Euro Inflation Cools, China Chips Down, Canada Strikes Back, Starmer’s Tax Twist, AI Takes Centre Stage — Baker Ing Bulletin: 30th August 2024

Welcome back to this week’s Baker Ing Bulletin, where we’re attempting to explain what's interesting about this week's news with all the determination of a seasoned credit manager on the trail of an elusive debtor.

From sizzling market trends to cooling economic indicators, we’re here to uncover the news and translate the truth.

Ready to roll? Here’s the latest...

Inflation Cooling? Or Just Taking a Holiday? ????

August in the Eurozone has delivered a surprising twist in the dance of digits that define its economic health. Inflation cooled to 2.2%, the lowest since mid-2021, flirting dangerously close to the European Central Bank’s (ECB) target of 2%. This shift is igniting discussions about another interest rate cut by the ECB. For credit managers, the news is a beacon of hope, guiding strategic decisions in a sea of financial policies that impact everything from payment behaviours to overall creditworthiness across the Eurozone.

With consumer prices showing a modest increase of 2.2% compared to last year, down from 2.6% in July, speculation is rampant that the central bank may opt for a second rate cut this year, echoing the rate reduction we witnessed in June — the first since 2019. Such financial easing could make borrowing more appealing, potentially increasing investment but also swelling debt levels which could, in turn, skew the credit landscape.

The subtleties of these economic shifts are important. For instance, the services sector saw a price surge, likely inflated temporarily by the Olympic Games in Paris, indicating that this spike might not have a lasting impact. However, it’s a reminder for to stay vigilant, understanding that such fluctuations could influence short-term credit risks. Conversely, a 3% drop in energy prices has eased operational costs across various a range of industries, potentially improving financial health and lowering short-term credit risks. Yet, the energy market remains notoriously volatile, necessitating constant vigilance.

Despite the promising headline, the core inflation rate — which strips out volatile food and energy costs — remains elevated at 2.8%. This figure is a crucial indicator, hinting at underlying price pressures that might not relent so easily. Muted price changes in imported goods suggest some stabilisation in international supply chains, potentially easing inflationary pressures further. However, the continued rise in service costs, driven by events like the Olympics, underscores the transient nature of some inflationary spikes.

As we edge closer to the ECB’s September meeting, there is cautious optimism mixed with strategic preparation. The headline inflation rate suggests a shift towards normalisation, but underlying factors like a tight labour market and persistent core inflation complicate the outlook. This complexity makes it imperative to prepare for both opportunities and challenges that lie ahead.

China’s Chip Grip: A Tech Tsunami Incoming? ????

China’s thrown a spanner in the works with its latest export curbs on semiconductor materials, and the ripple effects are starting to look like a tsunami for global tech. With Beijing holding the reins on 98% of the world’s gallium and 60% of germanium, the West is feeling the squeeze.

These critical minerals are the backbone of everything from advanced microchips to military hardware, and now that China’s tightening its grip, supply chains are on red alert. Prices are already skyrocketing, with Europe seeing almost a doubling in costs over the past year. It's a move that screams, "You hit us with sanctions; we’ll hit where it hurts," and it's a direct shot across the bow at the West's economic interests.

For those in the credit game, the implications are massive. Supply chain disruptions on this scale mean production delays, spiralling costs, and a potential wave of credit defaults as companies scramble to secure these now-precious resources. The tech sector, particularly in consumer electronics, automotive, and even green energy, is bracing for impact. With the West heavily reliant on Chinese exports for these materials, the tech companies you’re backing could soon be facing skyrocketing costs and tightening margins, and that’s if they can even get their hands on the materials they need. The threat of production slowdowns or halts could push some into default territory, especially if they’re already skating on thin financial ice.

But let’s dig deeper. As production costs rise, so too will the prices of finished goods, leading to potential decreases in consumer demand — especially in sectors where discretionary spending is key. Retailers might face slower turnover rates for high-tech products, while automotive manufacturers could see a dip in sales as consumers delay purchasing new vehicles due to higher prices. This means heightened vigilance is required across the board. Companies that were once considered stable could quickly become high-risk as their financial health deteriorates under the weight of these new challenges.

Moreover, supply chain bottlenecks could cause delays that extend beyond the tech sector. Industries like telecommunications, aerospace, and even healthcare, which rely on advanced semiconductors for everything from communication networks to medical devices, might experience production lags, leading to missed deadlines and, potentially, contractual penalties. This creates a domino effect, where one sector's struggles spill over into others, amplifying the overall risk landscape.

China's move is a reminder that in the high-stakes game of global trade, the power to disrupt isn’t just about tariffs — it’s about control of the essential materials that the modern world runs on. The tech industry’s lifeline is now in Beijing's hands, and the West is scrambling to respond.

For those watching the chessboard, the next move will be crucial. The West will need to diversify supply sources, but that’s easier said than done when China dominates the market. In the meantime, expect more volatility and uncertainty as businesses, governments, and credit professionals alike navigate these treacherous waters.

Canada vs. China: The Trade War Just Got Juicy ????

Continuing the theme, Canada is ramping up the stakes against Chinese electric vehicles and steel, setting the scene for a potential showdown in international markets. Following in the footsteps of the United States and the European Union, Ottawa announced on Monday a hefty 100% tariff on all Chinese-made electric vehicles and a 25% tariff on steel and aluminium imports from China, starting October 1st. This dramatic move is designed to counter China's aggressive overcapacity and state-driven economic strategies.

This escalation could potentially disrupt the economic symbiosis between the two nations, impacting Canadian consumers and businesses by increasing costs and complicating trade relations. China, being Canada's second-largest trading partner, plays a crucial role in various sectors of Canadian trade, making the consequences of these tariffs potentially far-reaching.

The development heralds a period of heightened uncertainty. The tariffs could reshape the landscape of trade credit risk, particularly for companies within the affected sectors. Businesses dealing in Chinese EVs and steel may well face increased costs, disrupted supply chains, and a reevaluation of credit terms.

Furthermore, the impact on automotive and steel is likely to be significant. Companies may need to renegotiate payment terms or adjust their risk management strategies to account for the increased costs of importing Chinese goods. There's also the potential for retaliatory measures by China, which could introduce further tariffs or restrictions affecting other Canadian exports. Such measures would exacerbate the situation, leading to a tit-for-tat escalation that might affect global trade dynamics more broadly.

For sectors like automotive manufacturing, where supply chains are intricately linked across borders, the tariffs likely necessitate a shift in production strategies or sourcing. Companies may look to alternative markets to bypass increased costs, potentially benefiting regions outside of China. However, this shift would take time and may not be feasible for all, particularly smaller players with less flexibility in their supply chain arrangements.

Starmer’s Tax Surprise: Wealthy Wallets Beware! ????

Hold onto your wallets, folks! Prime Minister Keir Starmer’s garden party at No. 10 wasn’t for scones and tea—it was to tell us all about the “painful” Budget on the horizon. Brace yourselves, because Starmer’s warning that things will “get worse before they get better” might just be the understatement of the year.

Here’s the lowdown: Starmer’s gunning for a fiscal shake-up this October that’s going to hit the wealthy where it hurts — their treasure chests. With plans to hike capital gains tax up to the high heavens, aligning it with the top income tax rate, he’s looking to pull in a cool ￡16.7 billion. But here’s the kicker: the tax boffins at HMRC reckon this could backfire, with the big fish likely to just sit tight on their assets, playing the waiting game.

The City’s big brains aren’t too chuffed either, warning that punishing the risk-takers could spell disaster for entrepreneurial spirit. The message is loud and clear: mess with wealth creation, and you might just scare off the very folks who keep the economic gears grinding.

The looming tax hikes are set to send ripples through the markets, potentially cooling investment appetites and squeezing the cash flow channels that businesses rely on to stay afloat. The sectors likely to feel the pinch the hardest? Think real estate, tech, and any industry where capital gains play a big role in investment flows.

If Starmer’s tax hammer comes crashing down, we'll need to navigate an environment where higher taxes dampen business expansions and investments, tightening liquidity and possibly leading to a higher incidence of credit defaults. The smart move? Start recalibrating those risk assessments and credit terms, folks. Reinforcing credit control measures and a having a robust collections facility on-hand might just be the life raft needed in these choppy fiscal waters.

AI + You: The Dynamic Duo of Finance ????

Set your reminders for an electrifying online rendezvous this September 19th! Esker UK & Northern Europe in collaboration with Baker Ing are poised to demystify the future of finance in their not-to-be-missed webinar, "AI + YOU: The Future of O2C." From noon till 1 PM GMT, industry pioneers will unveil how blending artificial intelligence with human insight is revolutionising Order to Cash processes.

With AI at the helm, credit management is getting a major upgrade. This powerful tech doesn't just automate processes; it anticipates financial risks and customer behaviours long before they become apparent, giving companies an unprecedented edge in proactive decision-making.

The session promises to dive deep into the synergies between AI-driven automation and human intervention. Participants will explore how AI enhances daily operations, from automating time-consuming collection tasks to freeing up experts to tackle complex customer disputes and nurture valuable relationships.

Don't let this opportunity slip through your fingers — scan the QR code now or register here and be part of shaping the next wave of financial operations.

And just like that, we’ve navigated through another maze of financial twists and turns. But before you close those tabs and hit the weekend, a little reminder: the game’s not over until you’re armed with the best intel in the business.

So, why not give yourself the edge? Dive into our Global Outlook document library or check out the latest CreditHubs — because in the world of credit, knowledge isn’t just power, it’s profit.

Until next time — keep your wits sharp, your risks calculated, and your balance sheets balanced. See you on the winning side!