India: an economic powerhouse on standby

BY Fraser Tennant

India is a sleeping economic powerhouse which should rank among the world’s strongest economies, according to a report published this week by Deloitte.

The report – ‘Competitiveness: Catching the next wave’ – portrays India as a country possessing the basis for great economic strength, such as stable democratic rule, a global outlook, a young demographic base, growing incomes, and an increasingly educated workforce.

But, on the downside, the report makes abundantly clear that the assertion that India is, or should be, a major global economic player is largely theoretical.

Decades of chronic infrastructure paralysis and indecisive political decision-making have resulted in a country which, in automotive terms, is driving with the handbrake very much on.

Despite this, according to report co-author, Gary Coleman, a managing director at Deloitte Global, India is on the cusp of a startling revival. He said: “India is a large market with rising purchasing power, a strategic location with links to fast-growing economic regions, and a young population eager to take part in the nation’s development.

“Recent policy moves such as the Reserve Bank of India’s shift to an inflation-targeting framework, along with the new government’s focus on fiscal consolidation, have helped improve business sentiment.

“Another positive indicator is the government’s initiatives to upgrade ties with major economies, ease decision making, develop infrastructure, and promote manufacturing.

“However, it’s still a long road ahead. Change is never easy, but the government can draw comfort from the economy’s inherent strengths. They will serve as a solid base from which policymakers can steer India’s economic ship to catch the next wave of growth and prosperity.”

Deloitte’s report certainly paints a picture of a sleeping economic giant, just waiting for the right time to stir from its slumber. Whether the stimulus for the awakening will prove to be of domestic or international origin remains to be seen, but what is clear is that India is poised to take its place among the global economic elite.

Report: Competitiveness: Catching the next wave

Lloyds hit with new mis-selling charge

Merely days after squeezing through a European banking health check, Lloyds Banking Group has been hit with another sizeable mis-selling charge.

Relating to the bank’s handling of the payment protection insurance (PPI) scandal, which came to light in the wake of the financial crisis, the £900m charge confirmed on 28 October brings the total cost required to cover Lloyds mis-selling of PPI to £11.3bn. The latest charge means that Lloyds has paid out more than any other affected bank, as well as close to half the total bill for the entire British banking industry. The PPI bill for Britain’s five biggest banks now stands at more than £22bn.

Further, it appears that the bank is still not out of the woods. Analysts have predicted that Lloyds will be required to set aside an additional £1bn to cover potential PPC compensation claims made in 2015. According to Lloyds' finance director George Culmer, PPC complaints in the third quarter of 2014 rose by around 2 or 3 percent compared with Q2, however new complaints are down by 18 percent on the year. The group also noted that should there be a similar level of complaints registered in the fourth quarter, as in Q3 the required provision would increase by around £600m.

Lloyds’ most recent PPI charge overshadowed a raft of other news released by the bank. In a statement Lloyds confirmed a 41 percent rise in underlying profits for the third quarter, with profits rising to £2.2bn following an improvement in bad debts. However, the bank also confirmed its previously reported plan to dispense of 9000 jobs over the next three years. The job losses will be the result of around 200 branch closures as the bank attempts to digitise its business.

Despite its recent tribulations, Lloyds is still confident that it will be able to pass the Bank of England’s stress test in December. The BoE’s test will assess whether Lloyds, the worst performing British bank in European testing, would be able to withstand a new financial crisis. Should Lloyds fail the test, it would be forbidden from paying its first shareholder dividend since it was bailed out by the British government.

News: Lloyds Takes $1.4 Billion PPI Charge, Shares Decline

UK growth to decline sharply

BY Richard Summerfield

The UK will experience economic growth of just 2.4 percent in 2015, according to a recent report from forecasting group EY ITEM Club. The forecast is significantly lower than predictions issued by the Bank of England, the Confederation of British Industry and the International Monetary Fund.

In its ‘Autumn Forecast’ the EY ITEM Club noted that the UK’s changing economic fortunes are likely to be based on uncertainty both at home and abroad. Political uncertainty in the UK will likely deter businesses from investing in the coming year.

Potential constitutional reform, the impending general election and a possible 2017 EU referendum are all expected to curtail investment activity. Further, burgeoning geopolitical risks, most notably the crisis in Ukraine, have heavily dented business confidence in the UK’s key European markets.

Peter Spencer, chief economic adviser to the EY ITEM Club, said “The forecast for GDP growth is still relatively good. What has changed is the global risks surrounding the forecast and the headwinds facing investment by firms. Looming political uncertainty risks denting corporate confidence - the question now is how will these risks play out? I expect caution to become the order of the day.”

Although, as the report notes, growth in business investment in the UK will have increased to 9 percent in 2014 compared with 2013, it will drop sharply in 2015 to 5.8 percent. The faltering European recovery and the relative devaluation of the euro compared with the pound have had a detrimental effect on the UK’s export business. According to Mr Spence, the outlook for UK exports appears to be “dreadful”.

Weaker global economic growth and stagnating UK wages and productivity will all combine to keep interest rate rises at bay. In the UK, interest rates have been at 0.5 percent for more than five and a half years. The report also predicts inflation will remain low going forward. Inflation is currently at a five-year low of 1.2 percent, but that figure is likely to increase marginally, averaging 1.3 percent next year.

Report: EY ITEM Club: Autumn Forecast 2014

Africa rising

BY Richard Summerfield               

Although a lingering sense of scepticism surrounds the continent’s development, Africa’s economic outlook is on the up according to a new EY report. New-found confidence in Africa has been built on the impressive economic growth rates recorded by many country's across the continent.

EY’s report, ‘Africa 2030: Realising the possibilities’, builds on the firm’s previously Africa-centric series, ‘Africa Attractiveness’, which has been highlighting progress over the last 15 years. The report notes that, as a result of the last 14 years of sustained growth across Africa, the continent’s relative attractiveness as an investment destination has increased dramatically. The sub-Saharan region in particular has seen a jump in foreign direct investment (FDI), with projects growing at a compound rate of 19.5 percent between 2007 and 2013.

Looking to the future, entrepreneurship is likely to be a key driver of economic growth and job creation in Africa as we move toward 2030. EY expects that new products, services and problem solving will also help to drive the job creation needed to generate inclusive and sustainable growth.

Yet, despite the optimism, future success across the continent is in no way guaranteed. “There are still many challenges ahead, not least of which is a robust structural transformation — required across many economies — that will not only lessen dependency on commodities, but also expand the private sector, increase productivity levels and, most of all, create jobs,” says the report.

Report: Africa 2030: Realizing the possibilities

HP splits in two

BY Richard Summerfield

Computing giant Hewlett Packard has unveiled plans to separate its business into two distinct publicly traded entities, one consisting of the company’s personal-computer and printer operations, the other its corporate hardware and services business. The division of the company will see HP shed around 5000 jobs and is expected to be complete by the end of 2015.

According to HP, the company’s software and services businesses will be known as Hewlett-Packard Enterprise. The other side of the business – the PC and printing units – will be known as HP Inc, and will keep the existing HP logo. The firm’s incumbent chief executive, Meg Whitman, will continue to run Hewlett-Packard Enterprise and act as chairman of the PC and printing business. HP’s chief financial officer, Cathie Lesjak, will also remain with the enterprise company. Dion Weisler, current head of the printing and personal systems group, will lead HP Inc. Pat Russo will assume the role of chairman of HP Enterprise. “In short, by transitioning now from one HP to two new companies, created out of our successful turnaround efforts, we will be in an even better position to compete in the market, support our customers and partners, and deliver maximum value to our shareholders,” said Ms Whitman in a statement announcing the division.

HP is believed to have considered a separation of its PC business for some time. Indeed, in 2011 the firm announced that it was contemplating spinning off or selling its PC unit, allowing it to focus on selling servers and other equipment to business customers, much like competitor IBM had done six years earlier. However, the proposed spinoff was halted by spooked investors who felt that the separation would jeopardise both branches of the company. The plan was cancelled and the chief executive responsible for the proposal – Léo Apotheker – was dismissed.

Based on revenues generated during the last financial year, the separation of the HP units will create two roughly equally-sized firms. The company’s PC and printer businesses produced revenues of $55.9bn in its last financial year, almost identical to the combined $55.7bn of its enterprise computing, services and software divisions. In trading following the announcement, HP’s stock jumped nearly 5 percent.

HP’s announcement came just days after US e-commerce giant eBay Inc declared its intention to spin off its PayPal business into a separate publicly traded company in 2015.

Source: HP to Separate Into Two New Industry-Leading Public Companies