A Collective Sigh of Relief - Deloitte

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Global Economic Outlook 2nd Quarter 2012 Figure 2. Financial prospects Net % of CFOs who are more optimistic about financial prospects for their company now than three months ago More optimistic 70% 24 50% 30% 10% -10% -30% -50% -70% Less optimistic Figure 3. Consensus GDP growth forecasts for 2012 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0 -0.5% -1.0% 2007 2008 2009 2010 2011 2012 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Source: Deloitte CFO Survey Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Source: Consensus forecasts from The Economist US Japan Britain Euro area Changes in the outlook are often seen first in survey data, and a number of surveys point to a bounce in business confidence. The first quarter Deloitte UK CFO Survey shows that confidence among Chief Financial Officers about their own firms’ finances has risen at the fastest rate since 2007, taking it close to levels last seen in late 2010 (see figure 2). The worries about the risk of recession and a breakup of the single currency that dominated the air waves and newspapers at the end of last year have eased. On average, CFOs now assign a 30 percent probability to the UK economy seeing a double dip recession, down from 54 percent in December. In the Euro area, the extensive provision of liquidity to banks by the European Central Bank and a further debt bailout for Greece has reduced fears of an early breaking of the single currency. Last December, UK CFOs, on average, saw a 37 percent probability of one or more members of the single currency leaving the euro in 2012, and this clearly weighed on business confidence. By March, this probability of secession fell to 26 percent. Easier policy has also helped confidence and boosted financial risk appetite. The United States, UK, Japan and Switzerland have been busy pushing money into the system through quantitative easing. Stronger financial conditions, reflected in rising global equity markets, seem to be benefiting larger UK companies, with CFOs reporting an increase in credit availability in the first quarter. This more than unwinds the deterioration in credit availability seen in December, which at the time, some feared could be the start of a second credit crunch. And, as a very open economy, the UK has also benefitted from the growing mood of optimism about the U.S. economy over the last few months. It would be a premature to suggest that the UK economy is out of the woods. UK GDP growth in the first half of 2012 is likely to be anemic at best. While the Bank of England thinks the UK should be able to avoid a recession, the OECD reckons the UK entered a technical recession in late 2011. And, of course, the future remains unpredictable. The deterioration in UK and European growth prospects in the second half of 2011 (see figure 3) derailed what, in early 2011, seemed like a solid recovery. That episode underscored how macroeconomic risks can escalate. Those risks may have receded, but they have
hardly been eliminated. From the high oil price to the recent focus on Spain’s debt problems, the risks to the recovery are changeable and numerous. In the background is the worry that rates of UK GDP growth could remain anemic for years to come. On average, economists expect UK growth over the next few years to run at significantly lower levels than were seen in the years before the recession. Current near-record levels of UK corporate cash may well be a manifestation of caution on the part of corporates — and insurance against a volatile, slower-growth world in which the availability of capital can shift quickly. Yet, it is the corporate sector’s hiring, exports, and capital spending that are widely expected to drive the UK recovery. A rebound in corporate sector activity may be later in arriving than previously thought (see figure 4). In the last six months, the UK’s official, independent forecaster, the Office of Budget Responsibility, has cut its forecast for capital spending in 2012 from 7.7 percent to just 0.7 percent. Figure 4. UK private and public sector job growth (thousands) 400 300 200 100 0 -100 -200 -300 Source: ONS 2007 Q1 Q2 Q3 Q4 2008 Q1 With the UK in its third year of a seven-year program of fiscal austerity, government spending will make no contribution to the recovery. Households face a multi-year deleveraging and rising unemployment, but, after a double dip recession for the consumer last year, things are looking up. Falling inflation should support real incomes. UK consumers’ days of free spending are over, but household spending should make some modest contribution to GDP growth in 2012. Overall, 2012 is likely to be a year of erratic, sluggish UK growth, which is likely to come in at well under 1.0 percent for the year as a whole. Hopes for a more robust recovery now reside toward the end of the year and in 2013. Whether that recovery materializes depends as much on financial and economic conditions outside the UK — and especially in the Euro area — as it does on the actions of UK policymakers. Private sector job growth Public sector job growth Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 UK Geographies Q2 Q3 Q4 2011 Q1 Q2 25
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Page 7 and 8: Figure 1. Use of ECB's deposit faci
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A Collective Sigh of Relief - Deloitte

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