But there is more to worry about than a politician’s feelings. Eight other Eurozone members, including Austria, Italy, Spain and Portugal, were also downgraded. Standard & Poor’s (S&P) decision froze out hopes that sentiment towards the Eurozone was beginning to thaw after the successful bond issues in Spain and Italy during the week. The decision to downgrade was blamed on European policymakers’ lack of action. This will certainly turn the heat up under them to find a swift resolution at the next summit. But worryingly, it also raises questions about the strength of the Eurozone's rescue fund as a smaller proportion of its resources will now be backed by AAA rated countries. And the bad news on Europe didn't end there. Greek debt restructuring talks collapsed, increasing the chances of a disorderly default. So, like the weather, the warm spell is over for now and it's another cold snap.
UK and Eurozone interest rates were left unchanged in January
The Monetary Policy Committee (MPC) and the European Central Bank (ECB) Governing Council left interest rates unchanged at 0.5% and at 1%, respectively. Neither of them had any new policy initiatives either. In the UK, the asset purchase scheme was left unchanged at £275bn. In Europe, ECB President Draghi didn’t add to the measures to support the Eurozone banking system announced last month. While much of the liquidity he made available to banks looks to have been deposited at the ECB, it does seem to have helped to bring down interest rates across the yield curve. The success of the Spanish and Italian auctions also suggests it helped stimulate a tentative improvement in sentiment. But this was short-lived in the face of the S&P downgrade.
UK bond holders trade off return for security
Investors are still very nervous about the global economy. In fact, they were so nervous that they were even prepared to pay for the privilege of lending £700 million to the UK government. Being seen as a safe haven is good news for the UK because it means the Government is able to borrow money at a low price. But there is a worrying side as well. Investors don't usually agree to accept a negative real return on their money. That they have done so reflects the fear of unresolved Eurozone tensions and nervousness about the outlook for the global economy.
UK exporters and industry found November hard going
UK exporters failed to repeat October's strong performance. Despite the headwinds from a sluggish economy, exports to EU countries rose slightly, while the value of exports to non-EU countries fell. This is disappointing given the need to build exports to faster growing regions. Overall, the trade deficit in goods widened to £8.6bn. But the UK's trade surplus in services increased by £0.1bn to £6.1bn, leaving November's overall trade deficit at £2.6bn. Poor domestic and international demand hit industrial production in November too. Overall it fell by 0.6%m/m in November after a 1%m/m fall in October. This weak performance adds to worries that the UK economy could have stagnated, or even shrunk, in Q4 2011.
Still no good news for the UK housing market
Surveyors still think house prices are falling. A net balance of 16% thought prices were lower in the three months to December. This is better than the 2011 average net balance of 24%, but things don't look too promising ahead. A rise in new sellers outpaced that of new buyers and suggests more price falls ahead. The exception is in London where prices are rising and are expected to continue to do so. Everywhere else surveyors expect prices to fall, with confidence weakest in Yorkshire and Humberside.
US retail sales collapsed in December
US retail sales slowed for the third month in a row in December. They increased by just 0.1%m/m, but after taking account of autos, gas and building materials they fell by 0.1%m/m. This is disappointing just as things seemed to be looking up for the US. But it could turn out to be a blip. Consumer confidence reached an eight month high in January according to the University of Michigan, driven by brighter expectations about the future outlook.
Chinese inflation fell to a 15-month low in December
A favourable base effect helped drive the headline figure drop in December, and despite a spike in food prices, the underlying trend is still down. This should pave the way for further monetary easing. The boost this could give the domestic economy would be good news for exporters to China, as would the expectation that the quota for new loans set by central government should increase. Overall, in spite of some slowing, China is still a giant on the world economic stage. The UK Chancellor’s visit to drum up business is only one small example of this.