Local Difficulties

08/04/2011 at 2:37 pm 2 comments

The first quarter of this year – remarkably, when we consider the upheaval experienced in many parts of the world – saw reasonably strong returns to equity. With the exception of Japan, all the major markets are up at the moment: the US and Eurozone markets are about 6% higher on the year to date.

The UK, on the other hand, has managed less than half that. This could reflect a number of things: the release of GDP data showing an unexpected contraction at the end of last year, fears over the impact of fiscal consolidation, concerns over inflation – there are always reasons not buy. The question for UK investors is whether the underperformance can be written off as passing volatility, a bump in the road – or whether it might indicate more serious problems.

One important measure which has showed a decline is consumer confidence. Again, this could prove transitory. When the indicator first fell it was suggested that it was a response to worries over higher fuel prices, which had been receiving a lot of media attention. These two elements – inflation and media negativity – are still very much with us.

Meanwhile, over at the Bank of England, where they expect prices to stop rising of their own accord any time now, workers were finding it difficult to manage on incomes which have been frozen under the government’s cost cutting programme. In a delicious return to the policies of the 1970s, the Governor’s response was to impose a price cap on food.

Elsewhere in government, the prime minister has been sending mixed signals on his commitment to austerity in the face of military action in Libya which the country can’t afford.

And outside Britain, of course, commodity prices continue to increase. PPI data out this morning show the cost of raw materials rising at 15% per year – and that can’t be blamed on the currency as trade weighted sterling has hardly budged since the beginning of 2009.

There are reasons to be hopeful too. We are not insulated from the rest of the world and will benefit from continued global recovery. Away from the confidence data, surveys such as the purchasing manager series suggest that business conditions are robust and that last quarter will have seen an unequivocal return to growth.

Perhaps our troubled start to the year will soon become a distant memory. In the meantime, the Bank would do well to observe the deleterious connection between inflation and confidence and expand its focus beyond the price of its employees’ sandwiches.


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