Data hints at brighter future
Equity investors have received some crumbs of comfort recently with European Central Bank (ECB) chief Mario Draghi’s vow to “do whatever it takes” to save the euro.
There have also been hints that Angela Merkel may take a more supportive stance regarding potential resolution measures for the eurozone sovereign debt crisis. As a consequence of this, equity markets have staged something of a recovery in the last six weeks, albeit on incredibly low trading volumes.
There have also been signs that the US housing market is finally stabilising, with building permits reaching a four-year high. This is incredibly important for the confidence of the US consumer. Offsetting this slightly more positive US outlook are the sharp increases in personal tax rates and major cuts in US government spending that are due to automatically come into play in January 2013: the so-called ‘fiscal cliff’. The tax changes include ending president Barack Obama’s 2 percentage point cut in payroll tax, which started in 2010, and reversing the ‘Bush’ income tax cuts introduced in 2003. Given the deadlock of the two major US political parties, and their vastly differing views on tax and spending, there is likely to be significant jostling for position near year end before any concessions are able to make their way through Congress.
Back in the UK, the situation now looks a little less bleak than recent data had led investors to believe. Many retailers sharply discounted prices in July to tempt consumers and, to some extent, this seems to have worked. Retail sales volumes in July increased by 0.3 per cent, meaning they rose by 2.8 per cent year-on-year. In addition, June’s monthly sales increase was revised upwards substantially to 0.8 per cent from an initial 0.1 per cent. In spite of distortions attributed to the Diamond Jubilee holiday, and those likely to stem from the 2012 Games, it had seemed likely that the estimated fall in UK gross domestic product (GDP), of 0.7 per cent in the second quarter, was likely to be revised in a positive rather than negative direction. This was indeed the case as it has just been announced that GDP fell by 0.5 per cent in the second quarter - by 0.2 percentage points less than previously thought.
The slightly less gloomy picture was supported by improved factory output and better news from the construction sector as well as 46,000 new jobs in the second quarter, bringing unemployment down to 8 per cent. Given that unemployment in the eurozone was recently announced at a high of 11.1 per cent, the UK data is reassuring in relative terms.
The outlook for some individual industries, however, remains more difficult. The banking sector globally has recently been beset with new woes, as evidenced by Standard Chartered’s recent woes. The bank has agreed to pay New York-based regulators $340m (£215m) to settle claims that it had been involved in money laundering in order to hide transactions with Iran. Standard Chartered serves as a good example of how global banks need to be particularly conscious of potential reputational risk coming out of the blue – as also happened to HSBC – in an era of increasingly complex regulation.