7. Weekly Newsletter

UK Economy Avoids Recession

The UK narrowly avoided entering a recession in 2022 following zero growth (0%) in the fourth quarter of the year; although, the Bank of England (BoE) forecasts the UK to fall into a short and shallow recession this year. The chancellor described the economy as demonstrating an “underlying resilience” but warned that the UK is “not out of the woods” yet. It is worth noting that December experienced an unexpected 0.5% contraction partly due to strike action.

The UK economy had the highest year-on-year growth from 2021 to 2022 in the G7 with 4% growth but this is attributable to the UK’s disproportionately sharp decline in 2020. However, by comparison to the rest of the G7 the UK’s remains the only economy still below pre-COVID levels (-0.8%) according to the OECD. This contrasts to US (+5.1%), Canada (+3.5%) and Italy (+1.8%) where they have fully recovered and grown beyond pre-pandemic levels.

Newspapers & English Football

The UK’s front page news cycle over the last seven days has covered a wide range of topics with analysis of the earthquakes in Syria and Turkey drawing support from the public. The King and Queen Consort have provided a “generous donation” to the UK’s Disasters Emergency Committee (DEC) to help earthquake survivors following over 20,000 deaths in the region. Elsewhere, Ukraine’s President Zelensky has also made his second foreign trip, since Russia’s invasion, to the UK to discuss assistance for his air force. Some of the newspaper front pages over the last week were:

• The Independent: Sunak facing Tory rebellion over sewage in UK rivers
• The Observer: Secret cross-party summit held to confront failings of Brexit
• The Mail on Sunday: UK Forces Too Small To Combat Russians, Says NATO
• The Sunday Telegraph: British weapons could be made in Ukraine
• The Independent: UK warns Putin- we may send fighter jets to protect Ukraine
• Financial Times: Sunak breaks up business department to sharpen focus on energy and science
• The Daily Telegraph: Truss to challenge PM over China

The English Premier League has experienced revenues and club valuations soar in recent years as it now, according to the Financial Times, resembles a “European super league”. This comes following an announcement on Monday (13th February) that the Qatar Investment Authority is about to launch a competing bid to buy Manchester United against Sir Jim Ratcliffe. Chelsea FC was sold for around £2.5bn last year and the American owners of Manchester United are expected to be looking to double this. Revenues for the Premier League’s clubs exceeded £7.11bn this season and the net transfer fees spent in the leading English league (£2.1bn) dwarf the net spend of even the second largest football league globally (£52m). Revenues at the smallest Premier League team, Norwich City (€120m) outpace many of the top continental clubs such as Bayern Munich (€90m), Juventus (€78m) and PSG (€58m). However, this has created obstacles for England’s second leagues who face increased competition to (re)enter the Premier League without revenues to support this.

Big Oil Profits in the UK

The UK’s two largest revenue generating businesses, BP and Shell, generated $241.4bn and $365.3bn in sales during 2022, respectively. Combined they delivered annual adjusted earnings of $68bn for 2022 in a year where oil and gas priced soared. Russia, prior to invading Ukraine, was the world’s largest exporter of oil and natural gas but faced boycotts from across the Western world which reduced supply for them- further exacerbated by OPEC output levels remaining constant. BP also experienced a $24bn write off from their exit in Russia’s Rosneft. Russia’s largest exports for oil and gas are now India and China. For oil producers the fixed costs vastly outweigh variable costs and thus benefit the sector when the price per barrel rises.

However, there is substantial political pressure in the UK to tax the windfall profits with tighter ‘windfall taxes’. At present, UK oil companies pay a 40% tax on profits from oil and gas production (for most sectors in the UK the corporate tax rate is 19%) as well as an additional 35% windfall tax (increased from 25% in November). The government expects to raise an additional £40bn from companies operating in UK waters by 2028 under this windfall tax scheme. Although, firms can deduct 90% of their cost of new oil exploration and production from this windfall tax rate. Domestically, critics (ranging from trade unions to poverty campaigners) have argued for higher tax rates for the sector but most UK oil producers generate profits abroad with Shell having paid $13bn in taxes globally– of which $134m was in the UK. The resurgence in profitability for energy giants has also reignited capital expenditure into future energy requirements. BP’s CEO, Looney, last week announced that the multinational would spend $8bn more on its “transition” business (biofuels, convenience, charging, renewables and hydrogen) by 2030 and also an additional $8bn on oil and gas investments.