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United Kingdom

May 2012

  • A double-dip recession is confirmed.
  • The UK market falls – but outperforms its global peers.
  • Banks falter on renewed eurozone woes.

April brought official confirmation that the UK economy had, after a valiant struggle, finally succumbed to a long-feared disease: a double-dip recession. Preliminary estimates from the Office of National Statistics showed that the economy shrank by 0.2% in the first three months of this year. Because GDP also contracted (by 0.3%) in the final three months of 2011, the UK thereby met the technical definition of a recession – two successive quarters of negative growth.

Despite these gloomy statistical tidings, however, the FTSE 100 Index fell by just 0.3% on the month, outperforming many of its global peers. The UK market held up so well even as the economy shrank, reflecting the outward-looking nature of many of its largest companies. The Footsie is dominated by multinational businesses for whom the UK is but one market among many. As such, returns this year have tended to be driven by developments overseas – by falling unemployment and rising confidence in the US, by fluctuations in the economic data emerging from China and by the twists and turns in Europe’s ongoing sovereign-debt crisis.

That Europe remains at the forefront of investors’ minds was illustrated by the renewed underperformance of the UK banking sector in April. Share prices of numerous lenders slumped as yields on Spanish government bonds spiked higher. As the soothing effect of the European Central Bank’s LTROs began to fade, Barclays, Lloyds Banking Group and Royal Bank of Scotland were prominent among the month’s fallers.

Despite the eurozone’s ongoing woes, however, the IMF revised up its estimate for global economic growth. It now thinks the world economy will grow by 3.5% in 2012. This improving global picture may explain why some British companies remain upbeat despite the slowdown in their domestic market. Vodafone, for example, agreed to pay £1 billion cash – a healthy 92% premium – for Cable & Wireless Worldwide.

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