Capital expenditure rose sharply in the fourth quarter of 2006, according to figures from the Office for National Statistics (ONS). Business investment increased by 3.3% over the three months to December, while the figure was 11.1% higher on an annual basis. This increased spending was driven by the energy and utility sectors, with strong investment also coming from the service sector.

The number of people out of work in the UK fell by 23,000 to 1.69 million in the three months to December, according to the ONS. This improvement nonetheless left the unemployment rate unchanged at 5.5%. Meanwhile, the number of people claiming unemployment benefit fell by 13,500 to 925,800 in January.

The UK equity market was caught up in a global equity market sell-off at the end of February. The decline was triggered by a number of factors, including rumoured plans to impose investment restrictions in China and fears over the US economy. The UK market was led lower by mining companies, which fell on concerns over the imposition of a windfall tax on the sector by the South African government.

Retail sales fell sharply in January, despite widespread discounting. The 1.8% decline was the biggest monthly fall in four years, according to figures from the ONS. This deterioration was most acutely felt by household goods and clothing retailers.

The UK equity market continues to offer some attraction in a global context. It is heavily influenced by raw materials and these stocks have experienced wide fluctuations in recent months. However, its growth prospects, relative to other regions, are solid and valuations are less challenging than, for example the US market.

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Economic sentiment strengthened in the eurozone during February, according to the European Commission. French business confidence also improved, and although Germany’s Ifo index of business sentiment fell slightly, from 107.9 to 107, it remains high by historical standards. The German ZEW survey of economic sentiment was slightly weaker than anticipated but recorded its first positive reading since July 2006.

After continuing their upward trend for most of February, European equity markets fell sharply towards month-end, as they became caught up in the global sell-off that initially began in China before quickly spreading to other world markets. The FTSE Europe ex-UK index ended the month 2.0% lower in euro, total return terms. A strengthening of the euro mitigated some of the losses for sterling denominated investors, with the index declining 0.5% in sterling, total return terms.

The European Central Bank kept interest rates unchanged at 3.5% for a second month in February, as expected. However, rates are widely expected to be raised to 3.75% in March, with a further increase to 4.0% likely later in the year. Although annual CPI inflation remains below the ECB’s 2.0% target ceiling, money supply growth – seen as a gauge of future inflation – remains strong and well above the Bank’s comfort level.

Economic growth in Europe remains strong. The strength of the corporate sector has fed through to household consumption via an improving labour market and this trend looks set to continue. We expect the ECB to raise interest rates to 4.0% this year before pausing to assess the impact of earlier increases. The favourable economic environment should continue to support the region’s equity markets. However, the gearing of European equities to the global economic cycle could leave them at risk should the weakness in the US economy broaden.

The research or analysis included in this section of the website have been produced by Insight Investment Management (Global) Limited for their own use and are made available only coincidentally. It is under no circumstances to be considered as an offer, or solicitation, to deal in investments. Information has been obtained from sources that are believed to be reliable, but is not guaranteed as to its accuracy or completeness. Any opinions expressed represent the views of the contributor at the time of preparation, and are subject to change. The views and analysis above do not constitute investment advice. Anyone seeking advice should consult a stockbroker or independent financial adviser.

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