By: Dr. Mike Campbell
The New Year is the traditional time for economic pundits and politicians to make projections as to the course of the fledgling year. This year, they seem to be united in their unremitting gloominess with warnings that Europe stands on the brink of a further recession. Germany’s Chancellor Merkel said that Europe was experiencing its "most severe test in decades", however, she believes that the debt crisis is bringing the European family closer together (with the probable exception of the UK, of course – but even the UK will participate in the talks to bring about closer fiscal unity and bolster the Euro). President Sarkozy astutely noted that the crisis was not finished and the Italian President called for more sacrifices to be made.
The Euro is hovering at the lowest level seen against the Yen for a decade, but this is more of a concern for the Japanese than the Europeans since it makes Japanese imports to Europe costlier whilst European exports to Japan become cheaper – a good situation in times of weak demand from the European perspective. Against Sterling and the US Dollar, the Euro is little changed from a year ago when it was at lows caused by the Irish sovereign debt crisis.
The Eurozone Markit PMI (Purchasing Manager’s Index) for December showed the fifth monthly contraction with a value of 46.9 (anything above 50 shows expansion), but the value was above November’s reading of 46.4; the worst reading for 28 months, which is better news.
Markets in Asia and Europe have greeted the New Year with modest gains, but the acid test will be the sustainability of such gains. 2011 was marked by volatile trading conditions where gains were wiped out as soon as they were recorded with all but the Dow Jones showing significant falls over the course of the year.