Global: Déjà vu - are we heading for a re-run of 2011?
• There are concerns that 2012 is shaping up to be a repeat of last year when increasing optimism about the world economy in the first quarter had evaporated by the middle of the year,
bringing a sharp decline in equity markets. The recent rise in the oil price is an echo of that period and may well herald a period of softer activity.
• However, there are some key differences. The commodity shock is not as great as last year as oil prices have not risen as rapidly and food prices are down (chart). Furthermore,
policy makers have acted to support growth with the ECB in particular containing tail risks through the provision of unlimited term liquidity to the banks. Meanwhile, Greece
has received a second bail out.
• There are still risks to the outlook with tensions between Iran and the West and we still doubt whether some of the peripheral Eurozone countries will be able to meet their
fiscal targets. However, global growth expectations are 1 percentage point lower with the Eurozone GDP forecast 2.5 points weaker, according to Consensus Economics. Peripheral
bond spreads are wider and the equity risk premium is considerably higher than twelve months ago. Investors and economists are cautious, probably a better basis for the markets
to withstand whatever the world economy has in store compared with a year ago. UK: Micro tinkering, macro boost
• With threats of possible sovereign debt rating downgrades, the Chancellor had little room to manoeuvre when presenting his budget. Nevertheless, he still managed to stir the
political cauldron of personal taxation and upset many ‘grannies’ in the process. The budget does however offer some pro-business measures which we believe could boost
business investment and growth.
• Business investment growth has been very weak since the credit crunch. Poor domestic demand and uncertainty in the Eurozone have discouraged capital spending.
Foreign direct investment has also been badly hit and while the corporate sector in aggregate is cash rich, many especially SMEs still complain of a lack of funding.
This is where the government is trying to fill the gap with their credit easing scheme. At some stage, companies will have to increase investment, if only to keep up the
maintenance of their existing capital stock.
• Overall, the budget should be positive for growth and we have revised up our forecast in response. However, these measures alone are not a game changer. The UK economy
continues to face severe headwinds that will keep growth subdued. More quantitative easing is likely to follow from the Bank of England.