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UK’s Post Brexit productivity puzzle

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UK's Post Brexit productivity puzzle

By Sohail Singal, Associate Director at Chatham Financial

Last week’s comments from the new home secretary, Priti Patel, on the UK’s post-Brexit immigration policy raised some eyebrows from employers around the country, especially those that rely on cheap labour.

Ms. Patel announced plans that will effectively prohibit most businesses from recruiting outside the UK for unskilled jobs requiring qualifications equivalent to below an A-level, or who are to be paid less than £25,600 annually. Does this spell the end of cheap labour for the UK economy? And what impact will this have on productivity?

The UK, like a lot of Western economies, has suffered from a productivity decline since the mid-2000s, with productivity growth rates effectively flatlining since the 2007 financial crisis (see graph below). On the flip side, employment has been a bright spot of the economy despite lack lustre GDP growth. This is a perplexing situation for the Bank of England, whose mandate is to keep prices stable and to some extent maintain low unemployment. These goals have been met over the past couple of years, preventing the Bank of England from raising interest rates.

UK-Output-IndexWhile the economy has maintained a high level of employment, business investment in capital has been virtually non-existent. Instead, employers have substituted investment for a large supply of cheap labour from abroad. UK businesses are well behind some of their European peers, who deploy nearly three times as many robots according to data published by the International Federation of Robotics.

But the new stance on immigration policy means that businesses will no longer be able to rely on low skilled migrant workers. The obvious conclusion is that they will need to raise wages and invest more instead. The Tories have already shown a willingness to fight employers on this by raising the Living Wage. Current noises from the government suggest that immigration was never envisioned to be an alternative to increased investment in automation. The prime minister argues that he and his colleagues are entrusted to set the rules of the economic game, which for too long has been rigged against the interests of low wage staff. Ironically, this paints Labour as the party backing free movement, and the Conservatives championing workers’ rights.

Whenever automation is mentioned, the instinctive reaction is to anticipate robots pushing humans out of work. In countries such as South Korea and Sweden, however, the bots are not displacing humans entirely, simply pushing them into higher paid work. This is seen by some economists as more than welcome, against a backdrop of UK wages only just beginning to rise above levels seen during the global financial crash.

That said, there are clear flaws in Ms Patel’s thinking. One of her headline arguments is that more than eight million people – or 20% of the workforce aged between 16 and 64 – are currently economically inactive. She argues that the new immigration policy will mean that they will be able to fill the void left by a diminished immigrant workforce. This ignores the critical fact that when those classed as economically inactive are surveyed, only 1.87 million out of 8.48 million say they want to work. Of the remainder, the majority are students, sick, elderly, or caring for others. It is currently unclear how the home secretary intends to persuade such people into employment.

If the government is successful in channelling business investment towards automation and labour-saving practices, it is likely to result in rising minimum wages. This could enhance employee morale and work ethic, as well as reducing turnover of staff. But what this means for businesses and the economy is more of a puzzle.

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Audi aims to sell one million cars in China in 2023

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Audi aims to sell one million cars in China in 2023 1

BEIJING (Reuters) – German premium automaker Audi aims to sell 1 million vehicles in China in 2023, versus 726,000 vehicles in 2020, the brand’s China chief Werner Eichhorn said on Wednesday.

Audi, which is making cars in the world’s biggest auto market with FAW Group, will also add more products in China, Eichhorn said. Audi’s rivals include Daimler and BMW.

(Reporting by Yilei Sun and Brenda Goh; Editing by Himani Sarka

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Netflix forecasts an end to borrowing binge, shares surge

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Netflix forecasts an end to borrowing binge, shares surge 2

By Lisa Richwine and Eva Mathews

(Reuters) – Netflix Inc said on Tuesday its global subscriber rolls crossed 200 million at the end of 2020 and projected it will no longer need to borrow billions of dollars to finance its broad slate of TV shows and movies.

Shares of Netflix rose nearly 13% in extended trading as the financial milestone validated the company’s strategy of going into debt to take on big Hollywood studios with a flood of its own programming in multiple languages.

The world’s largest streaming service had raised $15 billion through debt in less than a decade. On Tuesday, the company said it expected free cash flow to break even in 2021, adding in a letter to shareholders, “We believe we no longer have a need to raise external financing for our day-to-day operations.”

Netflix said it will explore returning excess cash to shareholders via share buybacks. It plans to maintain $10 billion to $15 billion in gross debt.

“This is in sharp contrast to Disney and many other new entrants into the streaming market who expect to lose money on streaming for the next few years,” said eMarketer analyst Eric Haggstrom.

From October to December, Netflix signed up 8.5 million new paying streaming customers as it debuted widely praised series “The Queen’s Gambit” and “Bridgerton,” a new season of “The Crown” and the George Clooney film “The Midnight Sky.”

The additions topped Wall Street estimates of 6.1 million, according to Refinitiv data, despite increased competition and a U.S. price increase. Fourth-quarter earnings per share of $1.19 missed analyst expectations of $1.39.

With the new customers, Netflix’s worldwide membership reached 203.7 million. The company that pioneered streaming in 2007 added more subscribers in 2020 than in any other year, boosted by viewers who stayed home to fight the coronavirus pandemic.

COMPETITION HEATS UP

Now, Netflix is working to add customers around the globe as big media companies amp up competition. Walt Disney Co in December unveiled a hefty slate of new programming for Disney+, while AT&T Inc’s Warner Bros scrapped the traditional Hollywood playbook by announcing it would send all 2021 movies straight to HBO Max alongside theaters.

Disney said in December it had already signed up 86.8 million subscribers to Disney+ in just over a year.

“It’s super-impressive what Disney’s done,” Netflix Co-Chief Executive Reed Hastings said in a post-earnings analyst interview. Disney’s success, he added, “gets us fired up about increasing our membership, increasing our content budget.”

Netflix said most of its growth last year – 83% of new customers – came from outside the United States and Canada. Forty-one percent joined from Europe, the Middle East and Africa.

For January through March, Netflix projected it would sign up 6 million more global subscribers, behind analyst expectations of roughly 8 million.

Revenue for the fourth quarter rose to $6.64 billion compared with $5.47 billion a year ago, edging past estimates of $6.63 billion.

Net income fell to $542.2 million, or $1.19 per share, from $587 million, or $1.30 per share, a year earlier.

Netflix shares jumped 12.5% to $564.32 in extended trading on Tuesday.

(Reporting by Eva Mathews in Bengaluru and Lisa Richwine in Los Angeles; Editing by Sriraj Kalluvila and Matthew Lewis)

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MGM Resorts drops takeover plan for Ladbrokes-owner Entain

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MGM Resorts drops takeover plan for Ladbrokes-owner Entain 3

By Tanishaa Nadkar

(Reuters) – Casino operator MGM Resorts International on Tuesday ditched plans to buy Ladbrokes owner Entain after the British company rejected an $11 billion takeover approach this month, sending Entain’s shares down nearly 12%.

The United States is seen as the next big growth market for sports betting, spawning a series of transatlantic partnerships tapping in to European technology and expertise. These include Caesars Entertainment agreeing last September to buy William Hill in a 2.9 billion-pound deal.

MGM said it would not submit a revised proposal or make a firm offer for Entain, which had said the approach announced two weeks ago significantly undervalued its business.

Entain shares closed down 11.9% at around 12.44 pounds in London. MGM shares were up 2.5% at $30.54 in New York trading late on Tuesday afternoon.

“We look forward to continuing to work closely with MGM to drive further success in the United States through the BetMGM joint venture,” Entain said in a statement.

Online betting firms have benefited during the COVID-19 pandemic-led lockdowns, as customers took to playing from home when casinos and betting shops were off-limits.

MGM had previously said a merger with the British bookmaker would be compelling and believed a deal would help expand BetMGM, which the two have operated since 2018.

The proposal, on the basis of 0.6 MGM share for each Entain share, was also backed by billionaire Barry Diller’s IAC. It valued Entain shares at 13.83 pence each when it was first announced.

Complicating matters, Entain Chief Executive Officer Shay Segev decided to step down just seven months into the role and in the middle of negotiations with MGM to take a job with sports streaming service DAZN.

Segev’s departure, as well as limited engagement in talks shown by Entain and a difference in price expectations between the two sides, led MGM to decide to walk away from the deal, according to a person familiar with the matter.

Entain, previously known as GVC, has itself expanded rapidly through a series of acquisitions and owns the bwin, Coral and Eurobet brands, operating traditional British high street betting shops as well as offering online gambling.

“While we are genuinely surprised MGM didn’t up its consideration … we don’t think this changes MGM’s ability to secure equity value enhancing benefits from the attractively growing US sports betting and iGaming pie,” JP Morgan analysts said.

The brokerage said it would not rule out further discussions with Entain depending on how the company shareholders reacted, adding it would be tough for someone else to buy Entain given so much potential equity value coming from the 50/50 BetMGM joint venture.

(Reporting by Tanishaa Nadkar in Bengaluru; Additional reporting by Joshua Franklin in Miami; Editing by Keith Weir and Matthew Lewis)

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