UK and European Overview.

06/01/2012

Slowdown and recession are key words for 2012. Europe is the single largest obstacle to global growth. The UK isn’t immune from Europe’s struggles to find a solution to its debt crisis. Trade is global, so what happens in Europe affects the world.

Europe will see the greatest weakness in the year ahead. The UK also face challenges outside of Europe’s influence. They need to find ways to keep their economies growing. At the same time they have to make cuts to spending in order to avoid the same problems Europe faces with its debt. 

UK OVERVIEW

Looking back at 2011

• Interest rates remained low at 0.5%.
• Inflation grew but started to show signs of falling as the year ended.
• In his Autumn statement, Chancellor George Osborne scaled down his growth forecasts for the UK for 2011 and 2012 and increased government borrowing to £111 billion.
• The situation in Europe got worse and made investors nervous, causing UK equity markets to seesaw.
• In November the FTSE-100 Index saw its longest run of daily losses since 2003.
• UK government bonds, gilts, were popular as they were considered a ‘safe haven’ for some, amid worries over Europe.

Looking to 2012

The UK faces a number of problems. Austerity appears to have derailed the UK’s recovery. And that was before the Chancellor announced further spending cuts in his Autumn Statement.

Although we expect interest rates will stay low and inflation will fall, growth will be hard to find. The continent is our largest trading partner so a recession there will impact us. Spending cuts from the Government will also make growth tough going. There are measures that could be taken to give the UK economy a boost. We expect to see more quantitative easing, where the Bank of England injects more money into the economy to help stimulate it.

Overall, unless the situation in Europe improves quickly, we may be unable to avoid a recession.

EUROPEAN OVERVIEW

Looking back at 2011

• What began as a problem with Greek debt grew into concerns over Spain, Portugal and Italy. 
• Government changes occurred in both Greece and Italy
• With European banks holding a lot of government debt, they were under pressure to build up their own finances. They reduced lending and sold off assets, which impacted on European companies.
• Politics and vested interests delayed much needed decisions and solutions.  Inevitably, the future of the euro itself came into question. 
• As fears of a recession grew investors avoided European equities.  

Looking to 2012

Even with a solution to the Eurozone’s sovereign debt crisis, Europe will struggle this year to live with the outcome as increased austerity measures will make it tough to grow. Things may even get worse before they get better. Even Germany, considered to be the strongest European economy, looks vulnerable.

 A recession is likely, led by Italy and France. The question is how long and how deep will it be? Spending cuts and austerity measures across the region will hurt growth. It will also hurt confidence, meaning people will be more likely to save than spend. With banks more concerned about their own problems, they’ll be reluctant to lend. This will no doubt constrain company and consumer spending. It also means investors are in for another bumpy ride.

This was taken from articles first published by Legal & General Investment Management in November and December 2011.