City Comment: Eurozone threatens to scupper UK prospects

With financial markets dominated by the exploits in the Eurozone and UK economic indicators mixed at best, the prospects for any individual sector to shine are pretty slim, especially one such as recruitment which is regarded as a barometer for economic prospects.
Fri, 1 Jun 2012 | By Sue Dodd, director, Agile Intelligence
With financial markets dominated by the exploits in the Eurozone and UK economic indicators mixed at best, the prospects for any individual sector to shine are pretty slim, especially one such as recruitment which is regarded as a barometer for economic prospects.

Consequently as global stock markets have weakened, with the FTSE now standing far below the late winter highs, the recruitment sector has taken at least its fair share of the drop. Whatever can change the economy can change the markets but poor visibility, worsened by the Eurozone crisis, makes predictions difficult. In essence the markets are looking for an interaction of positive economic growth (GDP), investment (business and government) and consumption with benign inflation, stable exchange rates and transparent fiscal and monetary policy. The combination of external demand for goods and services, solid investment and internal demand creates economic growth which in turn generates net jobs, which then raises internal consumption to begin a chain reaction of demand and supply expansion. The catalyst for this is confidence – business and consumer – to kick start the process. The key ingredient for confidence is visibility and certainty.While politicians can argue their case for and against Keynesian-style* government spending to bolster growth, offset by the urgent need to demonstrate sovereign debt reductions, the Eurozone, described by Mervyn King as ‘tearing itself apart’, is really the out-of-control orchestrator. The latest news that German two-year bonds fell to 0% is the strongest signal yet that the flow of funds from ‘periphery’ countries to the euro core is accelerating dangerously. With periphery now including Spain, the potential costs of bailouts could prove too much. A run on some periphery countries’ banks is gathering pace and the solution is far from clear. This perpetuates uncertainty and suppresses confidence while also increasing the risk of trading with affected countries. A meltdown become self-fulfilling if fresh impetus is not found and the Eurozone now sits on a time bomb in the weeks leading up to the second Greek elections. The uncertainty persists.
(*A school of thought based on the ideas of 20th-century economist John Maynard Keynes)

Back to the UK – the Q1 downward revision of GDP to 0.3% was unexpected with construction even worse than originally estimated. Yet forward surveys seem more positive, real job creation from major companies is becoming evident (automotives, pharmaceuticals, even retail) and the official employment figures now show growth with unemployment declining. Business investment did pick up in Q1 (+3.6%) against a weak Q4, but recent Eurozone developments may well lead to more deferred decisions. It promised to be a slow, painful recovery and that, at best, is what we may have – once the latest decline is absorbed.

If the Eurozone were to break then all bets are off and it is this possibility which deters investors from grabbing some of the tremendous value available in UK and European shares following the latest slide. Recruiters, despite the uplift in temporary numbers and improved UK employment picture, are being swept along by the Eurozone tide.

Sue Dodd, director, Agile Intelligence

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