Is another recession dip upon us?

Last week saw the phrase ‘double dip recession’ begin to make its way into economic reporting on a serious level. Whether there will be a second wave of a more severe global recession has been a hotly contested topic. At the heart of the trouble lies Europe. There has been great volatility in the Euro rate and it dropped to its lowest against Sterling in over eleven months last week. Whilst there has been some identifiable positive market shifts in response to moves taken by the Eurozone to steer up confidence these have crucially been short lived. The effect of the original announcement of the near 1 Trillion Dollar rescue package for example only really benefited the Euro for one day. The conclusion on the part of investors seems to be that the problems are deep set and structural – however much money is pledged to help failing nations is insufficient without greater structural reform. There was more bad news for Europe last week, as Spain and Italy became further embroiled in the crisis that began with Greece. Both nations approved their own intensive budget cuts - the Italian Cabinet for example approved 24 billion Euros of cuts to bring Italy’s deficit within the EU limit of 3% by 2012. Spanish stocks tumbled as it was also revealed that the Bank of Spain acted to give its first Government bailout (550 million Euros) to one regional lender Cajasur. The crisis and its effects are far from limited to the Eurozone. In the UK, the new Chancellor has outlined initial plans to make 6 billion Pounds worth of budget cuts as the deficit desperately needs reducing and the scale of debt in the UK is staring to be directly compared to Euro nations. The weakness in the Euro has caused the Dollar to rise and rise. It has been reported that multi-national companies on the scale of McDonalds and Coca Cola are Dollar’s could be facing negatively affected earnings as a large proportion of their income is generated outside the US and denominated in currencies that have all fallen against the Dollar. The story however is not one sided. Rather than the crisis kick starting a second recession dip, the OECD’s chief economist has forecast that the weakening Euro will actually help European exports and with time this will lead to recovery. The luxury goods label Burberry is an example of one company who have reported increased profits on the back of the crisis. There are also worldwide discussions taking place regarding banking regulations and whether these should be tightened. Whilst the Chairman of the US Federal Reserve has stated that banks must be kept independent of political meddling, the situation in Europe is likely to lead to upfront levys on banks to help support struggling nations. More banking regulation may also help to prevent the second recession dip. For currency trades, the market is still exceptionally volatile. This is a great time for GBP/EURO and USD/EURO transfers. Speak to your Currency Solutions broker to make sure you catch the rate as it spikes – or can minimise your losses if you are selling Euros.