By ROBERT HARLEY 10/01/2010
In December analysts revised their forecasts for US growth in 2011 upwards. This combined with more positive data releases enabled equity markets to shrug off on-going concerns surrounding peripheral European governments and record the best stockmarket performance seen for the month of December since 1991.
The outlook for shares in 2011 is undeniably bullish, with consensus forecasts for growth in earnings in the mid to low teens. The investors love affair with bond markets maybe starting to wane, according to EPFR, the US financial data analytical company, with shares being the beneficiary. Indeed bond markets face a tough start to 2011 with the prospect of a large refinancing in the eurozone for both banking sector and governments, in particular Spain.
In the UK figures released by the Office for National Statistics showed that public sector borrowing in November hit a record high, raising concerns the government’s efforts to reign in the UK budget deficit will not be successful. Economic Forecasters have marginally lowered their growth outlook for the UK economy in 2011. Against this backdrop Consumer Price Inflation (CPI) is likely to rise to 4% in the New Year, driven by rising commodity prices and the increase of VAT to 20% this month. This could potentially set the scene for the Bank of England to raise the base rate in the latter half of the year.
Inflation data from China for November also surprised on the upside, raising concerns of an overheating economy. The Bank of China responded by increasing commercial bank reserve requirements and raising interest rates by 0.25% to bring headline inflation back down to the official CPI target. Markets wobbled in response, as investors assessed the impact of tighter monetary policy. 2011 is likely to provide a test for the Chinese authorities as they attempt to engineer a soft landing of lower growth and lower inflation, without undermining local and in turn global growth prospects.