Recession now expected for Germany in 2023

Germany’s economy will contract by -0.3% in 2023, predicts Munich-based institution the Ifo Institute for Economic Research, which back in June had forecast growth of 3.5% for next year. Ifo has also downgraded its projection for 2022, from 2.5% previously to 1.6%.

The Institute also raised its expectations for inflation, which in 2023 it now forecasts will reach 9.3% against its June forecast for 6% while the projection for this year is increased to 8.1% against 6.8% before. The predicted uplift in inflation is linked to the downgrade in growth as hefty prrice rises arre likely to restrict consumer spending, particularly in Q1 2023 when the inflation rate is seen as peaking at around 11%.

The Institute confirmed that the spike will largely be due to energy suppliers ratcheting up prices to offset soaring procurement costs spurred on by dwindling Russian gas supplies.

“This will result in a sharp drop in real household incomes and a noticeable decline in purchasing power," Ifo said in a statement, adding that government measures to limit the impact of inflation and stem the decline in economic growth will meet with no more than limited success.

Manufacturing will be the key driver of the German economy in the coming quarters, Ifo said, as ongoing supply chain constraints begin to ease because of weaker global growth. A renewed uptick in interest rates will also lead to more expensive financing costs for construction businesses and subsequently weigh on the entire sector.

However, price increases are forecast to moderate over the coming year, due in part to large quantities of gas reserves that have been accumulated recently to counteract the reduced Russian fuel flows this winter. Energy costs are subsequently estimated to fall again from spring 2023 at the latest.

However, the Institute believes the German economy will not “return to normal” until 2024, when it has pencilled in growth of 1.8% and inflation falling back to 2.5%.

Ifo flagged several risks to its forecast, including the development of energy prices, supply chain challenges, and restrictions on public life if this autumn sees a resurgence of Covid-19 cases.

Meanwhile, the UK’s economy grew by 0.2% in July while analysts had expected month-on-month growth of 0.4% after a -0.6% contraction in June due partly to an extended public holiday to mark the late Queen Elizabeth II’s Platinum Jubilee.

July was marked by a fall in power production possibly reflecting the sharp climb in energy tariffs as well as a heatwave that hit the country with record temperatures. It meant that in the three months to July, the UK’s GDP was unchanged from the previous three-month period.

“Anecdotal evidence suggests that there may be some signs of changes in consumer behaviour and lower demand in response to increased prices,” commented the Office for National Statistics (ONS) on the fall in power generation.

Electricity prices rose by 54% in the 12 months to July, part of the surge in power costs that last week saw incoming Prime Minister Liz Truss announce a cap on domestic energy tariffs. The move has reduced the risk of a severe hit to the economy, but at a cost upwards of £100 billion (US$116.16 billion) to the already stretched public finances.

Last month, the Bank of England forecast that the UK would enter recession at the end of 2022 and not emerge before early 2024, due in large part to the hit to living standards from the energy price surge. The BoE is nonetheless expected to raise interest rates again when its monetary policy committee meets on 22 September as it seeks to combat an inflation rate above 10%.

UK banks “face stress tests on impact of energy crisis defaults”

The UK’s largest banks will be tested on their ability to withstand a rise in defaults linked to rocketing energy prices, as part of the Bank of England’s (BoE) delayed health check of the financial industry, claims The Guardian newspaper.

The UK daily reports that the Bank has crafted a new crisis scenario that will feature a deep economic recession, punctuated by soaring energy bills that could make it harder for some borrowers – particularly businesses – to afford loan repayments.

It comes as UK businesses await details of incoming prime minister Liz Truss’s £150 billion bailout package to cap energy bills, which she has pledged will provide relief for companies that would otherwise be forced to close this winter.

According to The Guardian, this year’s stress-test scenario will also feature a drop in asset prices, a further jump in interest rates and soaring costs to cover misconduct. Any lenders deemed too weak to cover these eventualities could be forced to raise billions of pounds in capital to strengthen their finances.

Financial watchdog the Prudential Regulation Authority (PRA), which is part of the BoE and responsible for making sure banks and insurers are financially stable, is preparing to release the details of its stress-test scenario in the coming weeks, having postponed the annual exercise because of the war in Ukraine.

While the annual stress-test exercise usually features a severe economic downturn, this will be the first time that banks are forced to prove they can withstand the effects of an energy crisis. The central bank has previously tested lenders against worst-case scenarios linked to major events such as Brexit and the Covid-19 pandemic.

It follows similar efforts by the European Central Bank (ECB), which has reportedly asked lenders to analyse how gas shortages might affect their business customers and default rates. Bloomberg said the ECB was expecting responses from lenders by mid-September, with follow-up conversations due at the end of the month.

WEF reports exchanges’ growing focus on ESG

The past year has seen a “significant advance” in the depth and scope of environmental, social and corporate governance (ESG) from exchanges and clearing houses – with an increased focus on the transition to carbon neutrality, reports the World Federation of Exchanges (WFE).

The eighth Annual Sustainability Survey published by the global industry group for market infrastructures covers 54 exchanges and confirms the strength of what has consistently been a positive trend in the response of exchanges to ESG issues.

The WFE Sustainability Survey is a snapshot of member engagement with ESG issues in both developed and emerging markets. Since its launch in 2014, the Sustainability Survey has consistently captured the growing engagement with ESG matters among the WFE membership.

“Our new survey results highlight the vital role that the exchange industry plays in the shift towards a sustainable and inclusive global economy,” said Nandini Sukumar, CEO of the WFE. “It is encouraging for us, as an industry that has championed ESG in financial markets for more than a decade, to see a positive trend towards carbon neutrality accompanied by genuine interest and engagement in these issues from stakeholders.”

Survey highlights include:

• Exchanges increased their efforts by reducing their own carbon footprint, promoting the transition of their listed companies to a climate-neutral or carbon-neutral economy, and committing to Net-Zero pledges.
• Eight respondents out of 54 participated in 12 ESG initiatives in 2021, up from five in 2020.
• Initiatives offering ESG education are growing in importance. They ranked eighth in 2019 In terms of the number of exchanges pursuing them, third in 2020, and second last year.
• The number of exchanges participating in sustainability initiatives increased, while more initiatives were implemented per exchange. The average number per exchange rose from 7.7 to 8.4.
• The number of exchanges implementing initiatives that meet all five of the WFE Sustainability Principles increased by 17% to 69%.
• Sustainability concerns and the opportunities for business expansion were again the most frequently reported motivations for ESG engagement. Business and economic concerns remain the main concerns around sustainability efforts, while the lack of resources was seen as the second major concern.
• Efforts on ESG were more evenly distributed across environmental (31.2%), social (30.6%) and governance (38.6%) components, compared to 25.8%, 31.3% and 42.9% respectively in 2020.
• While green bonds continue to be the most offered ESG product, offerings across all sustainability product categories have increased.
• Eight respondents reported engaging in initiatives to prevent human rights abuses in the supply chains, and three respondents reported participating in all of the 13 listed ESG initiatives.
• There was limited progress regarding gender equality, with only small increases in the average percentage of female representation at board and senior management positions.

The Sustainability Survey maps exchanges’ activities against the WFE’s Sustainability Principles, which all exchanges, both WFE members and others, continue to demonstrate sustained engagement with. Published in October 2018, these Principles state that exchanges will educate participants about sustainability issues; promote the enhanced availability of ESG information; engage stakeholders to advance the sustainable finance agenda; provide markets and products that support the development of sustainable finance; and embed sustainability into the exchange’s governance, strategy, and organisational structures.

You can download a copy of the report here.

European airlines cut back flights schedule

Low-cost carrier Ryanair is the latest European airline to cut back its winter schedule in response to rising fuel costs and flights tax.

Ryanair announced that flights to Belgium’s Zaventem Airport, used for its Brussels service, will be cancelled until at least March 2023. Brussels flights will instead be moved to Charleroi Airport or to neighbouring countries. The company will also no longer offer flights to Greece’s capital, Athens over the coming winter months.

Ryanair CEO Michael O’Leary commented: “This winter is going to be extremely challenging, with higher fuel costs, so an increase in airport charges like in Zaventem is not sustainable.”

Rival UK budget carrier Wizz Air said that nearly all flights from Cardiff Airport would be cancelled for the next six months and that “economic pressures” were responsible.

British Airways and Lufthansa have also reduced their winter flight schedules. Germany’s national airline was also hit by a one-day strike by pilots’ union Vereinigung Cockpit on 2 September that forced it to cancel 800 flights at its Munich and Frankfurt hubs. A last-minute deal enabled it to narrowly avert two further days of industrial action on 7-8 September.

Separately, the Netherlands has announced that a passenger air tax introduced last January on all flights from the country to encourage travellers to opt for more environmentally friendly options will increase from the current €7.95 to €28.58 from 1 January 2023.

ANZ urged to push top polluters harder on transition

Australia’s ANZ Banking Group said that more than half of its 100 biggest carbon emitting customers had either not publicly disclosed plans to transition to net-zero or were just starting to develop their plans as of a year ago, as analysts pushed for updated disclosures about conversations with clients on the transition.

At a briefing on its environmental, social and governance (ESG) performance, ANZ provided year-old data relating to its biggest emitters, representing 30% of Australia’s overall emissions or more than 150 million tonnes of direct (‘scope 1’) emissions.

A graphic in the briefing showed more than 50 were still categorised as either “underdeveloped/starting out” or having “no public plans”, compared to around 15 in the “advanced” (A) category, and less than 30 in the “developing/intermediate” (B) bucket as of September last year.

Analysts questioned ANZ about providing outdated data, and it pledged an update at the full-year results in late October.

ANZ head of institutional banking Mark Whelan reported progress in engaging with customers over the past 12 months. “In general we’ve seen a shift up into our A and B categories,” he said. “The group of 100 is a little bit of a moving feast. Some will come off because we may have reduced the exposure to the point where it’s no longer relevant for us.”

However, unlike rivals Westpac and National Australia Bank, ANZ has not announced detailed plans to step away from lending to the oil and gas sector. Its presentation showed that between September 2021 and March 2022, ANZ increased lending to oil and gas extraction from A$5.9 billion to A$6.4 billion in the six months to March.

Whelan said that ANZ would update the market on its plans for the sector later this year, as activists renewed calls for it to halt financing of new projects.

Calculum launches free working capital metrics and payment terms calculator

US artificial intelligence-based (AI) fintech company and data as a service (DaaS) provider Calculum has released a software as a service (SaaS) working capital metrics and payment terms peer comparison calculator.

The Miami, Florida-based fintech says the new tool will aid companies worldwide in calculating and negotiating optimal payment terms with their trading partners, thus improving working capital for businesses worldwide to negotiate better payment terms and unlock millions in cash flow.

Calculum cites a recent working capital study that reported net working capital (NWC) days has reached a five-year-high, brought about by recent uncertainties caused by events including the Covid-19 pandemic.

While many of the spikes in working capital had unwound by mid-2021, the ending of government support, elevated levels of debt, and ongoing supply chain disruptions all mean that capital efficiency must be a priority moving forward.

Eugene Buckley, Calculum’s chief revenue officer said: “Currently, we see that corporates are shifting their focus from navigating from COVID slowdown to growth. That said, volatility in supply chains is increasing the pressure on working capital. We see that cash flow is on the management’s top priority list this year.” 

Calculum’s research and experience with corporates in all key sectors in Europe, the Americas, and Asia show that on average over 5% of annual costs of sales (COGS) can be freed up in cash flow.

CEO of Calculum, Oliver Belin, said: “AI represents the next frontier in applying data science to help companies unlock working capital.”

J.P. Morgan to acquire Renovite Technologies

J.P. Morgan has signed an agreement to acquire cloud-native payments technology company Renovite Technologies.

The firm said that the strategic acquisition of Renovite will help J.P. Morgan Payments build its next-generation merchant acquiring platform, bolster its payments modernisation strategy and support its journey to the cloud. Renovite will become part of J.P. Morgan Payments, which combines corporate treasury services, trade finance, card and merchant services capabilities at the firm, delivering an integrated payments experience to clients across the economy.

“We are excited to acquire Renovite and accelerate our roadmap for helping our clients stay at the cutting-edge of payments innovation. This acquisition will help us achieve our goal to develop the next-generation payments processing platform globally,” said Max Neukirchen, Global Head of Payments & Commerce Solutions, J.P. Morgan.

Renovite was founded in 2015 and is headquartered in Fremont, California. It focuses on cloud-native technology. The company has built six proprietary, cloud-agnostic and payment token agnostic payments products to help their clients to optimize infrastructure, including switch, reconciliation, security, issuing, ATM and testing. Renovite also has a presence in India and the United Kingdom and has supplied services to J.P. Morgan since 2021.

Revolut adds online checkout feature

Banking app Revolut said that it is challenging PayPal with its own one-click payment checkout feature for online purchases.

UK and Euroepan Economic Area (EEA) merchants can now present ‘Revolut Pay’ as a payment method - alongside the likes of PayPal and Apple Pay - across product, cart, and checkout pages. Several retailers, including WH Smith, are already onboard.

Existing Revolut users can use Revolut Pay and pay via saved cards or directly via their account balance. Non-Revolut users can pay by using saved Mastercard or Visa cards issued by any other providers.

Payments will be validated via features such as Face ID, or fingerprint unlock, and no account number will be shared.

The e-commerce play comes months after Revolut made its move into in-person payments with the launch of a card reader payment terminal.

Nikolay Storonsky, CEO, Revolut, said: “With its speed, convenience, security and low pricing, Revolut Pay gives merchants a competitive advantage in a rapidly growing e-commerce market.”