The euro-zone economy improved much faster than expected in the
second quarter of the year. Growth is estimated to have been around
the 1% level, the fastest quarterly level for three years; and this has
eased the fears about a move into a “double-dip” recession, at least for
the moment. But it is a two-speed recovery, with the German economy
estimated to have grown by 2.2% during the quarter, the Netherlands
economy by 0.9%, and the French economy by 0.6%, but with Spain
and Portugal basically unchanged and the Greek economy falling further
into recession. With domestic demand weak, it is therefore essential
that overseas demand remains buoyant if German exports are going
to continue to drive the overall economy forward; but this is now very
uncertain, and so growth projections for the rest of this year and for
2011 are still fairly cautious.
However the European Central Bank is maintaining its optimistic view
of prospects. Speaking before the latest figures were announced, the
chairman, Jean Claude Trichet, argued that the second quarter outturn
would be better than expected, that there would also be an encouraging
result in the third quarter, and that there was no prospect of a move
into a “double-dip” recession.
He also defended the bank’s actions during the recession, suggested
that the economy has responded well to those actions, and was anxious
to ensure that “perhaps part of the credit could come to the central
bank”.
There is an obvious risk that his comments will prove to be premature.
Since the latest downgrade in Ireland’s credit rating has provided
further evidence that the problems in the European banking system
are far from resolved, and that the threat of sovereign debt defaults
remains. It is not surprising therefore that markets have been unable
to resist the downwards pressure despite the relatively good corporate
results from European companies.
The UK market has also fallen sharply over the past month. The UK
economy is currently performing better than expected, with consumer
spending holding up well so far; and the markets are continuing to
give the latest measures by the new UK government to reduce the fiscal
deficit the benefit of the doubt. But there are fears that those austerity
measures with have a significant effect on growth in the second half
of the year, and into 2011, and that corporate activity will be badly
affected. The mood amongst investors has therefore become much more
cautious.
The latest news on the UK economy has been encouraging. The Office
of National Statistics has recently estimated that retail sales volumes
were 1.1% higher in July than in the previous month, and 1.3% higher
than in July last year, the strongest monthly gain since February;
unemployment remains much lower than might have been expected;
the latest Purchasing Manager’s index for July confirms that
manufacturing activity is continuing to expand; and exports also appear
to strong.
There are weaknesses in the housing sector, and apparently some loss
of momentum in the services sector, and bank lending remains low;
but overall there are hopes that growth in the current quarter will be
at reasonable levels. But there are already indications that the austerity
measures announced by the government are beginning to have an effect
on activity, and so the situation remains very uncertain.
This uncertainty is reflected in the minutes of the latest meeting of the
Monetary Policy Committee of the Bank of England. They state that the
economy is “on a knife-edge”, with “substantial risks” of a relapse
balanced against signs of “gathering momentum” in the recovery. This
uncertainty persuaded the majority of the members of the committee
that policy should remain unchanged for the present; but the minutes
indicated that “the risks were substantial, and that members stood
ready to respond in either direction as the balance of risks evolved”.
The subsequent Inflation Report from the bank was also a cautious
document, with growth forecasts revised lower, primarily because of
the expected effects of the austerity measures, and with the governor
of the bank, Mervyn King, stressing the need for “continuing monetary
stimulus” in the face of the “choppy recovery”. Interest rates are
therefore likely to remain low for some considerable time, despite the
fact that the inflation rate is well above the bank’s target rate, and so
monetary policy will continue to be supportive. But will this be enough
to justify the present market level? Global growing is slowing, and this
will add to the downward pressures on the economy resulting from
the austerity measures as they are introduced. The odds therefore seem
to favour further UK market weakness in the near-term, even though
we believe that the economic recovery will continue, and eventually
lead to higher equity prices.
The Japanese market has also moved lower over the past month. Recent
figures have shown that economic growth in Japan slowed very sharply
in the second quarter of the year because of weak domestic demand
and falling exports; and as a result China has replaced Japan as the
world’s second largest economy for the first time. Growth is estimated
to have been at a 0.4% annualised rate in the second quarter, after a
4.4% rate in the first three months of the year, and this has increased
the fears that the country may once again be slipping back into recession.
The dependence on exports has been an important adverse factor, as
overseas markets have weakened, and this has encouraged speculation
that the Bank of Japan will be forced to intervene in the currency
markets to prevent further appreciation of the yen; but even this might
not be enough to avoid a recession. In this situation, it is particularly
unfortunate that an impasse exists at the political level that is making
it extremely difficult for the government to take effective action. The
background situation therefore remains very disappointing, and the
weakness in the equity market looks set to continue.
Fisher Capital Management Korea is a leading global financial institution holding extensive relationships with financial institutions, institutional investors and corporations across the world. As a full service company Fisher Capital Management Korea provides a full range of investment banking services including advanced risk management, corporate strategy and structure, plus raising capital through debt and equity markets. With this as our backbone we continue to provide a client service second to none.
The euro-zone economy improved much faster than expected in the
second quarter of the year. Growth is estimated to have been around
the 1% level, the fastest quarterly level for three years; and this has
eased the fears about a move into a “double-dip” recession, at least for
the moment. But it is a two-speed recovery, with the German economy
estimated to have grown by 2.2% during the quarter, the Netherlands
economy by 0.9%, and the French economy by 0.6%, but with Spain
and Portugal basically unchanged and the Greek economy falling further
into recession. With domestic demand weak, it is therefore essential
that overseas demand remains buoyant if German exports are going
to continue to drive the overall economy forward; but this is now very
uncertain, and so growth projections for the rest of this year and for
2011 are still fairly cautious.
However the European Central Bank is maintaining its optimistic view
of prospects. Speaking before the latest figures were announced, the
chairman, Jean Claude Trichet, argued that the second quarter outturn
would be better than expected, that there would also be an encouraging
result in the third quarter, and that there was no prospect of a move
into a “double-dip” recession.
He also defended the bank’s actions during the recession, suggested
that the economy has responded well to those actions, and was anxious
to ensure that “perhaps part of the credit could come to the central
bank”.
There is an obvious risk that his comments will prove to be premature.
Since the latest downgrade in Ireland’s credit rating has provided
further evidence that the problems in the European banking system
are far from resolved, and that the threat of sovereign debt defaults
remains. It is not surprising therefore that markets have been unable
to resist the downwards pressure despite the relatively good corporate
results from European companies.
The UK market has also fallen sharply over the past month. The UK
economy is currently performing better than expected, with consumer
spending holding up well so far; and the markets are continuing to
give the latest measures by the new UK government to reduce the fiscal
deficit the benefit of the doubt. But there are fears that those austerity
measures with have a significant effect on growth in the second half
of the year, and into 2011, and that corporate activity will be badly
affected. The mood amongst investors has therefore become much more
cautious.
The latest news on the UK economy has been encouraging. The Office
of National Statistics has recently estimated that retail sales volumes
were 1.1% higher in July than in the previous month, and 1.3% higher
than in July last year, the strongest monthly gain since February;
unemployment remains much lower than might have been expected;
the latest Purchasing Manager’s index for July confirms that
manufacturing activity is continuing to expand; and exports also appear
to strong.
There are weaknesses in the housing sector, and apparently some loss
of momentum in the services sector, and bank lending remains low;
but overall there are hopes that growth in the current quarter will be
at reasonable levels. But there are already indications that the austerity
measures announced by the government are beginning to have an effect
on activity, and so the situation remains very uncertain.
This uncertainty is reflected in the minutes of the latest meeting of the
Monetary Policy Committee of the Bank of England. They state that the
economy is “on a knife-edge”, with “substantial risks” of a relapse
balanced against signs of “gathering momentum” in the recovery. This
uncertainty persuaded the majority of the members of the committee
that policy should remain unchanged for the present; but the minutes
indicated that “the risks were substantial, and that members stood
ready to respond in either direction as the balance of risks evolved”.
The subsequent Inflation Report from the bank was also a cautious
document, with growth forecasts revised lower, primarily because of
the expected effects of the austerity measures, and with the governor
of the bank, Mervyn King, stressing the need for “continuing monetary
stimulus” in the face of the “choppy recovery”. Interest rates are
therefore likely to remain low for some considerable time, despite the
fact that the inflation rate is well above the bank’s target rate, and so
monetary policy will continue to be supportive. But will this be enough
to justify the present market level? Global growing is slowing, and this
will add to the downward pressures on the economy resulting from
the austerity measures as they are introduced. The odds therefore seem
to favour further UK market weakness in the near-term, even though
we believe that the economic recovery will continue, and eventually
lead to higher equity prices.
The Japanese market has also moved lower over the past month. Recent
figures have shown that economic growth in Japan slowed very sharply
in the second quarter of the year because of weak domestic demand
and falling exports; and as a result China has replaced Japan as the
world’s second largest economy for the first time. Growth is estimated
to have been at a 0.4% annualised rate in the second quarter, after a
4.4% rate in the first three months of the year, and this has increased
the fears that the country may once again be slipping back into recession.
The dependence on exports has been an important adverse factor, as
overseas markets have weakened, and this has encouraged speculation
that the Bank of Japan will be forced to intervene in the currency
markets to prevent further appreciation of the yen; but even this might
not be enough to avoid a recession. In this situation, it is particularly
unfortunate that an impasse exists at the political level that is making
it extremely difficult for the government to take effective action. The
background situation therefore remains very disappointing, and the
weakness in the equity market looks set to continue.
Fisher Capital Management Korea is a leading global financial institution holding extensive relationships with financial institutions, institutional investors and corporations across the world. As a full service company Fisher Capital Management Korea provides a full range of investment banking services including advanced risk management, corporate strategy and structure, plus raising capital through debt and equity markets. With this as our backbone we continue to provide a client service second to none.
