Market Update - March 2011 

Overview

Widespread global economic uncertainty continues to be the theme with unrest in the Middle East dominating the headlines. The Middle East's role in the provision of the world's oil is not overlooked. Rising oil prices will be a drag on growth as it acts as a tax on consumers. If the trouble spreads across the region then oil prices will increasingly dominate the economic dialogue.

Global inflation levels are rising, particularly in commodity markets. Many central banks are now considering raising interest rates, the UK included - it will be interesting to see who moves first and to what extent rates will be raised. 

There have been some positive indicators, particularly in UK manufacturing the US and Germany where positive economic data has provided some welcome good news.

UK

The FTSE 100 closed February at 5,994 from a starting point of 5,862. The trading range of the index has been relatively contracted for the past couple of months, reflecting its nervousness to go anywhere fast.

With the Consumer Price Index (CPI) running at 4%, inflation is rising faster than wages, putting a painful squeeze on income.  Inflation is being fuelled by a number of one off shocks to the system, including the VAT rise, the higher cost of imports due to the decline of the pound and increases to world commodity prices.  The beginning of 2011 has also seen the cost of food increase by 6.3%, the highest rise since May 2009!

GDP growth was down 0.6%* in the last quarter of 2010, a figure that shocked many analysts.  This could be a possible indication that the Government's austerity measures are beginning to bite.

After a flat start to the year house prices posted a surprising rise in February of 0.3%, a seasonally adjusted month on month figure provided by Nationwide. Commentators and analysts remain of the opinion that the housing sector is unlikely to see much, if any, growth this year.

Some good news for the sector is that lenders seem to be opening their doors again by offering more appealing loan packages for first time buyers.

Europe

Return of the drachma? Rumours that Greece may have to quit the eurozone have been fuelled by the European Economic Advisory Group (EEAG). They have warned that Greece will require further bailouts unless it significantly increases its austerity measures or returns to the drachma.

Attention may have been diverted by the problems in the Middle East but government debt remains the number one issue for many western economies.

Germany remains the envy of Europe with positive GDP returns in Q4 2010 and unemployment at its lowest level since 1992. Export demands continue to drive the German economy. 

US

Oil is an issue close to America's heart, the fuel thirsty nation will be impacted by the fallout from the Middle East. Before the outbreak in Libya, confidence was returning to US consumers, retail stores being one of the main beneficiaries. Whether or not this confidence can continue remains to be seen.

Similarly to the UK they have local government budget problems that are likely to result in job losses. Corporate news is more positive; since the recession, businesses have implemented aggressive cost cutting in order to build a platform for growth. This is now starting to feed through into corporate earnings. The balance of the global economy will decide whether or not this can be sustained.

Global

Commentators continue to speculate about China's growth and how long it will last. It is agreed that there is a bubble but no one quite knows either how big it is or how resilient it is. The Government is trying to both manage inflation and maintain growth, no easy task. The tightening of monetary policy in 2010 seems to have had little impact, so we may just need to play out the next year or so in the hope that the bubble doesn't burst or perhaps just slowly deflate.

A slow deflation might be the preferred option. Remember Japan? Once the global economic power with growth peaking in 1991, the bubble didn't so much burst as deflated over what has now become known as 'Japan's lost decade', although this now heading for two decades. The country still struggles to post growth of any significance and remains in the economic doldrums.

Is this a warning to others that maybe a hard landing is a better way to go?

Source: Office for National Statistics (ONS), February 2011