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UK vs EU Global Economics Weekly Brief

UK vs EU Global Economics Weekly Brief

Another week, another upset on the way to finding a solution to the Eurozone debt crisis. The UK’s decision to block amendments to the Lisbon treaty was clearly a disappointment to the Eurozone members who were hoping to enshrine closer economic and fiscal integration within it.

UK vs EU
Without the UK vote the strict budgetary rules can still be agreed by the remaining 26 EU members via an “accord”. Although this is a weaker instrument than a treaty, success depends on adherence to the rules rather than the document they are written in. The changes establish fiscal rules which could form part of a longer term solution. However there are still a lot of short term problems to be dealt with. The Euro is in very deep trouble, who would wish to join now!

No change to monetary policy at the Bank of England. There was no monetary policy loosening for Christmas in the UK. The Monetary Policy Committee felt that the financial system wouldn’t have the capacity for any more just yet after October's £75bn increase in QE. We shouldn't rule out further easing next year though. The economy is still sluggish and even though the Chancellor announced some measures to promote growth in the Autumn Statement, these are small in comparison to the ongoing austerity measures.

The UK’s industrial production fell in October, but exports improved. Overall industrial production fell by 0.7%m/m in October, much more than expected. But in spite of this, UK exports rose to a record level. This, coupled with a fall in the value of imports, meant October's trade in goods deficit fell to £7.6bn, from £10.2bn in September. A small increase in service exports meant the overall trade deficit fell to £1.6bn, from September's £4.3bn. This is the smallest since April and is a sharp reversal of the recent trend of widening deficits. More exports required with less imports should be the strategy for 2012 and also to find new markets for UK goods quickly!

The service sector expanded in November. The Services Purchasing Manager Index (PMI) showed an increase in activity for the eleventh consecutive month in November. New business orders and a rise in advertising and marketing helped the sector to stay afloat, but it hasn’t escaped the sovereign debt crisis. Concerns about weaker conditions are weighing on business confidence and has led to the largest fall in jobs in over a year. Moreover, the combination of higher input price inflation, mainly due to raising energy costs, and intense competition squeezed businesses' margins. Energy costs are far too high and need to reduce rapidly to stay competitive and for domestic households to be able to afford the energy!

UK house prices are falling, but rents and yields are rising. UK house prices fell by 0.9%m/m in November and 1.7%y/y according to the Halifax. Low transaction levels cause volatility in the price numbers but also confirm the weakness in the market overall. But while house prices are falling, the rental market is more buoyant. Residential rents and yields are still increasing, though fewer landlords thought so in the three months to November, than did so in the previous three months. There are very few first time buyers and the market is stagnating due to the worry of people keeping their jobs! More unemployment in 2012 at new high levels!

Eurozone interest rates cut to 1% in December as recession looms. Eurostat confirmed that GDP growth in the Eurozone was unchanged at 0.3%q/q in Q3. Growth was helped by a 7.5% depreciation in the euro against the dollar, but better competitiveness is scant consolation for sentiment which points to a recession in the coming quarters. President of the European Central Bank, Mario Draghi, announced a 25bp cut in the policy rate in December and also dipped into his non-standard monetary policy toolbox to support the European banking system. Loosening of bank’s collateral and reserve requirements along with loans from the ECB to ease funding strains are all aimed at keeping the banking sector working properly and preventing tightening credit conditions. But the solution to the debt crisis is still firmly in politicians’ hands. The European Market is in very deep trouble and more misery on its way in 2012!

US services lose ground while manufacturing gathers momentum. The Institute for Supply Management’s nonmanufacturing index surprised on the downside in November. It dropped to 52 from 52.9 in October, but with a reading above 50 it still shows expansion as new orders and business activity improved over the month. Manufacturing fared better. Its reading rose from 50.8 to 52.7 driven by export demand from emerging markets. Manufacturers are optimistic about the near future as incoming new orders remain strong and this should calm fears about the Eurozone and a weak domestic economic environment. House prices still in decline and more unemployment in 2012!

China's inflation recedes more than expected. China’s inflation dropped sharply in November. It came in at 4.2%y/y, less than the 4.5% expected and a lot lower than the 5.5% reading in October. A large base effect was behind the drop but food price growth fell from 11.9%y/y to 8.8%, with softer global commodity prices helping too. This could pave the way for further easing in monetary policy next year.

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More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

UK vs EU

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