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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Microsoft to buy Activision Blizzard in $68.7bn deal; UK real wages fall in cost of living crunch – as it happened

Microsoft United Kingdom Activision Blizzard Activision ING Omicron Tony Wilson Goldman Sachs Office for National Statistics United States
Microsoft is buying Activision Blizzard for $68.7bn to gain access to blockbuster games including Call of Duty and Candy Crush.
Microsoft is buying Activision Blizzard for $68.7bn to gain access to blockbuster games including Call of Duty and Candy Crush. Photograph: Jae C Hong/AP

Closing summary

Time to wrap up... here are today’s main stories:

Goodnight. GW

Shares in Goldman Sachs have tumbled by 7% this morning, after net profits were hit by a jump in pay and bonus payments to its bankers.

Wealth correspondent Rupert Neate explains:

Goldman Sachs paid its 43,900 bankers more than $17bn (£12.5bn) last year, a 33% increase on 2020 as the investment bank celebrated a more than doubling of pre-tax profits to $27bn thanks to frenzied dealmaking on both sides of the Atlantic.

The pay and bonuses hike works out at about $403,000 for each employee on average, up from about $328,000 a year ago. It is the most the bank has paid out in wages and bonuses since 2007 at the height of the banking boom leading up to the financial crisis.

Goldman’s bankers will find out exactly how much they will personally collect for 2021 on Wednesday when the firm reveals annual bonuses on so-called “comp day”.

About 400 leading bosses – or the top 1% of the firm – are expected to receive a special one-off pandemic bonus in recognition of the bank’s success during the coronavirus crisis. The bonuses for this elite group are expected to range from the low single digit million to tens of millions of dollars, according to Bloomberg sources. Goldman declined to comment.

FTSE 100 close

Stocks have closed lower in London, as anxiety over looming US interest rate rises dampen the mood.

The FTSE 100 index closed 48 points lower at 7563.5 points, 0.6% down on Monday’s two-year high.

Industrial equipment hire firm Ashtead was the top faller, down 5%, followed online home sale portal Rightmove (-4.6%).

Unilever fell another 4%, with ratings agency Fitch warning that its ambitions to buy GlaxoSmithKline’s consumer health assets would put its ‘A’ credit rating at risk because of the huge debt it would have to swallow.

European markets had a weak day too, with Germany’s DAX dropping 1%.

Five payment companies including Mastercard have been fined a total of more than £33m for operating illegal cartels when providing prepaid cards for local authorities to distribute to vulnerable people.

The companies were found by the Payment Systems Regulator to have broken competition law by agreeing not to compete with each other for the authorities’ custom.

The regulator said that by acting in this way, the providers may have denied the councils access to cheaper products, and vulnerable people may have missed out on better quality services.

The cards in question were used to distribute welfare payments to vulnerable members of society, such as the homeless, victims of domestic violence and asylum seekers.

Back in the UK, yet another energy firm has collapsed.

The owner of Bristol Energy has gone bust weeks after the struggling council-owned supplier assured its customers that the business was stable despite record-high gas market prices.

The energy regulator, Ofgem, will appoint a new supplier to take on the 176,000 households affected by the collapse of its parent company, Together Energy, which is part-owned by Warrington borough council.

The energy company was forced to deny press reports earlier this year that it was on the brink of calling in administrators and told customers that the company was “stable” and operating on a “business as usual” basis.

Bristol Energy said it was “saddened” to announce its exit from the UK’s energy market but it was “untenable for us to continue”. It also denied press reports that suggested it had not bought enough gas and electricity to meet its customers’ needs.

Together’s collapse makes it the 27th energy supplier to go bust since gas market prices began a steep ascent to record highs in August last year, leaving more than 2m households in need of a new supplier.

Microsoft is acquiring Activision Blizzard in an attempt to dominate the metaverse, says Rupantar Guha, Principal Analyst at GlobalData’s Thematic Team:

“Taking part in what is the biggest tech merger & acquisition (M&A) ever reflects Microsoft’s desire to dominate the metaverse. The company is focused on acquiring both Activision’s communities and content—two essential parameters for success in the metaverse. Activision’s popular games franchises Call of Duty and Overwatch, and the communities it commands, will position Microsoft as a leader in the metaverse.

“Microsoft is formidable competition for Meta, Epic Games, Tencent, and Roblox, all of which are scrambling for dominance in this emerging theme. While the metaverse is still largely conceptual, Microsoft’s strength in underlying themes such as artificial intelligence (AI), augmented reality (AR), virtual reality (VR), and cloud computing give it a leadership position in this theme.

Activision’s games will help Microsoft create metaverse experiences and provide an established global consumer base to test and market them.

Factories in the New York region have reported that business conditions worsened sharply this month, as the omicron virus and ongoing supply-chain bottlenecks hit the sector.

The Empire State survey of business conditions tumbled to -0. 7 in January, a fall of 32.6 points to a reading of -0.7 this month. This was the first negative reading since June 2020 - anything below zero shows New York’s manufacturing sector contracted.

This is an early signal of the damage that Omicron has caused to the US economy.

The deal kicks off the metaverse ‘arms race’, says David Wagner, equity analyst and Portfolio Manager at Aptus Capital Advisors (via Reuters):

“This is a significant deal for the consumer side of the business and more importantly, Microsoft acquiring Activision really starts the metaverse arms race,”

“We believe the deal will get done,” Wagner said, but cautioned:

“This will get a lot of looks from a regulatory standpoint.”

Full story: Microsoft to buy Call of Duty maker Activision Blizzard for nearly $70bn

Microsoft is to pay almost $70bn to buy Activision Blizzard, the publisher of mega franchises including Call of Duty, World of Warcraft and Candy Crush, in the biggest ever takeover in the tech and gaming sectors.

Microsoft said that the $68.7bn (£50.6bn) all-cash deal – which dwarfs its previous biggest, the $26bn takeover of LinkedIn in 2016 – will “provide the building blocks for the metaverse”.

It is the biggest deal in tech history, eclipsing the $67bn paid by Dell to buy the digital storage giant EMC in 2015.

The deal will see the Xbox maker become the world’s third-biggest gaming company by revenue behind China’s Tencent and Japan’s Sony, maker of PlayStation games consoles.

“Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms,” said Satya Nadella, the chairman and chief executive of Microsoft.

“We’re investing deeply in world-class content, community and the cloud to usher in a new era of gaming that puts players and creators first and make gaming safe, inclusive and accessible to all.”

The deal comes after a tumultuous time for Activision Blizzard, which has 10,000 staff globally a market value of about $50bn and three $1bn gaming franchises, which has been affected by a string of allegations of sexual misconduct and discrimination involving senior executives.

More here:

Victoria Scholar, head of investment at interactive investor, agrees that the deal will face antitrust scrutiny:

Shares in Activision Blizzard have jumped nearly 30% after Microsoft announced plans to acquire the Call of Duty maker for almost $70bn in an all-cash deal. This is the largest M&A deal in tech history and Microsoft’s biggest deal, sending a strong signal about Microsoft’s ambitions in gaming and the metaverse.

The announcement is an exciting development for Activision Blizzard investors who have faced a 40% slump in its share price between February’s peak and Friday’s close on the back of a series of controversies surrounding the company’s CEO and management team.

While shares in Activision have staged an impressive rally today, the stock has not yet rallied to the offer price. There are undoubtedly set to be antitrust concerns, which could scupper the deal given the sheer size of the transaction and worries that Microsoft is already too big to fail.

Plus rising yields are pressurising the wider tech sector in today’s session with Tesla, Meta and Amazon all nursing sharp losses and with the Nasdaq deep in the red.”

Updated

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, says Microsoft has ‘come out swinging’ with a rather generous $68.7bn all-cash deal to buy Activision Blizzard:

“Activision Blizzard holds some of the most valuable IP in the world thanks to the likes of Call of Duty and a host of other games with dogmatically loyal customers. However, today’s news isn’t just about people liking gaming, we’ve known that for a long time. It says a lot more about how gaming is viewed as an integral part of our future social and digital lives. The mushrooming popularity of this hobby is why Microsoft has delved into its very well-lined pockets and splashed out on the gaming production giant. From an outside perspective, the logic is fairly flawless.

Microsoft is already the go-to provider of must-have software, so tacking on a gaming arm is a stroke of genius from a cross-selling potential standpoint. The likes of Netflix have already said they’d like to foray into gaming themselves, but Microsoft has come out swinging with today’s rather generous offer, which would make Microsoft the third largest gaming company in the world.

Execution risk is still a factor though. This still marks some new territories for Microsoft and is hardly a small-fry deal, so the time to pop champagne will be when the deal has first been fully approved, and second, showed that Microsoft’s model can stomach this new gaming hoard.”

Global gaming stocks are rallying after Microsoft announced its near $69bn takeover deal for Activision Blizzard.

Electronics Arts have jumped 6%, with Roblox 3% higher and France’s Ubisoft surging 10%.

The recent selloff in their shares and rising interest in gaming and the metaverse from megacaps such as Meta Platforms Inc. has raised expectations for more deals in the space, says Bloomberg:

Updated

Shares in Activision Blizzard have jumped 30% at the start of trading in New York.

They’ve risen to over $85, up from $65, but below the $95/share which Microsoft plans to pay:

There is already talk that antitrust regulators could take a close look at the deal, as it could lead to Microsoft restricting some Activision Blizzard games from running on other platforms.

Michael Hewson, chief market analyst at CMC Markets, says:

With annual revenues of just over $8bn the deal gives Microsoft, which has annual revenues of $175bn, the ability to oversee and drive the content across its platforms, not only PC games but gaming consoles as well, as it looks to diversify its revenue stream.

There is a worry that the deal could raise antitrust concerns if Microsoft decides to restrict new content to its own platform, and not allow games on its nearest competition, which is Sony’s PlayStation, and the PS5?

While some have argued that this would be against its own interests and curtail its revenue stream, this wouldn’t be unusual given how Microsoft has got itself into trouble by bundling hardware and software previously.

The way gaming has been going, more and more content is going online, and consoles are becoming more and more expensive. With Microsoft’s deeper pockets that will inevitably mean more investment in faster and more realistic graphics, as well as VR, which in turn will deliver richer content.

Freetrade’s equity analyst Paul Allison says Microsoft’s planned $68bn acquisition of Activision Blizzard could help it expand into augmented reality and virtual reality.

While Activision’s $2bn in profit is less than 5% of Microsoft’s, the strategic implications carry more weight. Microsoft has viewed gaming as being at the forefront of its AR and VR ambitions for a while, and this deal would reinforce that view.

The move could be well timed given Activision is struggling to recover from well publicised cultural problems. But investors have become comfortable with Microsoft’s impressive growth being driven by enterprise spending on its cloud and SaaS solutions.

Phil Spencer, CEO of Microsoft Gaming, says in a blog post:

Upon close, we will offer as many Activision Blizzard games as we can within Xbox Game Pass and PC Game Pass, both new titles and games from Activision Blizzard’s incredible catalog.

We also announced today that Game Pass now has more than 25 million subscribers. As always, we look forward to continuing to add more value and more great games to Game Pass.

Spencer adds that Microsoft will extend its “culture of proactive inclusion” to Activision Blizzard, in a clear reference to the allegations of sexual misconduct and workplace discrimination at the games developer.

We also believe that creative success and autonomy go hand-in-hand with treating every person with dignity and respect. We hold all teams, and all leaders, to this commitment.

We’re looking forward to extending our culture of proactive inclusion to the great teams across Activision Blizzard.

Microsoft to buy Activision Blizzard in $68.7bn deal

Activision Blizzard logo displayed on a laptop screen and a gamepad

Just in: Microsoft is buying computer games developer Activision Blizzard in a $68.7bn blockbuster deal.

Microsoft has announced it will pay $95 per share in cash for Activision Blizzard, the firm behind “Call of Duty”, a 45% premium, in the software giant’s biggest ever acquisition.

Microsoft says the deal will make it the world’s third-largest gaming company by revenue, behind Tencent and Sony. It will accelerate the growth of its gaming business across mobile, PC, console and the cloud -- and provide “building blocks for the metaverse”, it says.

The planned acquisition will give Microsoft popular gaming franchises including “Warcraft,” “Diablo,” “Overwatch,” “Call of Duty” and “Candy Crush,” and global eSports activities through Major League Gaming.

Satya Nadella, chairman and CEO of Microsoft, explains:

“Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.

“We’re investing deeply in world-class content, community and the cloud to usher in a new era of gaming that puts players and creators first and makes gaming safe, inclusive and accessible to all.”

Activision Blizzard has faced mounting pressure over its response to sexual misconduct allegations at the firm, including sexual harassment, sexual assault and gender discrimination.

Last November, employees staged a walkout to protest about the company’s handling of these allegations, which are being investigated by US regulators, and shareholders called on CEO Bobby Kotick to resign.

Yesterday, Activision Blizzard said it has fired or pushed out more than three dozen employees and disciplined another 40 since July to address allegations of sexual harassment and other misconduct at the videogame company.

Microsoft says today that Kotick will continue to serve as CEO of Activision Blizzard, and he and his team will “maintain their focus on driving efforts to further strengthen the company’s culture and accelerate business growth”.

Once the deal closes, the Activision Blizzard business will report to Phil Spencer, CEO, Microsoft Gaming.

The European Union is proposing to extend permission for banks in the bloc to continue using clearing houses in London for a further three years from June, its financial services chief says.

Mairead McGuinness had already said last year that such permission, known as equivalence, would be extended from June 2022, when it is due to expire.

A spokesperson for McGuinness said in a statement.

“We are now consulting member states on this draft equivalence decision, which will take the form of an implementing act. We envisage to propose an extension of the equivalence decision of 3 years - until end June 2025,”

[thanks to Reuters]

Clearing houses are a vital part of the financial sector’s ‘plumbing’. They also allow users to “net their positions” by concentrating them in one place. And by sitting between deals, clearing houses can stop one default creating dangerous shockwaves through the market.

The post-Brexit “carry-over deal” currently allows banks from the bloc to access clearing houses in the City as before, meaning the €80trn euro clearing market continues to operate.

The Commission has been pushing for this business to shift back to the EU, where it would fall within its regulatory oversight. But as the City of London currently offers such deep liquidity pools, clearing operations has been slow to move.

Another clampdown: The UK’s regulator is tightening up European firms who have been using a temporary license to operate in the UK since Brexit.

The Financial Conduct Authority says it has already cancelled the temporary permissions of four firms, who, it says, failed to respond to mandatory information requests to show they had applied for a permanent licence to do business in the UK.

The FCA provides a temporary permissions regime to allow European firms operating in the UK via a passport when the Brexit transition period ended, so they could keep operating temporarily while they seek full authorisation in the UK.

But it warns today that firms who have no intention in applying for full authorisation, or if their authorisation application is refused, would be removed from the TPR.

Sushil Kuner, financial services lawyer at law firm Gowling WLG, says European firms should heed the FCA’s warning:

“The Temporary Permissions Regime was always intended to enable only those businesses wanting to formally establish in the UK to continue to operate here, pending preparation and submission of their authorisation applications. It’s therefore important for businesses to heed the reality that if they miss deadlines for submission of information to the FCA, removal from the regime and the subsequent inability in the UK is highly likely.

“This is part of a wider programme of greater enforcement that the FCA is currently exerting so it will be interesting to see just how many firms are removed from the TPR.”

The UK government’s plan to strengthen rules on cryptocurrency promotions has been welcomed, although experts warn that it will not protect consumers from the full risks of crypto.

Bradley Rice, partner at law firm Ashurst, says the move could be “game changing.”

“These changes to the UK financial promotion regime will bring about monumental changes to how firms offer, promote and market cryptoassets in the UK or to persons in the UK. This could be game changing.

“There were only 25 respondents to the consultations. That’s pretty shocking given the number of firms operating in this space and the impact of this regime.

“This regime will mean regulated firms are at an advantage over unregulated firms because they will be able to issue their own promotions. Unregulated firms will need to find an authorised firm willing to approve their promotions and there is a lot of focus on this sector from all angles.

“I’m not sure how many firms will be offering this service, or if the FCA will let them through the new “s. 21 gateway”. If providers do offer the service, it won’t be cheap.”

But Laura Suter, head of personal finance at AJ Bell says new rules will bring crypto adverts in line with other financial promotions - but warns that many people learn about cryptocurrencies from other sources:

“You only have to glance through a few cryptocurrency adverts to see that many overstate the potential returns on offer and fail to clearly lay out how much risk individuals will be taking. The Advertising Standards Agency has already been banning individual crypto adverts that it deems misleading or understating the risk involved in the market, but this new move by the Government will lead to a wholesale tightening of the rules governing adverts.

“However, the FCA’s own research shows that a crackdown on advertising will have a limited impact, as most people find out about cryptocurrency elsewhere and very few are encouraged to actually buy it from an advert. The regulator’s data showed that only 2% of the people it questioned were led to buy crypto from an advert when they previously hadn’t planned to, and just 5% who were thinking about buying made the leap because of an advert.

Myron Jobson, personal finance campaigner at interactive investor, says the rules around crypto assets desperately needs modernising, to prevent people struggling to meet the cost of living being lured into high-risk products.

“From a consumer perspective, we’ve been crying out for greater measures to prevent the scourge of misleading and downright harmful advertising of cryptocurrency.

“Many cryptocurrency adverts I’ve seen tap into the FOMO (fear of missing out) culture and effectively gaslights would-be investors into thinking cryptos are a sure bet, without flagging the high-risk and highly volatile nature of the asset.

“The infamous poster plastered over London’s public transport claiming ‘If you’re seeing Bitcoin on the underground, it’s time to buy’ is a case in point. Cryptocurrency is highly complex, volatile and, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.

“Our research found that 45% of young adults aged between 18 and 29 are getting their first taste of investing through high-risk cryptocurrency – and an alarming number are funding this through a cocktail of credit cards, student loans, and other loans. The influence of cryptocurrency advertising cannot be understated here. They have become increasingly difficult to miss, often cropping up on social media platforms and even on public transport.

“The concern is first-time investors who experienced a baptism of fire by losing money on crypto bets could be put off investing for life – which could scupper their financial goals.

Israeli Prime Minister Naftali Bennett said funding for Iran could lead to “terror on steroids”, in an apparent warning against world powers easing sanctions against Tehran as they seek a new nuclear deal.

“The last thing you want to do ... is pour tens of billions of dollars into this apparatus. Because what will you get? Terror on steroids,” Bennett said in a video address to the World Economic Forum’s Davos Agenda.

Bennett also explained that as he runs Israel’s national Covid taskforce, he has an hour from 9am each day with all the agencies and ministries involved.

That helps make decisions about Covid-19 quickly

Leaders can make much quicker decisions, and in a pandemic being slow is losing. You’re better off making decisions early on and quick, and executing on them very quickly.

Also, pandemics are not only about medicine or biology, they’re also about society, the economy, education, logistics. It’s a ‘cross-discipline challenge, so you can’t “silo it” and leave running the nation only to doctors, Bennett adds.

UK cracks down on 'misleading' cryptocurrency adverts

The UK government has outlined plans to protect consumers from misleading claims by tightening rules over cryptocurrency adverts

Following a consultation into crypto assets, the Treasury has announced it plans to introduce legislation to address “misleading cryptoasset promotions”, amid worries that they could be missold.

The rules will bring crypto adverts into line with other financial advertising, ensuring they are fair and clear, it says, with new rules increasing consumer protection while “encouraging innovation”.

Around 2.3 million people in the UK are now thought to own a cryptoasset, but research suggests that understanding of what crypto actually is has fallen, suggesting that some users may not fully understand what they are buying, the Treasury says.

Chancellor of the Exchequer, Rishi Sunak said:

Cryptoassets can provide exciting new opportunities, offering people new ways to transact and invest – but it’s important that consumers are not being sold products with misleading claims.

We are ensuring consumers are protected, while also supporting innovation of the cryptoasset market.

Advertising cryptoassets will be brought within the scope of existing financial promotions legislation, by amending the UK’s Financial Promotion Order. That means crypto will face the same standards as stocks, shares, and insurance products.

The advertising watchdog has alreayd clamped down on some irresponsible crypto adverts, including one which claimed “it’s time to buy” bitcoin.

My colleague Rob Davies reported last week that cryptocurrency firms bombarded Londoners with a record number of adverts on public transport during 2021....

.. and that the unregulated trading and promotion of crypto assets risks creating a new generation of addicts.

Updated

UK insolvencies 33% above pre-pandemic levels in December

The number of company insolvencies in England and Wales jumped by a third compared to pre-pandemic levels last month.

The latest insolvency statistics show here were 1,486 registered company insolvencies in England and Wales in December 2021. That’s 20% higher than a year ago, and 33% above the 1,120 in December 2019, before the pandemic.

But it was lower than in November, when insolvencies hit 1,674, over their pre-pandemic levels for the first time.

Company insolvencies in England and Wales, to December 2021
Company insolvencies in England and Wales, to December 2021 Photograph: The Insolvency Service

The increase was driven by a large rise in Creditors’ Voluntary Liquidations (73% higher than in December 2019), in which a company chooses to close down because it can’t satisfy its debts.

Christina Fitzgerald, vice president of insolvency and restructuring trade body R3, explains:

“The monthly fall in corporate insolvencies has been driven by a reduction in all forms of corporate insolvency process. However, the annual and two-yearly increase in corporate insolvencies has been driven by a rise in Creditors Voluntary Liquidations, which suggests that the economic situation is pushing many company directors to voluntarily close their businesses before that decision is made for them.

“Despite the month-on-month fall in corporate insolvencies, December marked a tough end to a torrid year for many businesses. Increasing Covid cases, rising costs and falling consumer confidence hit footfall and sales, and company directors and management teams also had to work in the midst of new Covid restrictions, which will have affected day-to-day operation, customer behaviour and revenue levels.

“This is especially true in sectors like retail and hospitality, who normally have their busiest periods in December, but faced an unhappy Christmas this year.

Some better news. German investor sentiment has jumped this month, on hopes that the economy will pick up over the coming months as Covid-19 cases fall.

The ZEW economic research institute’s economic sentiment index has risen to 51.7 from 29.9 points in December, ahead of expectations.

ZEW president Achim Wambach says:

“The economic outlook has improved considerably with the start of the new year. The majority of financial market experts assume that economic growth will pick up in the coming six months.”

Oliver Rakau of Oxford Economics tweets:

IES: UK job recovery stalling

Today’s UK jobs figures are disappointing overall, says Institute for Employment Studies director Tony Wilson.

They show the recovery was stalling in the run-up to the outbreak of the Omicron variant:

Despite record levels of vacancies and unprecedented demand, employment is unchanged on the figures reported last month while economic inactivity, the measure of those who have left the labour market entirely, appears to be rising.

This weak performance is being driven in particular by fewer older people in the labour market, especially fewer older women, and more people out of work due to long-term ill health. With nearly as many vacancies as there are unemployed people, employers are facing the tightest labour market in at least fifty years, with labour shortages now holding back our recovery.

As each month passes these issues appear to be getting worse, with the recovery clearly stalling on the eve of the Omicron outbreak. So as we start the new year we need a new ‘Plan for Jobs’ that will raise participation and tackle the recruitment crisis.”

He’s also written a detailed thread on these points:

Full story: UK workers’ pay rises fall behind inflation amid cost-of-living crisis

Pay for workers in Britain has fallen in real terms for the first time in more than a year, despite signs that employers shrugged off concerns over the Omicron coronavirus variant to continue hiring in December.

Average wages, after taking account of inflation, dropped in November for the first time since July 2020 amid growing concerns over the hit to living standards this year from high inflation and surging energy bills.

The Office for National Statistics said although average total earnings grew at an annual rate of 4.2% in November, the impact from soaring rates of inflation meant workers suffered a 0.9% real-terms cut in their pay packets. The official rate of inflation reached a 10-year high of 5.1% in November.

The number of employees on UK company payrolls rose by 184,000 on the month to 29.5 million, an increase of 409,000 on pre-pandemic levels as the jobs market continues to recover from Covid-19.

Reflecting staff shortages across the economy, the number of job vacancies rose for most industries over the three months to December to a record 1.2 million despite a slowdown in the rate of growth in recent months.

Frances O’Grady, the general secretary of the TUC, said:

“While it’s good to see employment continuing to rise, on pay it’s the same story of a squeeze on workers.

“Working people deserve a decent standard of living and a wage they can raise a family on. But instead, following the worse pay squeeze for two centuries, real pay is falling, and they now face a cost-of-living crisis.”

Here’s the full story:

Oil hits seven-year high

Back in the markets, oil has hit its highest level in seven years as tensions rise in the Middle East.

Brent crude, the international benchmark, rose to $88 per barrel for the first time since October 2014, which could push up fuel costs in coming weeks.

The Brent crude oil price over the last 10 years
The Brent crude oil price over the last 10 years Photograph: Refinitiv

US crude also hit fresh seven-year highs, amid fears of supply disruptions after Yemen’s Houthi group claimed responsibility for an apparent drone attack in Abu Dhabi that killed three people.

The attack is likely to raise regional tensions as a crucial phase nears in nuclear discussions with Iran, as Martin Chulov, our Middle East correspondent, explains:

The strikes, which also injured six people, left flames billowing from an oil storage site near the airport of the United Arab Emirates’ capital

A separate explosion, which is also thought to have been caused by a drone, caused minor damage. Two Indian nationals and one Pakistani were killed amid the fireballs. All the wounded were reported to be lightly hurt.

The Saudi-led coalition fighting Yemen’s Houthi insurgents said yesterday it had launched air strikes targeting the rebel-held capital Sanaa, following the attack against Abu Dhabi.

AJ Bell investment director Russ Mould says:

A rise in oil prices to a seven-year high and a continuing, though below inflation, rise in UK earnings has put the spotlight once again on inflationary pressures and a cost of living crisis.

“Traders are eyeing the $100 per barrel mark for crude oil for the first time since 2014, with the perceived diminishing threat posed by Omicron to the global economy and supply constraints and disruption driving the black stuff higher.

“The question now is whether OPEC will take action to address the surge in the market, or risk demand destruction if it doesn’t.

Goldman Sachs expects oil prices hitting $100 per barrel in the second half of this year, citing a lower than expected hit to demand from the Omicron coronavirus variant coupled with increased supply disruptions and OPEC+ shortfalls.

“This has kept the global oil market in a larger deficit than even our above consensus forecast,” Goldman said in a note dated Monday, Reuters reports.

Updated

TUC General Secretary Frances O’Grady says:

“While it’s good to see employment continuing to rise, on pay it’s the same story of a squeeze on workers.

“Working people deserve a decent standard of living and a wage they can raise a family on. But instead, following the worse pay squeeze for two centuries, real pay is falling, and they now face a cost-of-living crisis.

“We urgently need to get pay packets rising across the economy – or too many families will have to choose between paying soaring bills or putting food on the table.

“Ministers must give unions more power to go into workplaces and negotiate better pay and conditions, give our public sector workers a decent pay rise, and get the minimum wage up to £10 an hour immediately.”

Today’s jobs data suggest that labour demand has remained fairly strong, that supply is struggling to keep up and that the squeeze on household real wages is only just beginning, says Paul Dales of Capital Economics.

The labour market appears to have tightened after the end of the furlough scheme and at the start of the Omicron wave.

So even though real wages are now falling and will decline further, we still expect the Bank of England to raise interest rates from 0.25% to 0.50% on 3rd February and to 1.25% by December.

IoD: long-term sickness driving people out of labour market

The legacy of the pandemic is a rise in economic inactivity, warns the Institute of Directors.

Kitty Ussher, chief economist at the Institute of Directors, flags that some people have left the jobs market because they’re not well enough to work:

“The good news is that the unemployment rate is now back to within a whisker of its pre-pandemic level but the same cannot be said for the number of people actually employed. The reason for this difference is an increase in the number of people who say they are not available for work – in fact, the legacy of the pandemic appears to be this rise in economic inactivity.

Today’s data shows inactivity is particularly pronounced in people over the age of 50 with, sadly, a rise in long-term sickness in this group the driving factor.

“It is also now becoming clear that the Office of Budget Responsibility’s forecast that the unemployment rate would be 4.8% by the end of 2022 is way off the mark. We expect it to be running at under 4% in the not-too-distant future.”

UK unemployment data, to November 2021

Labour MP Alison McGovern warns the struggle to fill jobs is holding back the economy:

The UK economy faces a double whammy of falling real wages and labour shortages.

Naomi Clayton, acting director of Policy and Research at Learning and Work Institute, has tweeted the key charts:

Reuters’ David Milliken points out that the jobless rate had fallen back, close to its pre-pandemic levels - but rising inflation is eating into wages.

Labour MP Barry Sheerman is also concerned that real wages fell in November:

Updated

Meanwhile in the City, stocks have opened lower as investors worry that America’s central bank will hike interest rates several times this year to fight inflation.

The FTSE 100 index has dropped by 59 points, or 0.8%, to 7552, away from the two-year high hit yesterday.

Online estate agent portal Rightmove (-3%), UK/US plumbing and heating firm Ferguson (-2.7%) and tech-focused investment trust Scottish Mortgage (-2.6%) are the top fallers.

European markets have dropped over 1%, while Wall Street is expected to open lower.

Sovereign bond yields (the interest rate on government debt) is also rising, as Victoria Scholar, head of investment at interactive investor, explains:

“European markets have opened lower with technology underperforming amid concerns about faster tightening from the Fed and rising yields as Britain’s 10-year gilt yield hits a three-month high and Germany’s 10-year government bond yield rises to the highest since May 2019. US markets get set to reopen after Monday’s holiday with futures pointing to a softer open.

The FTSE 100 is trading lower amid some profit taking after a strong start to the week, closing Monday’s session at the highest level since January 2020. BP and Shell are trading near the top of the index as surging oil prices provide a tailwind for the sector.”

Today’s jobs report increases the changes that the Bank of England lifts interest rates next month, City economists say.

Thomas Pugh, economist at RSM UK, explains:

‘Admittedly, Omicron pay have taken some heat out of the labour market in December. But the 184,000 rise in payrolls and 43,300 drop in the claimant count last month suggests that job creation remained robust at the end of the year.

Indeed, with pay growth at 4.2%, above its pre-pandemic level of about 3%, the MPC is likely to conclude that the labour market is strong enough to absorb higher interest rates.

The BoE lifted interest rates to 0.25% in December, away from the record lows set in the pandemic.

James Smith, developed market economist at ING, also predicts a rate rise in February.

On all the main metrics, the UK jobs market looks remarkably similar to its pre-pandemic state. The latest fall in the unemployment rate to 4.1% takes it to within a whisker of its pre-Covid level. The ending of the furlough scheme last September has been a smooth success, with no discernible increase in redundancies – a stark contrast to what happened ahead of the scheme’s original end-date in October 2020.

Alongside rising headline inflation rates and growing evidence that Omicron’s impact has been modest, a February rate rise from the Bank of England looks increasingly likely.

But, with a severe wage-price spiral looking unlikely, Smith predicts interest rates won’t rise as fast during 2022 as the markets expect (they are currently priced at above 1% by the end of this year).

Real wages falls 'likely to worsen' in coming months.

Martin Beck, chief economic advisor to the EY ITEM Club, warns that wages will probably fall further behind inflation in coming months, despite the pick-up in employment.

“The latest healthy set of labour market numbers reinforced hopes that job losses arising from the end of the furlough scheme in September were offset by strong demand for workers elsewhere in the economy. Employment over the September-November period rose 60,000. Combined with a pickup in inactivity, this was enough to lower the LFS jobless rate to 4.1%, a fall of 0.4 percentage points from the previous three-month period.

“Moreover, there were no signs that the economic effects from the spread of the Omicron variant held back job creation in December. PAYE data showed the number of employees rising 184,000, an improvement on November’s (downwardly revised) 162,000 increase.

An adverse effect may yet appear, but with infection numbers now falling, the EY ITEM Club expects disruption from Omicron to prove short-lived. And that job vacancies in October to December reached a new record high suggests that unemployment should stay low, supporting consumer spending in the face of rising inflation and taxes.

“Meanwhile, regular pay growth in the three months to November fell to 3.8% year-on-year (y/y) from 4.3% y/y in the previous month, reflecting, in part, a near unwinding of distortions from the furlough scheme and base effects. This means average pay fell in real terms, an unwelcome development which is likely to worsen over the next few months.”

Cost of living crunch "has only just begun"

The UK’s cost of living crunch has just begun, and is going to get worse, warns Stephen Evans, chief executive of Learning and Work Institute:

“The year ahead will be dominated by the cost of living crunch and labour shortages. Today’s data shows prices rose faster than wages in November. With higher inflation and tax rises still to come, the Government needs to help households: the cost of living crunch has only just begun.

Evans also points out that the total number of people in work is still below pre-pandemic levels (even though company payrolls are higher).

At the same time, rising numbers of people with long-term sickness mean there are one million people fewer in the labour market than on pre-pandemic trends.

We need to support more people to look for work for employers to fill record vacancy levels. We must do so in a jobs market showing some signs of slowing even before any effects of Omicron. Employment is still recovering, but on the best measure remains 600,000 down on pre-pandemic levels.

The Plan for Jobs has made a real difference, but the Government should not overclaim on the basis of payroll employment figures that don’t cover everyone in work. This is still mission progressing, not mission accomplished.”

Chancellor of the Exchequer, Rishi Sunak, has welcomed the rise in payrolls and fall in redundancies:

“Today’s figures are proof that the jobs market is thriving, with employee numbers rising to record levels, and redundancy notifications at their lowest levels since 2006 in December.

“From traineeships for young people to Sector Based Work Academies for those switching careers, our Plan for Jobs is continuing to create opportunity for all.”

Minister for Employment Mims Davies MP says:

“Our Plan for Jobs is levelling up opportunity across the nation to progress, with payroll employment above pre-pandemic levels in every region.

“As we begin the new year, our Jobcentres are open for business, to give people the skills and confidence they need to seize new and better paid jobs in 2022. And increases in the National Living Wage and changes to Universal Credit means everyone has the support they need to move forward and be ready to grab the record number of vacancies out there.”

Updated

Chart: how real average weekly earnings fell

Here’s a chart showing how real wages fell in November, as the sharp rise in inflation this autumn overtook average weekly earnings growth.

UK real wages have fallen as inflation rose faster than pay in November

The ONS says:

This was previously seen in early 2020 because of the initial impact of the coronavirus pandemic and previous to this in 2017, when inflation increased, and then before that following the financial crisis in 2008, when pay growth decreased and inflation increased.

ONS: Wage growth fell below inflation in November

UK workers are facing a pay squeeze as wages fail to keep up with inflation.

Today’s labour market report shows that average total pay, including bonuses, grew by 4.2% in the September-November quarter, while basic pay (ex-bonuses) was 3.8%.

Consumer price inflation (CPI) jumped to 5.1% in November, and is expected to hit 6% by this spring when energy bills rise very sharply.

The ONS reports that wages fell behind rising prices in November, meaning real wages shrank for the first time since July 2020:

  • In real terms (adjusted for inflation), total and regular pay have shown minimal growth in September to November 2021, at 0.4% for total pay and 0.0% for regular pay; single-month growth in real average weekly earnings for November 2021 fell on the year for the first time since July 2020, at negative 0.9% for total pay and negative 1.0% for regular pay.

Public sector workers were particularly hit by the pay squeeze, the ONS shows:

  • Average total pay growth for the private sector was 4.5% in September to November 2021, while for the public sector, it was 2.6%; all sectors saw growth, with the finance and business services sector seeing the largest growth rate at 6.8%.

Here’s some snap reaction:

Updated

Introduction: UK jobless rate drops to 4.1%

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The UK’s unemployment rate has dropped again, as employers continue to add workers to their payroll... but wages are now lagging inflation again.

The jobless rate dropped to 4.1% in the September-November quarter, the Office for National Statistics reports. That’s down from 4.2% a month ago.

Payrolls continue to swell too -- the ONS estimates that employers added 184,000 more staff in December, lifting payrolls to 409,000, or 1.4%, above their pre-pandemic levels.

All regions are now above pre-coronavirus levels, with Scotland having the largest percentage increase on the month.

UK payroll
UK payroll levels Photograph: ONS

Vacancies hit a record high, again - with 1,247,000 vacancies in October-December, as employers continue to struggle to fill positions.

That’s 462,000 more than before the pandemic, with most industries displaying record numbers of vacancies, and the ratio of vacancies to every 100 employee jobs at a record high 4.1. However, the rate of growth in vacancies did slow, the ONS warns.

The redundancy rate has decreased to a record low following the end of the Coronavirus Job Retention Scheme, suggesting that the end of the furlough scheme has not had a significant impact on the jobs market.

But, the economic inactivity rate has increased by 0.2 percentage points to 21.3%, showing that more people have dropped out of the labour market - either because they are studying, retiring early, or ill.

Sam Avanzo Windett, deputy director at Learning and Work Institute, says this increase is worrying:

And on pay, real average weekly earnings fell in November 2021 for the first time since July 2020 (more on that in a moment).

Also coming up today

The Bank of Japan has upgraded its growth and inflation forecasts overnight, and flagged heightening chances the recent commodity-driven price hikes will broaden.

Japan’s prime minister Kishida Fumio, addresses the World Economic Forum’s virtual Davos Agenda today, as does Israel’s PM, Naftali Bennett.

On the economic front, we get the lates German economic morale data, and a healthcheck on factories in the New York state area.

European stock markets could open lower, with bond yields rising as investors anticipate several US interest rate rises this year.

The agenda

  • 8am GMT: EU finance ministers hold EcoFin meeting
  • 10am GMT: ZEW survey of German economic sentiment
  • 10am GMT: Special Address by Naftali Bennett, Prime Minister of Israel, at Davos Agenda
  • 11am GMT: Special Address by Kishida Fumio, Prime Minister of Japan, at Davos Agenda
  • 1.30pm GMT: Empire State Manufacturing index for New York

Updated

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