Sunday, May 24, 2009

European Economy Recovers After Low GDP Numbers, But UK Looks Shaky

Sources: Bloomberg, Europe's Economy Contracts 2.5%, The Most Since 1995; AFP, European Stocks Pick Up After Heavy Losses; Reuters, Euro Turns Higher, Hits Session High vs. Dollar; Reuters, Economic Worries Pause Europe Stocks' Winning Run; Bloomberg, UK May Lose AAA Rating at S&P As Finances Weaken

Numbers released late last week showed a 2.5% contraction in Europe's GDP between the fourth quarter of 2008 and the first quarter of 2009, the largest since 1995. The impetus for this decline includes falling production and increased job losses in reaction to falling consumer demand and demand for European exports. Germany and Italy were hardest hit, with 3.8% and 2.4% GDP declines respectively.

European stocks declined significantly in response to the news, but rallied by the end of this week to finish strong, as did the euro. Another event also contributed to the shakiness of European stocks, as S&P reduced its outlook on the UK's sovereign rating from stable to negative based on government debt. The country's long-term rating, however, remains AAA. S&P stated that there is a one in three chance that the rating will fall.

Britain's problem centers on its debt, which is approaching 100% GDP. The country will need to raise $344 billion through selling bonds between now and March 2010, and the budget deficit is projected at 12.4% GDP. This problem needs a political solution, and part of the reason for S&P's outlook reduction lies in its uncertainty in the political arena. Prime Minister Gordon Brown's popularity is shrinking as the UK's economic problems continue, and House of Commons Speaker Michael Martin just resigned from his post. On the other hand, Moody's and Fitch are retaining their UK outlook at stable.


1) Do you think that the recovery this week in terms of stocks and currency is lasting, or will confidence in Europe stay low after poor performance in the first quarter?
2) Is Britain handling its debt problem responsibly, or do you think it could do more?
3) Do you expect that the bad news on Britain's sovereign rating will affect the political fortunes of the Labour party?

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