Global Month Ahead by 7IM - January 2012In our regular feature Seven Investment Management (7IM) look forward and assess what the month ahead might hold for the world’s largest economies.

Whether you are invested in the UK or overseas, in stocks and shares or fixed interest assets, read on to discover the latest insights from one of the UK’s most respected investment managers.

United Kingdom

Issues Outlook
As the economic outlook for the UK continues to deteriorate, all eyes will be on the MPC and whether they decide to resume the quantitative easing programme – adding more monetary stimulus to the economy. The minutes of the last meeting showed the MPC voted 8-1 to halt QE with David Miles the only dissenter who voted to extend QE by an extra £25bn, while the rest of the committee thought that ‘no further asset purchases were necessary at this point’.
It turns out that the committee felt that further loosening was only needed if the economy were to ‘deteriorate significantly’ however the decision was ‘finely balanced’. Some suggested that the pause in QE was simply a case of the MPC wanting to keep their powder dry in preparation for at least one member exiting the Eurozone. Some even suggested that the committee had concluded that QE had been an ineffective policy tool. Since May’s meeting, the case for providing more stimulus this month has strengthened. The Eurozone crisis has once again intensified, especially with concerns surrounding the Spanish banking system. In addition, CPI falling to 3% last month, bank lending contracting 3.8% from a year ago, a recession confirmed and PMI manufacturing falling to a 3-year low, all suggest that the MPC may take further action this month despite consensus forecasts of a continuing pause.

North America

Issues Outlook
The United States economy continued to provide mixed signals in the past month. Existing home sales rose to 4.62mn from 4.47mn, while new home sales also rose by 10% from a year ago to 343k. The soft jobs data suggests that either the euro-zone debt crisis is influencing business activity in the US or perhaps even more worryingly, the US recovery may not be as strong as some have been led to believe.
However, non-farm payrolls only rose by 59k which is the weakest growth in a year. This has taken the unemployment rate to 8.2% from 8.1%. The soft payroll numbers and weaker than expected GDP growth certainly provide considerable political capital to the Fed to announce further quantitative easing in the near future but it is more likely that like the MPC, the Fed will not act until there is evidence of a significant continuing deterioration in the economic figures.
First quarter growth for the US was revised down from an annualised rate of 2.2% to 1.9% largely driven by a fall in inventories and higher imports. Further fiscal austerity at the local and state level could well exacerbate the problem.

Europe ex UK

Issues Outlook
The main focus in Europe has now turned to the state of the Spanish banking system which has come under considerable stress as a result of ongoing concerns surrounding the outcome of the Greek elections. The stresses in Spain have been highlighted by recent data showing almost €100bn in capital having left the country in the first quarter of this year as investors search for safer pastures.
The ECB president Mario Draghi has been damning in his assessment of Spain’s handling of the problems at Bankia, its third largest lender, and said that national supervisors have repeatedly underestimated the amount that a bank rescue should cost. His comments seem to corroborate market assessments of Spanish banks and Spain’s fiscal position by implying that the amount required to rescue the banks continues to be insufficient.
Some European policymakers see a more powerful pan-EU banking supervisor as well as a Eurozone-wide deposit insurance scheme as the next step to solving the Eurozone crisis. Expect markets to remain frightened of the ongoing developments: Bund yields may well test further record lows and Spanish bond yields could well eclipse the highs of last year.

Other markets

Issues Outlook
India’s economic growth slumped to its lowest level in nine years in the first quarter of this year marking a dramatic fall from its once breakneck growth seen last year. The economy expanded at an annual rate of 5.3% in the three months to March from 9.2% in the same period last year. Whilst the Indian policy makers blame the Eurozone crisis for its woes, the fall in growth -currently at just over 10%, – was predicted by many as stubbornly high and it has weighed down on consumers and is impacting corporate investment. It may be that slowing growth is exactly what the separatist government require to push through the required reform.
Japan’s trade balance remains in deficit as both China and the EU both recorded their third consecutive decline. The Japanese trade balance will continue to suffer, from Chinese monetary tightening and from its ongoing nuclear power shutdown which has led to a rise in imports of natural gas and oil.

Indicators

Present Situation Next Meeting Expectation Source
Bank of England 0.5% 7 June No action likely – stalemate situation as inflation is monitored Click here
US Federal Reserve 0% – 0.25% 19 & 20 June No action while the economic situation remains balanced Click here
European Central Bank 1.5% 6 June Consideration of further LTRO’s Draghi’s call for growth Click here

The views expressed in this document are for information only and do not constitute investment advice.

Before considering investments we recommend that you consult your advisor who can assess your personal circumstances and objectives.

For more information call 0207 760 8777 or visit www.7im.co.uk

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