
in the UK in February (although this records prices agreed about three
months earlier). Prices in London grew by 5.5%y/y. London’s
outperformance is backed up by surveyors. Although 23% more of them
thought prices in Great Britain fell in the last three months than
increased, London bucked the trend, with 17% more surveyors thinking
prices increased rather than fell. Supply is probably the key. The sales
to stock ratio, which is a really good leading indicator of house price
growth, has been higher in London and the South East than in other parts
of Britain.

UK trade position improves as UK consumers tighten their belts. There
was also good news on trade. The UK trade deficit narrowed by £1.5bn in
March, reaching a 12 month low of £2.4bn. Exports, particularly of
goods, jumped 2.7%m/m (excluding oil) over the month, while imports
fell. Consumer goods imports shrank by a full 4.5%m/m in February,
reflecting subdued demand from UK households. A continuation of
rebalancing towards trade will do wonders for the UK recovery, given the
dual headwinds of fiscal austerity and household deleveraging.

The US trade gap also shrank in February. The US trade deficit in goods
and services narrowed in February to $45.8bn, down from $47bn in
January. Even though exports fell by 1.4%m/m, reduced demand for cars,
capital goods and industrial supplies meant imports fell more. This
coincided with the first Chinese trade deficit in seven years in Q1
($1bn). Although this is partly due to higher commodity prices and
seasonal effects, import growth has outpaced export growth over the past
two years. These trends will need to continue to achieve an orderly

rebalancing in the global economy.

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A consultative document has been issued which seeks input into how such
“Business Records Checks” should be implemented.

Mike Down, Tax Investigations Partner at Baker Tilly, states:

“A penalty of up to £3,000 will be sought from those businesses whose
records fail to come up to scratch. This penalty has been with us for the
past fifteen years but has hardly ever been pursued.”

The new information powers legislation introduced in 2008 enables HMRC to
carry out “real time” examination of records. The combination of these new
rules with the existing £3,000 penalty has brought about a re-think on the
adequacy of records kept by small businesses and HMRC suggests that poor
record-keeping generally leads to underpayment of tax.

Down continues:

“This is a worrying turn of events for small businesses struggling to cope
in the difficult economic climate. The new checks will be risk assessed and
industry sectors will be targeted where HMRC has identified general problems
in the past. This is likely to result in cash businesses experiencing evenmore robust and intrusive investigation than previously.”

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‘If you don’t ask, you won’t get. Invoice as soon as humanly possible after
supplying your goods or service. The sooner the invoice is received, the
sooner it can be processed and ready for payment, and the sooner you can
identify any problem or dispute that might hold up payment.’

The cashflow ‘tips’ are derived from the series of Managing Cashflow Guides
published by the ICM for BIS that have to date been downloaded more than
210,000 times.

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Osborne sticks to the script in Budget 2011. The Chancellor was in no mood to
dilute the planned cuts in public expenditure in the 2011 Budget. A strong
stance should add much needed certainty, but there are still risks that the
spending plans may squash the recovery. The Office for Budget Responsibility
lowered its forecasts for economic growth to 1.7% from 2.1% for 2011. But its
projections are above consensus for 2012. It also continues to expect the
cyclically adjusted budget deficit to be eliminated by 2014-15.

There were some sweeteners for companies and households. The most eye catching
budget initiatives were the 2% cut to the main corporation tax rate and the
reduction in duty on fuel. These measures will be largely financed by the bank
levy and increased tax on the oil sector. The £630 increase in the personal
income tax allowance from April 2012 was some good news that costs nothing
today. The government will save some money on pensions and other index linked
benefits because calculations will switch from RPI to the lower CPI measure. A
nod to the plight of the housing market came with £250m for the FirstBuy
Scheme. Government and housebuilders will provide favourable loans to help an
estimated 10,000 low income first-time buyers raise a 25% deposit. This is
great for housebuilders because the scheme is available only for newly built
homes, but overall its scale is too small to change the market significantly.

UK inflation continues to break records. The CPI rose by 4.4%y/y in February.
This is up from 4.0%y/y in January and is the highest since October 2008. The
RPI, which includes housing costs, rose by 5.5%y/y in February – the fastest
pace since July 1991. Rising costs of clothes and shoes was a major cause for
the lift in February. Domestic fuel costs also pushed inflation up, but this
was largely because of a big fall in costs in February 2010.

The retail sales data were a mixed bag. At first glance things look quite good
for retailers. The value of sales grew by 4.4%y/y in the three months to
February, the fastest growth for more than two years. But things are unlikely
to get better. Surveys and anecdotal evidence from retailers suggest shoppers
are already in belt tightening mode and higher prices are putting them off
further. Indeed, the volume of sales increased by only 1.7%y/y in the three
months to February.

Who would be a central banker? There was no change in the voting at the March
MPC meeting, and little change in the thrust of the debate. The MPC is trying
to balance the need to subdue rising inflation expectations with sustaining a
fragile recovery. Recent rises in oil prices – up 25% since the start of the
year and almost 50% over six months – only made that job tougher.

Portugal looks set to join the bail out club. The Portuguese prime minister
resigned after parliament rejected his austerity measures. This caused yields
on Portuguese two-year bonds to jump to their highest since the euro’s
inception. There is no shortage of drama in the Eurozone. Inflation is rising
at its fastest pace in two and a half years prompting the ECB signal of a rate
rise as soon as April.

US growth better than expected. The US economy grew at a 3.1% annualised rate
in Q4 2010, up from February’s estimate of 2.8%. Business investment and
stronger inventories triggered the upward revision while consumption was
strong at 4% in annualised terms. It is not clear how long this will continue
though. Higher oil prices, weaker consumer confidence and the housing market
will all act as drags on personal expenditure.

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The Bank of England’s growth projections have weakened since November. The Bank still expects the recovery to continue, albeit in a choppy way. But this largely depends on the assumption that world demand continues to grow and sterling’s past depreciation enables the UK to rebalance towards net trade. A pick-up in private investment could add some oomph to growth, but uncertainty about the impact of fiscal consolidation and the continued squeeze on households’ spending power mean the risks are skewed to the downside.

Inflation reached twice its target in January – and is expected to rise further. Consumer prices rose by 4%y/y in January, driven by higher fuel costs as crude oil prices climbed. The rise in VAT also bolstered January’s number, although in the retail sector, seasonal sales are likely to mean retailers absorbed at least some of this. A bigger pass through in the coming months, along with the commodity price pressures already in the pipeline, suggests inflation won’t fall just yet (especially if unrest in the Middle East causes another increase in oil prices). Indeed, the Bank of England’s projection for inflation was revised up in February’s Inflation Report, and the Governor openly talks about it rising to 4-5% y/y mid year.

UK households’ real incomes are still falling. Average weekly earnings increased by only 1.8%y/y in the last quarter of 2010, but with CPI at 4%y/y and RPI at 5.1% y/y workers are experiencing the biggest fall in real take-home pay since records began. This puts enormous pressure on households, but it is comforting for the Governor that this erosion of spending power has not fed into higher pay demands. The amount of slack in the labour market will be the reason why.

The UK labour market disappoints again. The number of people out of work increased by 44,000 to 2.49m in the last three months of 2010, increasing the unemployment rate to 7.9% from 7.8%. Figures were particularly bleak for younger age groups. Unemployment among 16 to 24-year olds rose by 66,000 to 965,000, the highest since records began in 1992. On a more positive note, full-time employment increased by 66,000, with improvements for both men and women. 2011 is likely to be a tough year for jobseekers, particularly when the spending cuts begin to affect public sector jobs.

UK consumers took full advantage of the January sales this year. Updated retail sales data shows confirms just how terrible December was. But a spending spree in January meant sales caught right back up. Growth of 1.9% in January, following Decembers 1.4% fall, means that over the last two months retail sales have grown by 0.5% in total.

The Eurozone economy grew by a modest 0.3%q/q in the final quarter of 2010. It survived the severe weather which caused the UK economy to shrink in the same period. Germany is responsible for the growth. Its economy grew by 4.0%y/y in Q4 and some of this spilled over to its Dutch and Austrian neighbours. Elsewhere activity has been tepid by comparison. Spanish and Italian GDP rose by 0.2%y/y 1.3%y/y respectively. But these countries are booming in comparison to Greece where output fell by 6.6% in 2010. European economic sentiment is, however, improving. The ZEW index of current economic sentiment increased to 85.2 from 82.8 in January and the forward indicator of investment confidence rose strongly, from 25.4 to 29.5 in February.

Energy prices hit US inflation too. US CPI inflation hit an eight month high of 1.6% y/y in January, up from 1.5% in December, driven by rising energy prices. Core inflation (which excludes food and energy) also increased, reaching 1% in January. These numbers seem subdued compared with the UK, but the minutes of the January meeting of the Federal Open Market Committee revealed concerns about the effect of rising commodity prices on inflation. But these were not strong enough to prevent a unanimous decision to proceed with quantitative easing. The Fed revised its growth forecasts up, but there are still worries that the pace of recovery will not be enough to reduce unemployment.

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For the last Quarter of 2010, according to the Equifax analysis, year on year the trend of reduced numbers of businesses going under was maintained. In comparison to Quarter 3 the numbers increased slightly. However, Equifax’s expert analysts do not believe this is a trend that should cause too much concern – the numbers are still lower than seen at the beginning of 2010.

Key Numbers
* 12.1% fall in failures for the whole of 2010
* 8.4% drop year-on-year for Quarter 4 2010
* However there was a 6.4% increase in failures in the last three months of the year compared to Quarter 3

Equifax comment
“What we have seen throughout 2010 is a steady drop in the number of organisations failing” explained Neil Munroe, External Affairs Director, Equifax. “Pay freezes and tight control on invoice payments were reported consistently throughout the year. So it appears that there has been a clear focus on cost control and cash flow management which has aided survival.

“But of course the big question is what is in store for businesses in 2011. When we look at the pattern of failures over the last seven years, we can see that we are not yet back to the numbers before the recession. There were just under 23,000 failures in 2010 compared to 19,000 in 2007. However, the quite significant year on year drop of 12.1%, from 26,000 in 2009 – should give business and industry a certain amount of confidence that, as long as they continue to do the things they have been doing in 2010, they should be able to survive.”

Sector Performance
Only the Transport & Communications sector achieved a drop in failures in Quarter 4 2010 compared to Quarter 3, however year on year all sectors saw a decline in the number of businesses going under. Transport & Communications saw the biggest drop year on year (18.7%) closely followed by the Manufacturing industry (18.3%). The Wholesale sector also performed well year on year with a 16.7% fall in failures.

Perhaps not surprisingly, the Retail sector saw the smallest drop year on year, at 6.5%. Despite the downturn in confidence in the Construction industry, this sector also saw a fall in failures (7.5%) and tthe Services sector achieved almost a 10% drop year on year.

When comparing the performance in Quarter 4 2010 with Quarter 3, the Wholesale sector fared the worst with a 9.2% increase in failures, followed by the Services sector at 6%.

The Regional Picture
In the regions the strongest performers year-on-year for Quarter 4 2010 were Scotland and the East Midlands with 23.1% and 17.9% drops in failures respectively. Wales was the only region that saw an increase in failures year on year – at 3.5%.

However, when compared to Quarter 3 2010, a number of regions saw an increase in failures in the last three months of the year. This ‘blip’ can probably be attributed to a number of businesses being wound up at the end of their business year. Scotland saw the highest increase in failures between the two Quarters – at 32.9%. The regions that bucked this trend were the East Midlands, with a 23.4% drop in failures quarter-on-quarter; the North West at a 7.6% drop and the South West with a 2.1% fall.

“The new year started off with a lot of focus on what can be done to stimulate further new lending in the commercial sector” concluded Neil Munroe. “These figures should give lenders confidence that businesses are taking all the right measures to protect their financial stability and, therefore, encourage new lending to support cash flow as well as growth.

“Under these conditions, the importance of monitoring existing customer performance can’t be under-estimated because the knock-on effect of one organisation’s failure can ripple throughout a region or sector very quickly. By operating best practice and harnessing the power of the latest risk management solutions, firms can minimise the threat of bad debt and secure the future of their own business.”

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1,266 businesses failed in January 2011, representing 0.07 per cent of the UK’s business community. This compares with 1,426 in January 2010. The strength of the UK’s business community also improved year-on-year, with its overall financial strength score[1] improving from 81.16 in January 2010 to 81.49 this year.

Max Firth, Managing Director of Experian pH, said: “Our analysis shows that business failure rates are falling steadily and the financial strength of the UK’s business community is improving. Our data also shows that the post-recession business population is beginning to increase once again, with the net number of firms trading up by one percent when compared with last January.

Irrespective of the environment, firms need to be vigilant and ensure that they have good insight into the financial risks associated with insolvencies among clients and suppliers. With issues from fulfilling increased orders through to late payment, the knowledge of how these will affect cash flow is imperative.”

Other key highlights include:
* Businesses in the South West continued to be the most robust, with the best financial strength score of 83.10 during January 2011.
* Yorkshire saw the biggest drop in the rate of insolvencies, from 0.14 per cent in 2010 to 0.06 per cent in January this year.
* Wales and the North West were the only two regions to see an increase in the rate of business insolvencies year-on-year. The North West had the highest insolvency rate in January with 0.11 per cent of its business population failing, closely followed by the North East at 0.10 per cent.
* In January 2011, medium sized businesses (26-50 employees) had the highest rate of insolvencies (0.17 per cent)
* Businesses with 51 to 100 employees had the worst average financial strength score (81.48), although they did see a small year-on-year improvement (from 80.06).
* Food retailers suffered the biggest decline in financial strength, dropping from 76.85 in January 2010 to 75.77 leaving it the industry with the lowest score in January 2011.
* The oil industry remains the top performing sector in terms of financial strength leading the way with 85.98.

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R3 President, Steven Law commented:
“Since we last carried out the survey, people have seen a rise in the cost of living, from the VAT increase; to the rise of fuel and utility costs. This has happened against a backdrop of pay freezes, pay cuts and, in some cases, redundancies, so it is understandable that many are feeling pessimistic about their financial outlook.”

The research shows that the number of people who are worried about their current level of debt has increased by 6 percent in the last quarter, with close to half (45%) now concerned about the amount of debt they owe. Credit card debt continues to be the main source of worry, with more than half (56%) expressing concern.

Research finds that younger people are more likely to worry about their debts. Those aged 25-34 are the most likely to be worried about their debts at 57%; meanwhile just 20% of those aged 65 and over are concerned about their debts – making them the least likely to be worried.

“In my experience, most people’s debts become unmanageable due to a change in circumstance, such as sudden unemployment. This no doubt accounts for the generational split with regards to debt worries. In these uncertain times, for many of those of working age there is a real fear that if they do suddenly lose their job they will struggle to keep up with their debt repayments.”

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The Bank of England’s growth projections have weakened since November.
The Bank still expects the recovery to continue, albeit in a choppy way.
But this largely depends on the assumption that world demand continues
to grow and sterling’s past depreciation enables the UK to rebalance
towards net trade. A pick-up in private investment could add some oomph
to growth, but uncertainty about the impact of fiscal consolidation and
the continued squeeze on households’ spending power mean the risks are
skewed to the downside.

Inflation reached twice its target in January – and is expected to rise
further. Consumer prices rose by 4%y/y in January, driven by higher fuel
costs as crude oil prices climbed. The rise in VAT also bolstered
January’s number, although in the retail sector, seasonal sales are
likely to mean retailers absorbed at least some of this. A bigger pass
through in the coming months, along with the commodity price pressures
already in the pipeline, suggests inflation won’t fall just yet
(especially if unrest in the Middle East causes another increase in oil
prices). Indeed, the Bank of England’s projection for inflation was
revised up in February’s Inflation Report, and the Governor openly talks
about it rising to 4-5% y/y mid year.

UK households’ real incomes are still falling. Average weekly earnings
increased by only 1.8%y/y in the last quarter of 2010, but with CPI at
4%y/y and RPI at 5.1% y/y workers are experiencing the biggest fall in
real take-home pay since records began. This puts enormous pressure on
households, but it is comforting for the Governor that this erosion of
spending power has not fed into higher pay demands. The amount of slack
in the labour market will be the reason why.

The UK labour market disappoints again. The number of people out of work
increased by 44,000 to 2.49m in the last three months of 2010,
increasing the unemployment rate to 7.9% from 7.8%. Figures were
particularly bleak for younger age groups. Unemployment among 16 to
24-year olds rose by 66,000 to 965,000, the highest since records began
in 1992. On a more positive note, full-time employment increased by
66,000, with improvements for both men and women. 2011 is likely to be a
tough year for jobseekers, particularly when the spending cuts begin to
affect public sector jobs.

UK consumers took full advantage of the January sales this year. Updated
retail sales data shows confirms just how terrible December was. But a
spending spree in January meant sales caught right back up. Growth of
1.9% in January, following Decembers 1.4% fall, means that over the last
two months retail sales have grown by 0.5% in total.

The Eurozone economy grew by a modest 0.3%q/q in the final quarter of
2010. It survived the severe weather which caused the UK economy to
shrink in the same period. Germany is responsible for the growth. Its
economy grew by 4.0%y/y in Q4 and some of this spilled over to its Dutch
and Austrian neighbours. Elsewhere activity has been tepid by
comparison. Spanish and Italian GDP rose by 0.2%y/y 1.3%y/y
respectively. But these countries are booming in comparison to Greece
where output fell by 6.6% in 2010. European economic sentiment is,
however, improving. The ZEW index of current economic sentiment
increased to 85.2 from 82.8 in January and the forward indicator of
investment confidence rose strongly, from 25.4 to 29.5 in February.

Energy prices hit US inflation too. US CPI inflation hit an eight month
high of 1.6% y/y in January, up from 1.5% in December, driven by rising
energy prices. Core inflation (which excludes food and energy) also
increased, reaching 1% in January. These numbers seem subdued compared
with the UK, but the minutes of the January meeting of the Federal Open
Market Committee revealed concerns about the effect of rising commodity
prices on inflation. But these were not strong enough to prevent a
unanimous decision to proceed with quantitative easing. The Fed revised its growth forecasts up, but there are still worries that the pace of recovery will not be enough to reduce unemployment.

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The toll is a one per cent rise on the previous year’s record and the highest since current records began in 1987. Experts warned the number of bankrupts is likely to rise again this year.

The combination of crippling borrowings built up during the boom, job losses and the squeeze on disposable income means thousands can no longer cope, they warned.

Keith Tondeur, president of the Credit Action debt advice service, said: “The predicted 500,000 or so redundancies from the public sector does not augur well for the second half of the year. Redundancy is a major cause of bankruptcy because when it happens income falls off a cliff.”

The insolvency total, which covers England and Wales, is made up of personal bankruptcies and two “bankruptcy lite” insolvency options, individual voluntary arrangements and debt relief orders.

It comes the day after the Citizens Advice Bureau announced it is making 500 of its free debt advisers redundant because of cuts in government funding. Although the annual total was up, insolvencies fell 14 per cent in the last quarter of the year to 30,729, reflecting the pick-up in economic growth last spring and summer.

However, it is feared that the drop will prove only a brief hiatus.

A spokeswoman for the charity, the Consumer Credit Counselling Service, said: “We expect things to get a lot worse this year. There will be more pressure on household budgets from VAT and other tax rises.

“A lot of the pain of the recession has been deferred. People who were not made redundant and on variable mortgages are likely to have had higher disposable income. But that’s all changing now.”

The average debt for people helped by the service is £24,274, she said,

The biggest jump in the number of bankruptcies has been among the over-65s as retired people relying on income from savings struggle to cope. In London, bankruptcies among women over 65 has increased 43 fold since 2000, according to insolvency figures.

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