In Brief
The first estimate of UK GDP for Q4 2010 shows a contraction of -0.5%.
Talks between the Coalition and UK banks to increase lending and curb bonuses have collapsed.
Bond auctions on the EFSF have been highly successful, and boosted confidence in the euro.
Spain’s Government may not be doing enough to curb fears of an ECB bailout.
In Depth
UK
The UK economy shrank -0.5% in the last quarter of 2010, according to figures released by the Office for National Statistics this morning. We can speculate the contraction was caused by the bad weather conditions throughout December and the Christmas season. However regardless of any hearsay it clearly suggests UK economic recovery is more fragile than previously thought.
Furthermore, talks between the UK government and leading banks (known as Project Merlin) have collapsed today. The Coalition aimed to rein in excessive bonuses and increase lending from the banks to small businesses. However, last minute demands from Chancellor George Osborne were viewed as a step too far by the banks, and the talks faltered.
EU
The first ECB (European Central Bank) bond auction on the EFSF rescue fund was a massive success on Monday. Demand during the auction meant the EFSF bond was oversubscribed many times over. This suggests the markets have a great deal of confidence in the rescue fund, and bodes well for the euro.
Furthermore, this morning the Gfk Consumer Confidence survey in Germany has been released. It reveals that German consumers are highly optimistic about their finances looking ahead to February. The survey increased to 5.7 this month, compared to 5.5 last month and estimates of 5.4.
On the other hand, confidence in the Spanish Government’s restructuring of its finance sector is low this morning. The Government has stumped up the cash to restructure Spain’s regional banks (called cajas) but not its central banks. This has raised concerns that Spain isn’t doing enough to repair its financial sector, and could need an EU bailout.
Coming Up
The US Consumer Confidence survey for January is released this afternoon. It will indicate how confident US consumers are in their prosperity, and could affect the US dollar. In addition, this evening Bank of England Governor Mervyn King is scheduled to make a speech this evening. This will be closely watched for comments about the state of the UK economy.
By Peter Lavelle with specialist currency broker Pure FX.