Welcome to Britain Brunei Business Forum

Headlines

The UK is recovering from the biggest financial crisis for generations and the deepest recession of almost all the major economies. The actions the Government has taken to reduce the deficit and rebuild the economy have helped restore stability and bring interest rates down to record lows.

Since then, the UK economy has been hit by a series of shocks: higher than expected inflation driven by global commodity prices; a sovereign debt crisis in the euro area; and the full scale and persistence of the 2008-09 financial crisis has become clearer. The uncertainty in the eurozone continues to have a chilling effect in the UK as well as elsewhere.

Banks should prioritise building capital ahead of paying out big bonuses and dividends. The Government has announced it will limit cash bonuses paid by the state-owned banks to £2,000 for a second year. And it is currently consulting on extending executive pay disclosure, which will help ensure that UK disclosure requirements are the most comprehensive of any major financial centre.

Economic indicators

· UK GDP decreased by 0.2 per cent in Q4 2011. UK GDP grew by 0.9 per cent during the whole of 2011.

· The unemployment rate stood at 8.4 per cent in the three months to November, with the total number of unemployed people standing at 2.68 million.

· Inflation (CPI) was 4.2 per cent in December, down from 4.8 per cent in November.

UK Economy News

UK GDP contracted by 0.2 per cent in Q4 2011 according to the Office for National Statistics’ preliminary estimate. During the whole of 2011 UK GDP grew by 0.9 per cent. The latest quarterly estimate was slightly worse than the 0.1 per cent fall many analysts had predicted, and was mostly driven by declining activity in the manufacturing sector. The Chancellor of the Exchequer said that, while the latest figures were disappointing, ongoing difficulties in the global economy and the eurozone meant they were ‘not entirely unexpected’. There is some hope, however, that the downturn will be short-lived: the chief economist of the Engineering Employers Federation said that manufacturing output ‘appears to have begun growing again in December’.

The IMF has revised downwards its expectation of UK GDP growth in 2012 to 0.6 per cent. This forecast puts the UK in the middle of the pack of the G7 economies. The IMF’s forecast of global GDP growth this year has also been lowered, to 3.3 per cent, mainly due to developments in the eurozone.

Annual CPI inflation fell for the third month in a row in December to 4.2 per cent, down from 4.8 per cent the previous month. This was the largest fall in the annual inflation rate since December 2008. The decline, which was driven primarily by falls in petrol, gas and clothing prices, was widely anticipated by market analysts. At the end of 2010 retailers were introducing one-off price increases in anticipation of the higher rate of VAT that was introduced in January 2011. Utility prices were also rising quickly. By contrast, at the end of 2011 retailers were introducing discounts in the run-up to Christmas. Most economists expect annual inflation to fall further this year as utility prices continue to decrease and the effect of last year’s VAT increase drops out of the annual comparison.

At its January meeting the Monetary Policy Committee voted unanimously to hold monetary policy steady for the third month in a row, but there are signs that further quantitative easing may be announced in February. All nine members voted to keep interest rates at 0.5 per cent and the asset purchase programme (QE) at £275 billion. However, the latest round of asset purchases is expected to be completed in February, and with the outlook weakening some analysts believe the MPC will vote for further quantitative easing next month. This will depend, largely, on whether the MPC expects inflation to fall below its target of 2 per cent in 2012. The Governor of the Bank of England, Sir Mervyn King, said that the path to economic recovery is likely to be ‘arduous, long and uneven’ but ‘there is no reason to despair’.

The UK unemployment rate rose to 8.4 per cent in the three months to November, up 0.1 percentage points on the previous month. The level of unemployment rose to 2.68 million over the same period, its highest level for 17 years. A modest rise in the number of private sector jobs was offset by a larger number of job losses in the public sector.

China’s sovereign wealth fund has purchased an 8.6 per cent stake in Thames Water, confirming Britain’s position as the most popular European destination (in value terms) for Chinese inward investment. The purchase follows the Chancellor of the Exchequer’s visit to Beijing to promote investment into UK utilities and infrastructure. The High Speed 2 rail link from London to Birmingham and the north was reported to have attracted interest from China, while projects to update the UK’s energy and broadband infrastructures were also discussed. Analysts at Ernst & Young think it unlikely that Thames Water will be the only deal of its kind this year: “For China, the UK – with its triple A rating, non-euro based currency and low risk of default – is an attractive market.”

US insurance broker Aon has announced plans to relocate its global headquarters from Chicago to London. Aon, the world’s biggest insurance broker in sales terms, said the move would provide it with improved access to emerging markets and place it closer to the Lloyd’s of London insurance market. The announcement provides a boost to London’s status as a world-leading global financial centre. Aon currently employs 59,000 people globally and has a market capitalisation of US$15 billion.

Economic calendar