Positive outlook as UK bucks European trend

Jean-Michel Six, chief economist at credit rating agency Standard &
Poor’s, said that despite a slowdown in consumer spending, he remained
optimistic on the UK’s growth prospects for 2007 because of strong investment
from UK companies.

‘Business investment has come back and that’s great news for the UK,’ Six
told cantos.com. ‘We knew that corporates had a lot of cash on their balance
sheets, but it was a bit of a mystery really to try and understand why they were
not investing more. Now we are seeing a surge in business investment. That’s
very important for UK productivity and explains the strength of the economy as a
whole.’

But the prognosis for mainland Europe was far less bullish. Demand for
European products is expectecd to fall and tighter monetary policies are
emerging in the major economies. FDs in Europe should prepare for a year of
belt-tightening and weaker profits.

Six said the Euro was expected to strengthen against the dollar next year,
which would make European exports less competitive.

Recent interest rate hikes in Europe would take their toll, he said, as their
impacts would only feed through to the European economy next year. ‘Monetary
policies have been tightening in Europe, as we know. The effects of higher
interest rates take time to feed into the economies. It takes months before you
see those effects starting and we think that those effects are going to
materialise by the beginning of 2007.’

But UK FDs should not be too smug. According to research from Ernst &
Young’s ITEM club, the UK economy is unbalanced and over-reliant on consumer and
government spending.

In its summer forecast, the ITEM club said that over the last seven years UK
manufacturing had lost market share to European rivals and emerging markets.
Strong spending from government and consumers had covered for this, but with
both these groups easing off there will be nothing to make-up for the poor
performance of manufacturing.

‘The UK has just had seven years of plenty, based on heavy spending by the
consumer and the government,’ the ITEM club said in its analysis. ‘Now these
sectors are over-borrowed and can no longer take the lead in driving the
economy.’

This situation would leave medium-term GDP growth dependent upon exports,
investment and vulnerable to fluctuations in the world economy.

COMPANY REPORTS

Corus of approval

Despite reporting a mediocre set of interim results lastweek, FTSE 100 steel
group Corus received a boost from analysts at investment bank Credit Suisse.
Corus FD David Lloyd reported that 2006 interim profits had fallen to £305m from
£485m in the same period in 2005. Profits from continuing operations for the
period were down from £340m to £106m. Credit Suisse, however, said that the
steelmaker would be a good bet in the event of a slowdown in the sector. The
banksaid that it expected the steel industry to move intocyclical downturn,
butadded that Corus would be well positioned to copewith a slump.

Sage advice

Analysts at JP Morgan have upped their forecasts for Newcastle-based software
company Sage and set a price target of 300p for shares in the accountancy IT
business. JP Morgan said Sage offered investors a good defensive investment
option. The broker also downplayed fears that there was weakness in corporate IT
spending and said that Sage was expected to deliver good results and news flow
over the second half of the year. Sage’s shares have been trading at around 243p
each.