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Financial Update - Thursday 11th March 2004

Most commentators believe that the UK is likely to achieve economic growth at an annual rate of around 3% over the next few months, which will be the strongest since the year 2000. This growth will be significantly stronger than in the Euro-zone. Perhaps, surprisingly, businesses exposed to conditions in the Euro area are also saying that they expect demand to improve in 2004, but at a slower pick-up than in the UK.

Whilst conditions are slowly improving in Europe, there is some way to go before there is any noticeable upturn in the European economies. Germany continues to suffer with high unemployment and the strength of the Euro against the Dollar is hurting exports. Whilst France and Germany have been pushing very hard for a reduction in the finance rate below its current 1%, it seems to be falling on deaf ears. Indeed, there was a recent comment that the Central Bank believes that the Euro could rise to as much as 1.30 against the Dollar before they see a need to make any changes.

Improved optimism in the UK seems to be concentrated in service businesses, with the morale of manufacturers still somewhat downbeat. The service sector's expansion seems to be not only driving recovery in the UK, but also within the Euro-zone as well. Indications are coming through of improved sales and order books in the UK and businesses are much more optimistic going forward than they were three months ago. In the SME sector, whilst there has been a drop in the number of insolvencies, we are not yet out of the wood.

In the USA, retail sales rose 0.6% in February, as consumers took advantage of tax refunds to buy cars and other household goods at department stores, according to a recent Government report. Chain stores and department stores are reporting increased sales and, although employment growth continues to be slow, the tax cuts will bring growth in disposable income. The number of Americans filing initial unemployment claims fell last week to 341,000, which is approaching a three year low and is an encouraging indicator of an economy picking up.

The USA economy is expected to expand at 4.5% in the first half of the year, compared with 4.1% in the last quarter of 2003. Consumer spending, which accounts for more than two thirds of the US economy, could rise at around 3.6% this quarter and 3.9% next.

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