The United Kingdom Returns to Recession
Today, we received news that a double-dip recession in the United Kingdom now is official. The U.K. economy shrank in the first quarter, as gross domestic product (GDP) fell 0.2% from the fourth quarter of 2011, when it declined 0.3%, according to the Office for National Statistics. The decline came as a surprise, as most analysts were expecting an increase in U.K. GDP of 0.1%.
As you likely know, a recession is defined as two straight quarters of economic contraction. Well, that’s precisely what we’ve seen in the United Kingdom, and that doesn’t augur well for the European Union, China — or the United States.
Adding to the region’s fiscal worries were Sunday’s results of the first round of elections in France. Here we saw current France’s President Nicolas Sarkozy finishing in second place to Socialist challenger Francois Hollande. Sarkozy and Hollande will face off in the second round of voting, but the worry is that Hollande is way ahead in the polls and is expected to win rather easily.
The problem here for investors is that Hollande plans to rework the financial terms of a recent European Central Bank (ECB) treaty, including raising the minimum wage and imposing much higher taxes on the rich. A rollback of the Sarkozy policies could throw the entire European bailout plan into jeopardy. If this situation happens, we could be staring down the barrel of a very pernicious global equity sell-off.
Another negative factor weighing on Europe is the latest decline in manufacturing. Euro-area services and manufacturing output declined for a third month in April, as the euro-area composite index based on a survey of purchasing managers in both industries fell to 47.4, a five-month low, down from 49.1 in March, according to London-based Markit Economics. A reading below 50 indicates contraction, and that makes this number yet another depressed metric coming out of the region.
I think a European-induced, global economy flu is going hit us this year, and that concern is one of the reasons why I’ve been so cautious in terms of allocating capital to equities in my Successful Investing advisory service. When Europe’s façade crumbles, it’s going to pull down the rest of the world’s equity markets — and I don’t want to be standing idly by when it does.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
