The views expressed in this column are solely those of the author and do
not reflect the views of SVB Financial Group, or Silicon Valley Bank,
or any of its affiliates.
As the mid-point of the year quickly approaches, major global
economies appear to be hitting a "soft patch" in their perspective recoveries.
The financial news in the last few weeks hasn't been good — from inconsistent
job growth and weak consumer sentiment in the U.S., to concern that China's
overheated economy is slowing faster than anticipated, hurting demand of global
commodities, and renewed concern surrounding the evolving Euroland sovereign
risk issues with Greece, which have severely cooled global investor appetite for
risk-related positions. Since the end of April, the S&P has slid 7.2 percent from this year's high, now trading at 12.7 times forecasted 2011
earnings, its lowest multiple in almost a year.
The U.K.'s economy isn't immune to this volatile environment.
Britain has experienced one of the deepest recessions in the West since the
financial crisis began. GDP dropped 6.4 percent over the 6 quarters through
September 2009, as compared to the U.S. economy, which shrunk 4.1 percent for
the same timeframe. Since the spring of 2010, the U.K's somewhat slow economic
recovery appeared to remain on track despite continued Euroland problems, the
inconsistent U.S. economy and declining consumer confidence, but recently the
story has changed.
Economic reports point to problems...
Last month, U.K. inflation rose 4.5 percent on a year-on-year
basis, reaching a 2 1/2-year high due to climbing food prices and energy-related
costs, and stayed at higher levels than the Bank of England's (BoE) long stated
2 percent target rate. Despite the elevated level of local prices and repeated
warnings by the central bank that ultimately inflation could reach 5 percent
before retreating later in the year, monetary policy (interest rates) are
expected to remain at record low levels, currently set at 0.5 percent.
As in the U.S., the housing sector in the U.K. is also
suffering from anemic demand, with home prices again falling last month at the
fastest pace since January as worries about the economic outlook and the
availability of mortgage finance takes a toll. Industry expectations for home
prices going forward continue to drop, with 27 percent more respondents to a
recent survey expecting prices fall rather than rise over the next quarter. Away
from the London market, home pricing has now fallen into negative territory.
The employment picture also remains muted. Based on
government's reports, unemployment claims had fallen 88,000 in the three months
up to April, the most since 2000, but suddenly turned the other way in May. U.K.
jobless claims in last month increased 19,600, well above market expectations.
Wage growth also slowed its pace, pointing to the continued financial squeeze on
households as inflation continues to accelerate and consumer confidence declined
as the government's proposed budget cuts take hold.
Are government programs getting in the
The slow pace of the U.K.'s recovery has recently fueled debate
over the government's proposed spending cuts. The opposition Labor Party says
Prime Minister David Cameron is holding back growth by trying to reduce the
budget deficit too quickly. Cameron and his chancellor of the exchequer, George
Osborne, argue their plans are supporting the economy by keeping borrowing costs
Osborne recently said it's time to begin unwinding support for
Britain's financial sector and begin selling the government's stakes in banks
amid early signs of an economic recovery. Osborne fired the first shot with an
announcement that Northern Rock Plc — nationalized in 2008 after suffering the
first run on a British bank in more than a century — will be put up for sale.
Liquidity programs and credit-support plans that saddled taxpayers with more
than 1 trillion pounds ($1.6 trillion) of liabilities at the height of the
financial crisis are also being unwound.
Osborne's comments are seen as the most upbeat assessment by
the Chancellor since he came to office a year ago and marks a shift away from
previous warnings that Britain faces the same fate as Greece if it abandons his
fiscal-austerity plans. Osborne's political opponents say growth remains too
weak and the aforementioned jobs market too mixed to call an end to the
Osborne believes the slow and steady recovery in Britain has
been hurt by a 60 percent increase in the price of oil over the last year, the
earthquake in Japan, the fiscal crisis in some European countries and the
sluggish recovery in the U.S. Keep in mind, the current "recovery" in GDP terms
reflects a positive 0.5 percent in the first quarter of this year, canceling out
a similar decline in the last quarter of 2010.
The pound looks vulnerable
The pound has traded in a somewhat tight range for most of the
year, but with rate hike expectations supporting the currency until recently,
forecasts for the second half of the year point to the downside. Market analysts
expect sterling's interest rate disadvantage against many other currencies will
deepen in coming months, as other central banks including the European Central
Bank (ECB) are expected to keep raising rates, while quantitative easing winds
down in the United States, which is expected to favor the dollar. The stubborn
inflation picture is also seen to be very harmful to the broader economy, which
has also suffered via the government's strict fiscal austerity measures, all
adding to the downside risks to the pound.
Now on the bright side...
Despite the looming economic storm clouds, Britain's continued
economic resilience has emerged in the closely-watched leading indicators index
compiled by the Organization for Economic Cooperation (OCED), which recently
suggested that major economies across the world are losing growth momentum (even
the fast-growing emerging economies) although the U.K. and Germany are holding
steady. The OCED indicator for the U.K. in 2011 is still expected to reflect
modest economic expansion over the coming months and is forecasting GDP growth
rates of 1.4 percent by the end of the year, elevating the U.K. to the upper end
of the G-20 universe.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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