Salary advancements: a double-edged sword?

This is an audio transcript of the FT News Briefing podcast episode: Salary advancements: a double-edged sword?

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, May 18th, and this is your FT News Briefing.

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Global fund managers are holding on to more cash than they have in more than 20 years. Employers are launching salary advancement schemes to help workers living pay cheque to pay cheque. Plus, China’s strict Covid lockdowns are taking a huge toll on the economy, and it’s unclear what officials could do to boost consumer spending.

Thomas Hale
Even if they dropped money into people’s homes through helicopters or drones, it’s not clear that would have any effect because what would people spend the money on if they can’t go outside?

Marc Filippino
I’m Marc Filippino. And here’s the news you need to start your day.

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If cash holdings are any indication, big investors are increasingly worried about the outlook for stocks. According to a survey from Bank of America, cash balances among global fund managers have grown to more than 6 per cent. That’s the most since the 9/11 terrorist attacks. The survey of nearly 300 investment professionals includes pension plans, insurance companies and hedge funds. Fund managers aren’t just growing negative about stocks, though. A majority say they expect corporate profits to weaken as well.

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China’s tough approach to stopping Covid is also slowing its economy. New data shows just how much Beijing’s zero-Covid policy and weeks of ultra strict lockdowns is hurting economic activity. Retail sales dropped more than 11 per cent. Industrial production also took a hit, and unemployment is up over 6 per cent. The FT’s Shanghai correspondent Tom Hale has more.

Thomas Hale
That doesn’t sound terrifyingly high. There’s a lot of countries with unemployment rate higher than that. But by the standards of China’s economic growth miracle, it’s certainly high. Anecdotally, in a place like Shanghai, where a lot of businesses have been shut for weeks and there’s absolutely no money coming in from customers, just from a perspective of the simple logic of the situation, the business is gonna run out of money eventually if it keeps paying its staff and doesn’t do any business with customers. So businesses are gonna be under pressure to keep paying their staff is part of the problem and something that people are paying more attention on as these restrictions continue.

Marc Filippino
Now, Tom, what about monetary or fiscal support? Could that help?

Thomas Hale
The People’s Bank of China isn’t unleashing huge amounts of stimulus. Even if they dropped money into people’s homes through helicopters or drones, it’s not clear that would have any effect because what would people spend their money on if they can’t go outside? So I think we’re in this very unusual situation, which is difficult to imagine in any other major economy, really, where a particular type of health policy has ultimately created a situation where it supersedes to some extent, monetary and fiscal policy. And it’s really not easily understood right now whether stimulus measures would have any effect or not.

Marc Filippino
What does it mean for the rest of the world if Beijing continues with its zero-Covid policy and the Chinese economy continues to slow down here?

Thomas Hale
Clearly, what happens in China is going to resonate around the rest of the world. It’s by far the most important manufacturer on earth. It’s the most important consumer of commodities, and it’s the main driver of global growth. So it’s really something that pretty much every country should be looking at extremely closely. If China, for example, eventually moves away from a zero-Covid approach and the disruptions that that have caused, and instead, for whatever reason, the virus gets out of control, that is likely to lead to other types of disruption that are very difficult to predict or even imagine right now. I think it is worth bearing in mind that there’s pretty much disruption for the rest of the world either way.

Marc Filippino
Tom Hale is the FT’s Shanghai correspondent.

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The UK will have new data on inflation today. Prices in April are expected to have risen 9 per cent year on year. That would be the highest rate in four decades. But some consumers will feel the pain of rising prices more than others. I’m joined by our employment columnist Sarah O’Connor to talk more about this and what some businesses are doing to try and help their struggling employees. Hey, Sarah.

Sarah O’Connor
Hey, thanks for having me.

Marc Filippino
So who’s hardest hit by inflation?

Sarah O’Connor
So, I mean, if you’re living pay cheque to pay cheque, as you guys would say in the US, or payslip to payslip, as we might say in the UK, then you’re really on the sharp end of this. And that’s actually a surprisingly large number of people. So in the UK, it’s about sort of 20 per cent. Twenty-two per cent of adults have less than £100 in savings. In the US, roughly a fifth of households say they could only cover their expenses for about two weeks if they lost their income. So it’s really quite a sizeable proportion of the population who are already living on the financial edge trying to kind of keep things going.

Marc Filippino
So Sarah, you’ve been reporting on something that employers are offering their struggling workers, you know, to try and help them manage their finances. What is it? Can you talk more about it?

Sarah O’Connor
One of the things that we’re starting to see growing more and more, both in the US and the UK and actually in other countries in Asia, are products that are sometimes called “earned wage access” or “early salary advance schemes” that basically companies which will partner with employers with the promise of kind of helping their employees’ financial wellbeing or their financial resilience. And what they actually offer is to advance people some of their wages early that month. So rather than having to go and get like a very expensive payday loan, you can tap your own wages, which you’ve earned but you haven’t yet received.

Marc Filippino
So they can use their salary sooner. But isn’t there going to be a time when they run out of money at some point in the future if they just keep borrowing against themselves?

Sarah O’Connor
Yeah, I mean, that would definitely be one of the criticisms of labelling this as something that is about financial resilience or wellbeing. If you are living from pay cheque to pay cheque, you know there is a risk that you end up just drawing down slightly earlier every month and you’re sort of stuck in a cycle of this rather than, in fact, building up any resilience. I mean, the data, you know, doesn’t suggest that that’s necessarily what’s happening now, but it’s clearly a risk.

Marc Filippino
Based on what you found on these wage access or salary advancement schemes, as they’re called, would you say they’re good or bad for workers overall?

Sarah O’Connor
They clearly do help some people. And people who use these apps often say that they find them helpful. But that’s not to say that there aren’t some reasons to be worried. Some kind of consumer advocates say that, you know, effectively this is a kind of a loan, but it’s not really classified as a loan. Most regulators don’t see them as loans at the minute and they’re completely unregulated. So we don’t have a huge amount of information on them. Consumers don’t really have anywhere to go if they have any problems or complaints. So regulators now are starting to take a closer look. So we’ll see what happens there. But yeah, I’d say the jury’s out for now.

Marc Filippino
Sarah O’Connor is the FT’s employment columnist.

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Before we go, Mastercard is trying to come up with high-tech ways to pay for things. It just launched a biometrics programme that allows consumers to simply wave or smile to make a payment. Yeah, I had the same thought. You know what if I’m talking and I use my hands and I accidentally get charged for like eight coffees? Well, retailers do have to sign up and consumers have to enrol. But still, I talk with my hands a lot like I’m doing right now. So I guess, I don’t know. Coffee’s on me.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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