City Watch: Eurozone ‘recession’ has turned to ‘depression’, says Charles Sylvester

Charles Sylvester of Charles Stanley & Co

Charles Sylvester of Charles Stanley & Co

After the positive upward moves seen in world stock markets throughout most of May, a dash of reality has returned to the scene over the last fortnight.

The fundamental drivers of share prices, apart from sentiment, are underlying earnings, dividends and cash flow. However, recent company results have been disappointing, especially in Europe where more than 50% of companies have missed consensus estimates.

The economic data in the euro zone has also been poor, so, with the recession deepening and unemployment topping 12%, it came as no surprise that the European Central Bank (ECB) cut interest rates by another 0.25% the other day, although this move is unlikely to give much economic relief to Southern Europe.

The euro zone has now endured six consecutive quarters of negative growth. It looks as though the situation should no longer be termed a “recession”, currently defined as a “business cyclical downturn”, but actually described as what it is, which is a “depression”. The difference between the two is that the former should not require a policy response, but generally gets one, whilst the latter desperately needs one but whatever is forthcoming is totally insufficient.

In the United State, the economy has started to look up; house prices recovered a massive 10% in March, and the benefits of plentiful cheap energy as a result of shale gas exploration have continued to flow through the manufacturing base.

It is to be hoped that the UK Government sees the light and pushes full steam ahead with a similar potential bonanza, which all signs point to being available under our feet.

They should ignore the siren voices who still insist that the answer to our energy problems is to reuse 17th Century technology, and litter our countryside with unproductive windmills.

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: : Charles Sylvester is an investment manager with Charles Stanley & Co in Ipswich.