Global Economic Update

Fears of a double dip recession in the UK have been dampened by growth in the manufacturing, construction and service sectors in March. The economy grew by 0.5% in the last quarter and helped to restore business confidence. Manufacturing in particular has benefited from the falling Pound. Economists have revised their forecasts and are now predicting that recession will be avoided. Feeble growth is anticipated in the UK but this is better than a double dip. However, rising oil prices and the Eurozone crisis may well affect their forecasts.

The US economy is showing signs of recovery with increase employment reported in the last quarter.  A strong manufacturing base leaves the US well placed for an export led recovery. The housing market has also hit rock bottom and economists are predicting a recovery is imminent. Wealthy individuals would be advised to look for value by investing in the US housing market.

The reported slowdown in China continues as the country feels the effects of the global economic recession. Many economists have been predicting a hard landing for China which sells a large proportion of its exports to the Eurozone.  Reduced productivity, car sales and steel output have all been reported in 2012. The Chinese property bubble has also slowed down following a restriction in lending by the government and the banks. China is also facing increased wages, a rise on the cost of power and raw material costs and will face a battle to flight rising inflation. China can expect a slowdown in 2012 but it’s strong manufacturing and export base leave the country well placed to show continued growth (albeit at a lower rate) over the next few years.

The Eurozone crisis continues. The recent cash injections by the European Central Bank (ECB) have averted a crisis in the European banking system. The solvency of peripheral countries remains in question with both Greece and Portugal expected to require further bailouts. Spain and Italy are also reported to have serious problems and may well require rescue in future. The Spanish economy is shrinking with unemployment at 23% and can expect further austerity as announced in the latest budget. Our view is that France and Germany are likely to be considering an exit strategy as the ECB cannot continue to bail out entire governments. Any decision is likely to be discussed in secret and it will take time for new currencies to be printed should an exit strategy be agreed. The question is how many countries will be ejected from the Euro? Greece in our view is inevitable, Portugal highly likely. But whether anything can be done to salvage the problems in Italy and Spain is anyone’s guess.