Events such as the Japanese earthquake and subsequent nuclear disaster, unrest in the Middle East and sovereign debt problems in the eurozone are more than challenging any small steps to economic recovery.
The markets have reacted with some resilience considering the terrible events in Japan over the last month. Perhaps now is the time that markets are looking to move positively and have become almost numb to the overwhelming negative newsflow of the last couple of years.
The FTSE 100 ended March at 5,909 from a starting point of 5,994, down 0.7%. Considering the events of the past month, this is a good outcome.
Earlier in the month, the Budget saw George Osborne announce reduced forecasts for growth in the UK economy to 1.7% in 2011, down from 2.1%, and for 2012 from 2.6% to 2.5%. The outlook is one of caution, with few signs of consistently positive newsflows.
Inflation remains a key concern. The government’s 2% target for inflation sits significantly below the current 4.4%. The Chancellor stated that he expects inflation to remain between 4% and 5% for 2011. Rising inflation means rising prices and whilst prices are rising, savers are not being helped by a reciprocal rise in interest rates.
UK manufacturing slowed considerably during March, although this could be attributed to the supply chain being disrupted by events in Japan. Figures just out show that the services sector in the UK expanded by 1.3%, according to the Office of National Statistics. With the services sector accounting for almost two thirds of the UK’s economic output, these figures are encouraging.
Sovereign debt has again been the topic of discussion amongst eurozone commentators. The Irish problem is worse than expected with recent stress tests on the banks revealing that an additional 24bn euro bail out is required. The stability of the Irish banking sector remains dependant on the European Central Bank.
It’s not much better further afield where Portugal and Greece continue to struggle. Portugal has seen its credit rating reduced to triple B minus by the ratings agency Standard and Poors. This means that Portugal’s rating is now only one notch above junk status, not good whichever way you look at it.
The US economy continues to grow with corporate profits and productivity at a level greater than when the recession started. The thorn in their side continues to be unemployment – corporate America is performing without recruiting. High unemployment means that consumer sentiment remains in the balance; the Obama administration knows that if it is to drive continued growth, it must reduce unemployment.
With the Middle East unrest continuing there are fears for the wider states not yet directly affected. If the unrest spreads to Saudi Arabia and other major oil producing nations, the effect on oil prices will be significant. With oil currently trading at just above $100 a barrel fears that it may peak as high as $150 are not without substance. As many countries try to control inflation, the potential repercussions of such a rise to global recovery will be significant.
Yet another month ends with uncertainty and caution being the overriding themes, an outlook that is likely to remain with us throughout this year. A global recovery will be measured in years and is now likely to be far longer than most pundits first expected.
Source: ONS March 2011