With the eurozone likely to deliver zero growth, and Spain and Italy struggling, the UK has shown that if left alone it can manage its financial challenges. But to keep our heads above the water it’s wise for the base rate to remain at 0.5%
THIS MONTH’S DECISION: HOLD
It’s been said that the first two to three months of the year don’t yield much by way of activity because the poor are busy paying off debts while the rich are away skiing, and this seems to be analogous with what is happening in the global economy.
The emerging economies are carrying on with their momentous drive forward while the debt-saddled West can’t seem to shake off the spectre of perpetual decline – although some countries are doing considerably better than others.
Germany has proved to be resilient due to its diverse economy – a fact not lost on the UK as it exposes how lopsided our economy has become. Aside from a glitch in Q4 2011, the German economy is predicted to grow 1.5% this year. And France’s economic activity, although predicted to be flat this year, has nevertheless been able to outperform the eurozone average by 0.3%. Higher taxes introduced in January will dampen consumer spending for Europe’s second largest economy in 2012 and at best it should expect zero to 0.5% growth.
But elsewhere it’s not looking so good. The near-term prognosis for Italy is recession. The combined forces of austerity measures of 3% of gross domestic product and tightening credit conditions means output will be dragged down in 2012. Official contraction is set at -0.4% but some analysts such as BNP Paribas expect the figure to be more like -1.6%.
As for Spain, the amount of fiscal consolidation is expected to be about 4% of GDP. Further pressure on activity comes from a fall in demand for consumer credit coupled by tightening lending conditions. With Spanish exports likely to exceed imports, net trade for 2012 is expected to increase, but this alone will not be enough to stave off the negative forces of unemployment and falling household incomes. The expected GDP contraction for 2012 sits at about -1.8%.
So what of the UK then? For now both manufacturing and services are showing signs of modest growth which has been sustained for the last three months. We seem to be on track as far as implementing austerity measures go and inflation is predicted to drop even further as the ripples of VAT and food prices dissipate.
While our exposure to the eurozone remains, the prospect of doom has significantly reduced due to the European Central Bank’s long-term refinancing operation, whereby 800 banks have been given access to nearly $713bn of cheap three-year money. The UK has shown it can handle crisis management as long as it’s left to its own devices.
But the eurozone is still expected to show zero growth as a whole and given the fragility of the situation, the best ailment for a debt-ridden economy such as ours is to keep interest rates low at 0.5%.