We all know the British economy is sickly. The latest survey from the CBI just confirms it. Apparently, the UK’s manufacturing output – that’s the sector that’s supposed to save us all from penury, remember – is set to start shrinking over the next 12 months.
That’s painful. It also suggests the country’s dole queues could soon be getting longer again, which would be very unwelcome all round. Yet something more surprising cropped up in the survey. The number of manufacturers expecting to raise prices has also fallen sharply.
You can see what this could add up to for the UK’s cost of living here. But in short, it could have two key effects.
First, the good news. There might be less inflation ‘building up’ in the system than expected. This would be handy for consumers, as our incomes might stretch a little further. And it would likely persuade the Bank of England to keep bank rate on hold at 0.5% for even longer.
But here’s the bad news. If Britain’s manufacturers don’t feel able to raise prices, even although they’re paying more for the likes of fuel, their profits will get squeezed. Add to that the deteriorating business climate, and it’s another sign to be wary about shares that depend on UK economic growth.
German inflation could spark more eurozone jitters
So what about a country where manufacturers are still king? Germany’s economy is almost the mirror image of our own. It’s been going gangbusters recently. So it seems the ideal place to invest.
But the flipside of that growth is that inflation is rising fast. It has just hit 2.6%, almost its highest level since September 2008. It may not seem that high compared to ours, but it’s heading in the wrong direction.
And this could well influence thinking at the European Central Bank (ECB). The ECB seems to be setting its interest rate policy in line with the level of German inflation. So the latest figure could prove the catalyst for another rise in eurozone interest rates, particularly now that the Europeans are patting themselves on the back for ‘sorting’ the Greek crisis. That in turn could mean plenty more euro-turbulence, which could have a knock-on effect worldwide.
So while there’s no doubt that a number of German stocks look quite good, with all this uncertainty still hanging over the global economy, then regardless of where you’re investing, I’d stick with high-yielding defensives for now, as we’ve been recommending for some time. We pointed out one high-yielding sector last week.
With dividends like these, you’ll do better than the inflation rate – both in Britain and Germany. And if the markets take fright at another ECB rate rise, you should get the chance to snap up such stocks even cheaper than they are today.
Category: Market updates