2012 has been a year of recession for most of the Western economies. The UK economy has received a boost from the London 2012 Olympics and the Queen’s Diamond Jubilee. This combined with the weak Pound has provided a booth to tourism. London has also benefitted from the fact that the Pound is considered a safe haven compared to the Euro and this has attracted inward investment from Europeans looking to safeguard their assets by investing in property and UK business.
The Bank of England has kept interest rates at near zero in a bid to stabilise the weakening UK economy. However, despite government austerity and increased quantitative easing the economy has not yet recovered and the UK Budget Deficit continues to increase. George Osborne’s Autumn Statement suggests that further austerity is to be expected over the next 3 to 5 years.
Prices in the UK continue to increase despite falling wages and employment. The costs of food, energy and petrol prices are expected to continue to increase in 2013. The Bank of England has already indicated that it may not meet its target of keeping inflation below 2%. In fact the new governor of the Bank of England, Mark Carney, has stated that he will focus on growth ahead of inflation next year.
2012 has also been significant in that all of the world’s major central banks have engaged in a policy of quantitative easing (or money printing) this year. Mario Draghi announced in July 2012 that the European Central Bank will “do whatever it takes to save the Euro” and has effectively promised unlimited Quantitative Easing in order to protect the Euro and the ailing European banks. In the same month, the Bank of England announced that it would inject a further £50 billion into the UK as part of its Quantitative Easing programme. In September 2012 the US Federal Reserve announced that it would embark on a programme of unlimited quantitative easing until the labour market has recovered. Not to be outdone, the Bank of Japan has also announced that it will embark on significant easing in order to devalue the Yen and boost the competitiveness of Japanese manufacturers.
The central bankers’ apparent ignorance to the threat of inflation is a major cause for concern. The constant money printing poses a significant inflation risk and could destabilise the economy. In our view the market simply hasn’t been allowed to correct and we are unlikely to have moved out of recession. All of the major Western governments have built up huge sovereign debts and are operating outside of their means. The US have yet to agree a resolution on their Fiscal Cliff and the UK is not doing enough to tackle the huge Budget deficit. Whether the central banks will be able to print their way out of trouble remains to be seen. One thing is for sure, we can expect rising prices and inflation next year.