The economic background in the UK is expected to be sluggish at best in 2012.
The key risk to a benign outcome for UK growth remains the eurozone debt crisis, despite the long-term refinancing operation, recently announced by the European Central Bank, having reduced funding pressures on hard-pressed European banks.
The costs of funding for peripheral eurozone countries may have fallen but we still have great scepticism regarding the creditworthiness of Greece. The austerity measures virtually guarantee further falls in the economy, worsening Greece’s fiscal position.
Meanwhile, the collapse in bond yields mean pension fund deficits will be quite a lot higher than expected which, longer term, could have an impact on dividend payouts by the companies affected.
Despite this backdrop, UK multinational companies are benefitting from the continuing improvements seen in the US economy and, given that major currencies still appear to be relatively range-bound, there has not been an issue of translation of overseas revenues into sterling having a significant effect so far.
The dividend payout ratios of many of these successful companies remain modest so there is room for improvement in 2012, although the pension deficit issue will need monitoring on a company by company basis.
The UK consumer may also feel a slight boost in confidence as UK inflation, as measured by the Consumer Price Index, having touched 5.2% in September has since fallen, most recently, to 3.6% in January.
The VAT increase of a year ago has fallen out of the annual inflation comparisons but we also saw some Christmas discounting by retailers help to curb prices.
George Luckraft is manager of the AXA Framlington Equity Income fund
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