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Europe

December 2008

  • Markets have another depressing month.
  • Fears of a protracted recession dominate investor sentiment.
  • Further rate cuts likely.

A rally in the final week of trading, led by gains in the battle-scarred banking sector, couldn’t prevent European equities from having another dismal month. Overall, the FTSE Europe ex-UK index was down 6.2% in euro terms.

Economic worries took centre stage. Confidence in the economy, according to a European Commission report, slumped in November to its lowest level since August 1993. Manufacturing output has fallen off a cliff, with all countries seeing record contractions in activity. Unemployment, meanwhile, saw its biggest monthly jump in 15 years. There was some good news on the inflation front, though, with the cost of living falling sharply in November. This should allow the European Central Bank to once again cut interest rates. Since the credit crunch morphed into a full-blown crisis with the collapse of Lehman Brothers in mid-September, the bank has slashed rates by half a percentage point on two separate occasions, taking the official rate to 3.25%.

But some governing council members have expressed concerns that additional reductions in the base rate will be less effective at kick-starting growth than in the past. One executive board member, evoking the memory of Sergio Leone, said: ‘‘in spaghetti westerns, the goodies won if they shot first – but they had to hit the target.’’ Adding: ‘‘There is no scene more depressing than one which the cavalry is surrounded, without any ammunition left.’’

European Union officials in Brussels, though, keen to use all the weapons in their arsenal have stepped into the breech. The first shot fired was a proposed €200 billion economic stimulus package, which would be implemented by the bloc’s 27 member states through tax initiatives and infrastructure plans. The proposal represents 1.5% of the EU’s gross domestic product. However, the plan has thus far received a tepid response from economists, politicians and investors.

 

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Scottish Widows Investment Partnership Limited (SWIP) is registered in England and Wales, Company No. 794936. Registered Office is at 10 Fleet Place, London EC4M 7RH. Tel: 0131 655 8500.
SWIP is authorised and regulated by the Financial Services Authority and is entered on their register under number 193707 (www.fsa.gov.uk).