API News & Blog

Growth in activity slowed in early 2013
China’s GDP growth slowed in the first quarter of 2013, to 7.7% year-on-year. This was down slightly on Q4
(7.9%), contrary to expectations that growth would continue picking up from a trough in Q3 2012 (of 7.4%).
Slower activity was broadly reflected across most indicators of activity over the quarter. Year-on-year growth
in industrial production fell to 9.5% in Q1 (from 10.0% in Q4 2012), while retail sales rose at their slowest pace
(12.4% y/y) in nine years. The latter was partly attributed to a crackdown on “conspicuous” consumption, in a bid
to tackle corruption and luxury spending by government officials (for example, by banning advertisements touting
expensive items as “gifts for leaders” and curbing civil servants’ spending on banquets). On-going anti-corruption
measures may continue to weigh on high-end retail activity going forward.
In recent years, Chinese authorities have been vocal about the desirability for slower, more sustainable growth,
brought about by a rebalancing of the economy – away from over-reliance on investment and towards domestic
consumption and services provision. However, signs of such a rebalancing appeared elusive in the latest
data. Indeed, while growth in fixed asset investment over the year to date ticked down in March (to 20.9% on a
year ago, from 21.2% in Jan-Feb), it nonetheless remained close to the highest seen in a year.

Increasing credit growth is a concern
Indeed, investment may pick up a little further in the near-term, driven by a surge in credit issuance in Q1.
Total social financing (a measure of lending to the non-financial sector) rose by 58% on a year ago, building on
the already robust growth seen over the second half of 2012. The last period of consistently strong credit growth
was in 2009, when state-owned banks ramped up lending sharply to combat the effects of the global downturn.
While increased credit can underpin GDP growth, heightened levels of indebtedness threaten the financial
stability of an economy. Indeed, even though the wave of credit in 2009 supported activity, it also led to a house
price bubble and significantly raised local government debt.
Concern over China’s credit growth, and the risks presented to the country’s financial stability, has
intensified of late. It was one of the reasons cited by the ratings agency Fitch in its downgrading of China’s local
currency debt earlier in April (to A+, from AA-), the first downgrade of China by a major agency in fourteen years.
Of particular concern is the increase in “shadow banking” activity, referring to lending activity conducted outside of the formal banking system (such as corporate bonds and trust loans). Some of this is a natural consequence of the growing sophistication of China’s financial sector. However, there is a lack of clarity around products sold outside of the formal lending sector, and many are used to finance uncreditworthy projects. Fitch cited that total credit in the economy – including various forms of shadow banking activity – may have reached 198% of GDP at end-2012, up from 125% at end-2008. Other reasons cited by Fitch for its downgrade included the rising indebtedness of local governments, a lower fiscal revenue base than other comparably rated countries and a less favourable record on inflation management. Broader impact of Fitch’s downgrade is likely to be minimal in the near-term 

While Fitch’s downgrade was the result of long-standing structural issues in China’s economy, its broader
impact is likely to be minimal. China’s credit rating remains relatively high by the standards of other emerging
markets. Furthermore, the downgrade was only on local currency debt, not on that denominated in foreign
currency (mostly in US dollars). This remains unchanged (at A+), thanks largely to China’s large foreign currency
reserves ($3.4 trillion at end-2012), relative to its foreign currency debt ($34 billion). China’s local currency debt
ratings by the two other major ratings agencies – Standard & Poor’s (AA-) and Moody’s (Aa3) – remain unchanged,
leaving them a notch higher than Fitch’s. However, Moody’s have cut their outlook to “stable”, from “positive”.
Furthermore, authorities have already taken some steps to curb credit growth, through measures to rein in
housing demand (for example, by raising mortgage down payments and restricting purchases of second homes)
and tackling local government indebtedness. However, the increasing prominence of the shadow banking system
may dampen the effects of these measures. 

Summary
The main message from recent developments is that China’s recovery seems to be on softer ground than
most had expected, and so the overall outlook is a little more uncertain. On balance, we continue to expect
growth to gain momentum over the course of this year (picking up to 8.0%, from 7.8% in 2012), as the effects of
previously sanctioned state investment and looser monetary policy continue filtering through. However, this will
be weighed upon somewhat by efforts to rebalance the economy, and continued measures to curb credit growth.

Industrial production in the UK rebounded in February, rising by 1.0% on the month, supported by a strong performance from both manufacturing (which rose by 0.8%) and mining & quarrying (2.8% growth). This only partially offset the 1.3% decline in January, however. The rise in manufacturing output was also not large enough to offset a sharp fall last month (of 1.9%).

Output also rose in core European states. German industrial production rose by 0.5% in February, broadly offsetting the decline in January (-0.6%). Production in France rose by 0.7%, once again offsetting a fall in January (-0.8%). However, industrial output fell in other parts of Europe – Italy saw a decline of 0.8%, while Spain’s output fell at an even sharper pace (by 2.4%).

Meanwhile, in the US, March’s labour market data showed a marked slowdown in job creation, with non-farm payrolls rising by just 88,000 in March – down from much stronger growth in both January (148,000) and February (268,000). Although the unemployment rate edged lower (to 7.6%) wage growth continued to slow and the labour participation rate fell again, to 63.3% – around the levels of the late 1970s.

Elsewhere, growth in China’s goods exports slowed considerably in March, to 10.0% on a year ago – the slowest increase in four months. In contrast, growth in imports picked up, to 14.1 %, compared with a year-on-year drop of more than 15% in January.

CBI President Sir Roger Carr this week chaired the launch of the Female FTSE Board Report, with a speaker panel which included the Secretary of State for Business, Innovation and Skills, Vince Cable MP, the Culture Secretary and Minister for Women and Equalities, Maria Miller MP and Lord Davies. Sir Roger welcomed the work done by Cranfield University, which showed improvements since the launch of the Davies Report in 2011, but a slowing in appointments in the last 6 months. Reflecting on the results he urged businesses to redouble their efforts to increase the number of women in executive roles as the best way to stave off threats of unhelpful European legislation. More on Corporate Governance and Employment.

A big week in China, with the National People’s Congress and the appointment of Xi Jinping as President and Li Keqiang as Premier of China, and good news for business. The widely expected break-up of the Railway Ministry and merger of the Family Planning Bureau with the Ministry of Health were announced whilst the Food and Drug regulator was given enhanced powers. These three departmental changes should have broadly positive implications for foreign businesses operating in China.

Earlier this week CBI Director General John Cridland spoke at a Russo British Chamber of Commerce parliamentary event, highlighting the importance of the UK’s business relationship with Russia, and the strengthening commercial ties between the two countries. Many CBI members were a part of the CBI’s recent trade mission to Moscow and St Petersburg, with trade minister Lord Green. A third CBI/UK Trade and Investment trade visit for medium sized businesses is being planned, for later in 2013.  If your firm may be interested in being involved, please be in touch with sarah.knaus@cbi.org.uk.

Hitting the headlines this month was a new CBI report, Trading Places, highlighting that flights drive trade and the UK risks missing out on billions of pounds in trade unless it boosts direct flights to the world’s fastest growing economies. The CBI warns the UK is failing to keep pace with major European competitors in winning new direct connections to Brazil, Russia and China, hitting long-term export potential, damaging competitiveness and deterring inward investment.  The CBI also called for the Davies Commission to support a thriving aviation network by proposing urgent investment in the poor road and rail links to the UK’s international airports, as well as taking action on hub capacity.

Also in the news were the announcements by Secretary of State for International Development Justine Greening focusing on the role of British business in international development.  Secretary Greening set out an ambition for developing countries to end aid dependency through jobs, while reiterating that the UK would not return to tied aid programmes.  The CBI welcomed the government’s renewed focus on ensuring aid money is spent effectively and that businesses in developing countries are well supported to ensure their objectives and development goals are met.  In April the CBI is hosting a CEO roundtable to discuss this with the secretary of state.  For more information, please contact sarah.knaus@cbi.org.uk.

Across the pond, this week the CBI’s team in Washington DC hosted the penultimate session of the CBI’s Leadership Programme.  This programme aims to help future business leaders gain knowledge and develop skills to engage effectively with government. Earlier sessions were held in London, Edinburgh and Brussels.  While in Washington DC for the programme, Deputy Director-General Neil Bentley met Dr John Holdren, President Obama’s senior advisor on science and technology, highlighting progress with the UK’s transition to a low-carbon economy and the strong business support for further action to tackle climate change.  He also met with Dan Mullaney, the Assistant U.S. Trade Representative, conveying that UK business is calling for a comprehensive EU-US trade agreement.  Also with a US theme, in London CBI economist Richard Woolhouse gave a presentation comparing the economic recoveries in the UK and the US to a group of congress staffers visiting from the US.

On the trade front, whilst we are pleased to see continuing momentum with a possible EU-US trade and investment deal, the EU-India Free Trade Agreement negotiations remain at a difficult stage. An EU-India Summit and a UK-India Summit are scheduled for later this year, however an initial offer on public procurement and a revised services offer will need to be forthcoming from India soon, because if negotiations do not conclude this spring, it is likely that the Indian political timetable ahead of the 2014 election will make progress difficult. For more information, contact tom.sallis@cbi.org.uk.

Earlier this month, members at a CBI energy roundtable with the British Ambassador to Poland discussed the country’s key role in the future of EU energy and climate change policy, and the opportunities for British business related to Poland’s energy system requiring major investment. The Ambassador outlined the challenges in finding agreement with Poland on a 2030 EU-wide emissions target – a key CBI policy priority – as well as the country’s role hosting this year’s UN Climate Conference. For more information, contact steven.altmann-richer@cbi.org.uk.

For members interested in expanding overseas, a number of events taking place in the UK may be of interest.  Australia holds a wealth of business opportunities, and is keen to attract UK investment and expertise in a range of areas, including oil and gas, defence and aerospace. A briefing is being held at the Australian High Commission in London on 26 March, for more information email Stuart Russell at stuart@wago.co.uk On 21 March in Manchester the UK-ASEAN Business Council is holding an event on Discovering & demystifying South East Asia And in May, InPeru, a joint partnership between Peruvian business and government, is hosting a Roadshow in London. The Peruvian event provides a variety of opportunities to engage with the Peruvian government and business executives.

Also looking forward, as part of the CBI’s exports campaign that was launched with our 2011 Winning Overseas report, the CBI will soon be releasing new data detailing the state of UK exports and the potential for economic growth by encouraging exports to fast growing markets. As medium-sized businesses will be the drivers of export growth – and therefore economic growth – our campaign will focus on what can be done by business and government to help these companies expand their international presence.

The UK construction sector appeared to start 2013 on a weak note, with the volume of non-seasonally adjusted construction output falling by 7.9% on a year ago in January. This was a slower decline than that seen in Nov and Dec 2012 (-14.5% and -8.1%), but compared to the same period in previous years, the decline was particularly large – output fell at a slower annual rate in Jan 2012 (-1.6%), and actually rose in Jan 2011 (by 10.8.)
Industrial output also weakened in January, falling by 1.2%; significantly below consensus expectations (of a 0.1% increase) and more-than reversing growth of 1.1% in December. The fall was driven primarily by a 1.5% decline in manufacturing (which makes up 67% of total production), against the consensus forecast that it would be flat, again more-than undoing growth of 1.5% in December.
Industrial production also fell in the Eurozone, with the month-on-month decline (of 0.4%) slightly worse than the consensus forecast of a 0.1% fall. This came after an increase of 0.9% in December 2012.
In particular, French industrial production fell sharply in January, by 1.2%, disappointing consensus expectations of a smaller contraction (of 0.2%). The decline was board-based, with manufacturing production contracting by 1.4%, reversing growth of 1.3% in December.
Elsewhere, French Inflation, as measured by the harmonized index of consumer prices (HICP), fell to 1.2% in February from 1.4% in January, it’s lowest since December 2009.
On the other hand inflation in Spain edged higher in February (to 2.9%, from 2.8% in January).

Responding to the announcement from the Bank of England’s Monetary Policy Committee (MPC) that it will keep interest rates on hold and the size of the asset purchase facility unchanged, Stephen Gifford, CBI director of economics said: “A combination of mixed economic data and the MPC’s recent tilt in a more dovish direction, is likely to have made this decision a close call. With only a modest pick-up in growth expected, the possibility of further QE will remain a live issue.”

Earlier this week the Bank of England published data on the use of the Funding for Lending Scheme (FLS), showing the amount borrowed from the Bank by each participating institution, and the net quarterly flows of lending to households and businesses, for the three months to December. Though participation in the FLS is picking up, net lending fell by £2.4bn. However, the Bank has previously indicated that the FLS may only encourage institutions to reduce lending by less than they would have in the absence of the scheme. More recent data has been somewhat more positive. On Friday, the Bank of England published lending data for January, with the FLS-relevant measure of lending to households and corporates rising by £3bn, which was the strongest since September 2011.

The UK CIPS/Markit services PMI pointed to further growth in the sector in February, rising to a five-month high (of 51.8, from 51.5), outperforming consensus expectations (51.0), and consistent with a subdued pace of expansion for a second consecutive month. This offset the more downbeat messages from the manufacturing and construction PMIs, both of which pointed to a contraction in activity (at 47.9 and 46.8 respectively). In its accompanying press release, Markit attributed the downturn in the manufacturing PMI to bad weather in January having a knock-on effect to production and orders in February, via disrupted deliveries.

During the same period, the Euro area PMI indicated a steepening of the downturn in business activity. At 47.9 in February (down from 48.6 in January) the composite output index (i.e. combining manufacturing and services output) was below the 50.0 no-change mark for the thirteenth-consecutive month. The drop in the composite PMI was driven by the Services Business Activity Index, which fell to 47.9 in February (from 48.6 in January).

The deterioration in the services sector was driven mainly by Italy and Spain, both of whom moved further into contractionary territory in February. Italy reported a fall in its services PMI to 43.6 in February (from 43.9) and Spain (from 44.7 to 47.0). However, the German PMI indicated continued growth in its services sector (at 54.7), although at a slower pace than in January (55.7).

Meanwhile, the second estimate of Eurozone GDP data for Q4 2012 was unrevised, confirming that the recession deepened in the final quarter of 2012, with GDP falling by 0.6% – the steepest fall since Q1 2009. For 2012 as a whole, Eurozone GDP contracted by 0.5%, following 1.5% growth in 2011.

Date: 07/03/13

The EAT has held that post-employment victimisation is not covered by the Equality Act 2010 (‘the Act’).  Section 108 of the Act clearly protects employees against post-employment discrimination and harassment but does not include victimisation.  Section 108(7) of the Act expressly states that conduct is not in contravention of this section in so far as it relates to victimisation.

The facts of this case relate to an employee who was provided with a poor reference after he brought a discrimination claim.  The employment tribunal found that due to the wording of section 108 of the Act post-employment victimisation is not unlawful.  The EAT upheld the tribunal’s decision.

Due to the importance of this case the EAT have granted permission to appeal to the Court of Appeal.

Key point:

It would appear that there has been a drafting error within the Equality Act 2010.  Post-employment victimisation should undoubtedly be covered by the Act.  Presuming the EAT is in fact correct (and it would appear they are) the UK is not compliant with EU law.  An amendment to the legislation is likely to be made as a matter of priority.  In the meantime employee’s are left without a remedy under the Act.  Employees in this position may make a direct claim to the government for failing to implement the legislation correctly.

The indecisive results of Italy’s general election re-ignited tensions in global financial markets and prompted fears that the Eurozone crisis would escalate once again. Italian 10-year bond yields averaged 4.9% on the day the results were announced, up from 4.6% the day before and the highest since mid-November, while the FTSE MIB index fell by 4.9%.

In the UK, the second estimate of GDP confirmed that the economy shrank by 0.3% in the final quarter of last year, following strong Olympics-fuelled growth of 1.0% the previous quarter. A 0.4% fall in investment, a decline in stock-building amounting to 0.3% of GDP and a 1.5% decline in exports all contributed to the fall in GDP, offset to some extent by a 0.2% increase in household consumption and a 1.2% decline in imports. The unwinding of the Olympics effect is likely to have particularly hit household consumption, which was boosted by ticket sales in Q3, and exports (including tourism expenditure).