The global economic outlook is grim. The UK is forecast to enter into a post Olympic slump and figures for July have outturned worse than expected with the UK showing signs of renewed recession.
The European outlook is in decline as the economy enters into a double-dip recession. In the past three months, European earnings estimates have fallen by 10%. Morgan Stanley recently reported that expectations for 2013 are too high. Profit forecasts have been downgraded from 12% to 2%.
There are continued fears over a Greek exit from the Euro. Last month, ECB chairman Mario Draghi announced that he will do “whatever it takes to save the Euro”. Quite bizarrely, the markets rose following this announcement despite the fact that Mario Draghi did not say what he planned to do about the crisis. Since then, Mr Draghi suggested that the ECB would buy Spanish and Italian bonds and to lower the borrowing costs for weaker economies. We have heard nothing since and no further progress has been made. It is rumoured that this announcement was made to counter traders who have been shorting the Euro.
European officials have consistently failed to tackle the issue of keeping Greece in the Euro and it is unlikely that the country’s problems will be resolved without new measures put in place. Currently Greece is being treated like a county that is short of cash and is being saddled with more debt. The Eurocrats have failed to acknowledge that Greece is technically insolvent and should be treated as such. The problem is simply delayed, the ramifications of which are likely to be severe. Several European banks, including the Bundesbank and the European Central Bank have significant exposure to Greece. Investors seem to be counting on the central banks to come to the rescue and the possibility of further Quantitative Easing in Europe is high.
The Spanish economy continues to suffer from the European recession with Spanish bonds reaching a high of 7% in July. Greece, Ireland, Portugal, Cyprus and Spain have already required eurozone bailouts. Slovenia is the latest country to reveal a large government deficit and could be in need of a bailout in order to meet its capital requirements.
The US economy continues to stagnate. The country suffered its most severe drought in history last month and this will lead to an increase in food prices later in the year. The US dollar continues to strengthen on the back of weakness in the Eurozone. However, American firms are increasingly pessimistic about their profit prospects for the third quarter. Low interest rates mean that many large corporations are stockpiling their cash reserves and are waiting for opportunities that may arise in the Eurozone.
The banking crisis is largely responsible for the European downturn. Governor of the Bank of England, Mervyn King admitted that one of the things that surprised him the most was the fragility of the banking system almost four years after the collapse of Lehman in Autumn 2008. He emphasised the “extraordinary concern about credit risks for banks” and admitted that most people “underestimated the capital requirement required for banks to encourage lending”. The ECB has not dealt with the underlying solvency concerns - it has provided liquidity only. Banks have still not been recapitalised fully which is why many are still having difficulties accessing wholesale lending markets. There is little on the horizon that will solve this.
Whilst the economic update is grim, Belsize point out that the global recession could well provide opportunities to our clients. High youth unemployment means that UK businesses are currently able to source talented staff at relatively low cost which can be valuable for those offering apprenticeship schemes. The European crisis may well offer a range of opportunities. A likely Greek exit could result in a significant devaluation of the Euro which may create procurement opportunities to source cheap supplies from Europe. Businesses with cash reserves could also benefit from expansion opportunities in Europe as takeover targets emerge.
Belsize Accountancy provide expert financial advice to our clients. Feel free to contact us if you have any queries over mergers and acquisition opportunities arising under the current climate.