Another week of doom and gloom has passed and we are still hearing the very same words uttered in the media, downgrading, spiralling debt, credit crunch, recession….This week has taken a turn for the worse as a prediction of another recession looks likely to hit the capital. But if you thought that was it, on Wednesday we witnessed the largest public sector strike in the UK in decades as the British public sector workers took to the streets to protest against pension fund reforms and job cuts. And with all this havoc taking place in the developed markets, we are now starting to see the emerging world on edge, as China fears an economic slowdown.
Might today’s discussions between Sarkozy and Cameron add to the gloom pot? Key discussion points include what’s happening in the Eurozone and what is being discussed at the European Council next week. No not much news there then. Though the good thing is, believe it or not, we are still here – so neither the UK nor the Eurozone have gone belly-up.
But is the situation getting any better? Well, take your pick – Nomura has slashed its exposure to countries in the Eurozone by 75 per cent in the past two months: not exactly a vote of confidence, is it? Likewise, the debt crisis in Europe is now fully systemic and will require a systemic response to resolve it, the President of the European Council stated on Wednesday. Oh – and then there was also another big thing this week in the UK – formerly known as the pre-budget report and nowadays gloomily called Autumn Statement – which this year was led by one little but memorable word.
“Infrastructure” is the new word on the street. Really, you might wonder – Infrastructure – why? Well, going by the Oxford Dictionary, the word was imported from French, where it means subgrade, the native material underneath a constructed pavement or railway. And now we’re getting closer, as with the delivery of George Osborne’s Autumn Statement on Tuesday, the word “Infrastructure” suddenly had about £6bn behind it for 35 road and rail projects around the UK. Once again, the Oxford Dictionary nailed it.
But frankly, will this tiny yet financially powerful word provide a real safe haven for the UK in the bigger picture of the Eurozone crisis? I am not so sure about it. When German chancellor Merkel, Italy’s new Prime Minister Monti and France’s President Sarkozy met last week to hold crises talks, Infrastructure wasn’t such a big word at all – it was rather more financial, with them deciding not to seek ECB intervention to rescue the Eurozone.
But what does all of this mean in an even bigger context including the likes of the US or Emerging Markets? Well, back in the States, you might say they are sitting on a fiscal time bomb. One could ask if the Eurozone or the US will go down first? Thinking about it though, I think the Eurozone will organise itself eventually . For example, a recent Forbes article argues that Germany will eventually (if needed) print new money and stimulate the Eurozone – despite Merkel’s currently rather hesitant stand and despite the recently failed Government bond auction, which didn’t fuel investors’ confidence at all. The same article states also, that the US is largely ignoring their debt problems. Whilst the debt problems in Europe currently strengthen the Dollar, that bubble might bust as soon as the Eurozone is out of muddy waters.
And then there are the emerging markets. Certainly those directly linked to the Eurozone didn’t have it easy recently, Hungary for example being the latest downgrading victim. But there might be light at the end of the tunnel. Whilst the recent environment wasn’t exactly helping the emerging markets, Renaissance Capital’s global chief economist potentially sees the tide turning soon as investors put off our developed markets are searching for the higher yield found in emerging markets in Africa and Asia.
At the end of the day, one might think “so what”? Politicians are still trying to slash costs, boost the economy and provide safe havens for their flock. Investors are still searching for the highest returns, no matter which markets provide them. Crises come and crises go – it has always been like that. But thanks to a powerful little word called “Infrastructure”, we can at least be sure that we’ll have usable roads, tracks and maybe even a new airport close to the capital for the time after the crisis.