UK service sector contracts for first time in two years

'Very disappointing' fall in activity in dominant economic sector raises fears Britain is headed for triple-dip recession

A shock fall in activity in Britain's services sector at the end of last year has put the economy on the road to a triple-dip recession, as economists predict the UK will be stripped of its triple-A credit rating.

The services sector – including banking, retail and travel – accounts for three-quarters of the UK economy

The services sector – which accounts for three-quarters of Britain's economic output – shrank for the first time in two years in December, suggesting the UK economy contracted in the fourth quarter. If output drops again over the next three months, the UK will fall into its thirdrecession in five years – an unprecedented triple dip.

Howard Archer of IHS Global Insight said: "This is undeniably a very disappointing survey that fuels fears the economy suffered a renewed dip in GDP in the fourth quarter. Given the dominant role of the services sector and the fact that it has recently been the healthiest part of the UK economy on the output side, the reported fall in activity in December is a significant blow for growth hopes."

The data came out as Citi released a report suggesting the UK economy will disappoint again this year and could lose its prized triple-A credit rating. Michael Saunders, economist at Citi, said Britain is likely to suffer from weak growth, inflation will stay stubbornly high, and the government will fail to make a substantial dent in the deficit. "With the public debt/GDP ratio set to surge further in coming years, we think the UK will lose its AAA rating in 2013," he said.

The closely watched CIPS/Markit purchasing managers index (PMI) for services dropped from 50.2 to 48.9 in December, below the 50 mark that separates expansion from contraction. It is the lowest reading since April 2009 and substantially undershot analyst forecasts of a rise to 50.5.

The survey snuffed out the glimmer of hope offered by data released earlier this week that showed a surprise jump in factory activity in December. But manufacturing accounts for just 10% of the economy and that release was followed by a dreary set of figures from the construction industry, which shrank much faster than expected. Markit said overall the PMIs suggest the UK economy contracted by 0.2% in the last quarter of 2012.

Chris Williamson of Markit said the weakness in services could continue into 2013. "Bad weather is likely to have played a role in dampening service sector activity in December, but the fact that incoming new business dropped for a second successive month suggests that underlying demand remains very weak and that activity may continue to fall in the new year."

Poor trading meant companies chose not to replace leaving employees, which led to a slight decline in staff numbers. Williamson said that means UK unemployment could soon start to rise again, as private sector lay-offs add to public sector job cuts.

The news will reignite the debate over whether the Bank of England is likely to expand its quantitative easing (QE) programme to try to kickstart the economy.

Archer said: "While the weak services purchasing managers' survey is unlikely to prompt the Bank of England's monetary policy committee into taking any stimulative [action] at its January meeting next week, it does reinforce our belief that further QE is more likely than not over the coming months. For now though, the MPC is likely to sit tight given current increased inflation concerns and signs that the Funding for Lending Scheme could be having a beneficial impact."

There was better news out of the US, where employers added 155,000 jobs in December, slightly ahead of expectations. But analysts said it was not enough to make a big difference to the unemployment rate.

Article source : http://www.guardian.co.uk

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Smartphone sales to hit 1bn a year for first time in 2013

Accountant Deloitte predicts the smartphone will become a mass market phenomenon and an everyday object worldwide

The smartphone is predicted to become a mass market phenomenon this year, with annual shipments soaring to 1bn globally for the first time, although a fifth of the devices will rarely be used to go online.

In 2013 the smartphone will become an everyday object worldwide, according to a study by accountants Deloitte, bringing the number of active phones with either a touch screen or an alphabet keyboard to 2bn by the end of the year.

Despite soaring sales of smartphones, research suggests one in five owners will rarely, if ever, use them to access the internet

The everyday accessibility of what was once a luxury device will be made possible by falling prices and better mobile networks. The average selling price of an iPhone has remained above $600 (£370), puttingApple's gadgets out of reach for most buyers, but high performingsmartphones with good cameras, bright screens and fast processors are now available for a fraction of that cost from other makers such as HTC and Nokia.

Deloitte estimates 500m phones have already been sold for $100 or less, and initiatives to create $50 devices for emerging markets are under way.

However, research in several countries suggests one in five owners of these sophisticated portable computers rarely or never connect to the web. Hundreds of millions may not even bother to subscribe to a data package from their mobile network.

These devices will not be idle, but their owners will use them for the traditional mobile activities of text messaging, voice calling and taking the occasional photo.

"They are like [traditional] feature phones in a smartphone casing," said the report's author, the Deloitte telecoms research head Paul Lee. "Smartphone penetration goes up but data plan penetration doesn't go up as quickly. Not every mobile will be used in the same way."

Many phones in use will be older hand-me-downs, whose software is out of date and cannot cope with new applications and website graphics.

Older owners may have been put off going online by reading about high bills in the press, and many may be wary of the complicated data tariffs on offer. For many of those living outside cities, 3G internet connections are still hard to come by.

Article source : http://www.guardian.co.uk

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Rolls-Royce accused of bribing a Chinese airline executive

Blogger alleges that airline executive accepted payments as intermediary in deal to supply aircraft engines valued at £1.25bn

Rolls-Royce is facing allegations that it paid bribes to an executive involved with two Chinese airlines, in the latest claims attached to a corruption probe at the aircraft engine maker.

A Rolls-Royce jet engine on show. Orders for two Chinese airlines have come under spotlight over alleged payments to an intermediary. Photograph: Rolls-Royce

The latest allegations are contained in postings by a blogger operating under the pseudonym of "soaringdragon" and related to deals worth a total of $2bn (£1.25bn) with Air China in 2005 and China Eastern in 2010. They claim an executive who worked at both airlines, Chen Qin, accepted payments as an intermediary in those deals.

Rolls-Royce revealed last month that the Serious Fraud Office hadapproached the company over allegations of malpractice in Indonesia and China, prompting the Derby-based manufacturer to conduct its own investigation through a law firm, Debevoise & Plimpton. In a statement last month Rolls-Royce said the probe had found "matters of concern" in Indonesia and China and other unspecified markets, relating to "concerns about bribery and corruption involving intermediaries in overseas markets."

Rolls-Royce, which is aware of the Soaringdragon postings, declined to comment on whether the blogger's allegations were included in the dossier passed to the SFO. However, the Sunday Times published a statement from China Eastern which appeared to confirm the blogger's claim that Chen Qin had been arrested by the Chinese authorities in 2011. It said: "Neither China Eastern nor Air China has any right to talk about Chen's case; only prosecutorial organs know the real background."

The deals at the centre of the allegations boosted Rolls-Royce's presence in the rapidly growing Asian aviation market. In 2005 Rolls-Royce said it had received an order from Air China for Trent 700 engines, to power the Airbus A330, worth $800m. Then in 2010 Rolls-Royce said it had won an order from China Eastern worth $1.2bn for Trent 700 engines to power 16 A330 aircraft. The China Eastern deal was signed in the presence of David Cameron, in the Great Hall of the People in Beijing, during an official trade mission to China.

Rolls-Royce faces the threat of a multimillion-pound fine on both sides of the Atlantic if the allegations escalate into official investigations by authorities, although the SFO and the US Department of Justice have yet to announce whether they will proceed with formal probes. The Soaringdragon postings are the second set of allegations implicating Rolls-Royce in corruption to be posted on the internet. Dick Taylor, a former Rolls-Royce employee in Indonesia, had alleged via a series of online postings that Tommy Suharto, the son of the former Indonesian president, was paid $20m (£12m) by Rolls-Royce and given a Rolls-Royce car to persuade the Garuda airline to buy Trent 700 engines in 1990. Taylor has said he felt "cheated" by his experience at Rolls-Royce, the world's second largest aircraft engine maker, after he was warned that he risked redundancy when he raised concerns over a colleague's expenses claims. Taylor subsequently took early retirement in 2004 but claims that Rolls-Royce was still making payments to intermediaries in Indonesia in 2010.

The Asia-Pacific region is a vital market for western aerospace companies targeting new customers amid stagnating demand at home. According to Airbus, the region will account for 35% of aircraft deliveries over the next 20 years, with China overtaking the US as the world's largest domestic airline market from 2031 onwards. As well as bringing opportunities for aircraft makers such as Airbus and Boeing, new jet sales also boost orders for engines. The front-runners for those orders are the likes of Rolls-Royce and its US rivals, General Electric and Pratt & Whitney.

Speaking in December, Rolls-Royce's chief executive, John Rishton, said the company would not tolerate "improper business conduct of any sort."

"This is a company with exceptional prospects and I will not accept any behaviour that undermines its future success". The company also announced that it will appoint an "independent senior figure" to review its compliance process and report to the board's ethics committee. Rolls-Royce is one of Britain's blue-chip exporters and thus a key manufacturer in George Osborne's "march of the makers", posting revenues of £11.3bn last year and a pre-tax profit of £1.2bn, with its strong future prospects underlined by an order book worth £62.2bn.

Rolls-Royce has admitted that the disclosures could result in the "prosecution of individuals and the company." Legal experts have warned that Rolls-Royce's co-operation so far will not spare the business from a prosecution by the SFO. The organisation's new boss, David Green, has signalled that the SFO will eschew settlements in favour of prosecutions, tackling a perception that it had been keener in recent years to deal with cases outside the courtroom.

Article source : http://www.guardian.co.uk

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Banks given four more years to introduce minimum liquidity standards

Bank of England governor Mervyn King says concessions will allow banks to use reserves to help struggling economies grow

Banks have won significant concessions from global regulators after being granted four more years to introduce watered-down measures designed to make them less vulnerable to Northern Rock-style runs and financial shocks.

As well as extending the time limit on compliance, the Basel committee of banking supervisors has relaxed proposals setting out the range of assets banks must hold as a buffer against the threat of a collapse.

The British banking industry described the changes, secured after lobbying, as a "Twelfth Night present". Mervyn King, governor of theBank of England and chair of the committee's oversight body, denied that the agreement was a weakening of earlier proposals: "For the first time in regulatory history, we have a truly global minimum standard for bank liquidity."

The standards are intended to allow a bank to survive a 30-day crisis by retaining a minimum amount of cash and liquid or easy-to-sell assets, as an insurance against the mass withdrawal of deposits and funding freeze that crippled Northern Rock or a systemic crisis of the kind triggered by the Lehman Brothers collapse.

Stefan Ingves, left, chair of the Basel committee on banking supervision's governing body and Mervyn King of the Bank of England

The new rules will not be imposed in January 2015, as intended under an earlier draft, but will be phased in over four years by 2019. King indicated that the concessions would allow banks to use their reserves to help struggling economies grow, rather than have them tied up in meeting the new global banking guidelines, dubbed Basel III.

"Importantly, introducing a phased timetable for the introduction of the liquidity coverage ratio … will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery," he said.

The Basel group includes representatives from the 27 major financial centres – including the UK, Japan, China and the US – and it agreed a first draft of liquidity rules in 2010. The draft triggered fierce lobbying by the banking community because it required the buffers to comprise government bonds and the highest grade of corporate bonds.

Banks warned that it might choke off a global economic recovery by squeezing lending to households and businesses. They added that focusing the buffers on government bonds would force them to buy even more sovereign debt, tying their fortunes more closely to a state's solvency – a concern exacerbated by the mounting eurozone crisis.

King said the new liquidity coverage ratio (LCR) was more "realistic", although he denied that the changes represented a weakening of the proposals.

He added that the agreement would protect taxpayers from the consequences of a banking crisis, saying it was a "clear commitment to ensure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort".

Under the deal, banks will only have to meet 60% of the LCR obligations by 2015. A study by the Basel committee in 2011 found more than 200 banks had a total shortfall of €1.8tn (£1.4tn) in meeting the 2010 LCR. The way in which the buffer is calculated has also been changed in a way that will benefit many banks, analysts said.

King added: "The committee and the regulatory community more generally felt it was appropriate to broaden the class of liquid assets. That doesn't mean to say it's a loosening of the whole regime."

Simon Hills, executive director of the British Bankers' Association, said allowing mortgage-backed securities in the liquidity buffer would help kick-start that particular market, which has been moribund since the 2007-09 crisis. Mortgage-backed securities have been classed as "liquid" under the new guidelines even though their lack of liquidity from 2007 on was a key factor in the banking crisis, a recurrence that Basel III hopes to prevent.

During times of stress, the Basel committee said, national regulators could allow banks to drop below the minimum liquidity requirement.

The UK Financial Services Authority signalled last summer it would consider relaxing liquidity rules – which required UK banks to hold a buffer of £500bn of government bonds and other instruments – amid concerns that banks were restricting lending to businesses and households.

The financial policy committee, responsible for overseeing financial stability and chaired by King, had considered whether liquidity rules should be relaxed altogether.

UK banks have been concerned about the liquidity rules since they were first suggested in the wake of the 2008 banking crisis and could have required banks to hold up to three times the level of the assets that they held in the past.
Article source : http://www.guardian.co.uk

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