Economic data released so far this year has strengthened our belief in improved GDP growth prospects...
Economic data released so far this year has strengthened our belief in improved GDP growth prospects and a benign inflationary environment.
The growth perspective has in recent months received a tremendous boost from rapidly declining unemployment figures - in France the rate of unemployment has dropped to 10.2% from a 1997 peak of 12.6%. This development, allied to the well documented upturn in capital expenditure and export growth, possibly renders our previous GDP growth forecast for the full year conservative.
Against the background of robust growth expectations, however, the outlook for inflation appears less clear, at least from the point of view of the European Central Bank (ECB). It raised official interest rates on two occasions during the first quarter of 2000, each time by 25 basis points. The European ODR thus now stands at 3.5%. It is arguable, based on evidence from the corporate sector, that product pricing remains as difficult now as during less favourable economic conditions.
A possible explanation for the ECB's recent actions appears to derive from its observation of global events, in particular the threat of inflation within the US, combined with the feeble practice of interest rate movements as a policy instrument for managing the euro exchange rate. Within the UK the highlight of the period under review was undoubtedly the Budget, which has since encountered heavy criticism from the International Monetary Fund for its perceived marginally expansionary stance. Against this the Treasury now has an unexpected £20bn windfall from the current rounds of bidding for third generation UMTS licenses.
In the stock markets, Europe had started the year strongly in January and February, driven largely by TMT stocks, then fell in March as investors lost confidence.
Going forward, markets are poised for extreme levels of volatility in the very short term following the extensive falls suffered by both the Nasdaq and Dow Jones indices during the early part of April.
Concerns over interest rate developments within the US will undoubtedly have global repercussions. These ought to be short lived in Europe, however, if economic fundamentals prevail, namely a more positive outlook for pan-European cons- umer price inflation.
Equally important is the imminent first quarter reporting season of the corporate sector if present and forward looking valuations are to remain firmly underpinned. Based on the scarce number of first quarter 2000 company reports released thus far we remain confident that on balance the corporate sector will produce positive earnings surprises. Corporate activity will similarly offer a cushion.
Dino Fuschillo is a director and head of European equities at SocGen
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