As promised last week, here's the second instalment of my examination of the knock-on effects of the European Central Bank's attempts to avert deflation and attempts to promote growth in the Eurozone through its 1.1billion euro programme of quantitative easing (QE).
The effect of Europe's troubles has been to push down the value of the euro and this has been reinforced by the announcement of QE. Last March, the pound stood at 1.20 euros, but last week, a pound could buy 1.34 euros at one point. This is bad news for companies exporting to Europe. UK manufacturers, in particualr, face a difficult outlook.
The US is the UK's largest export market, but Germany, the Netherlands, France, Ireland, Belgium, Spain and Italy are included in the top ten and, overall, Europe is the most important export market for the UK. The strength of the pound is putting pressure on British exporters and cheaper goods flooding into the UK will create pressure in the domestic market too.
The UK economy remains too dependent on consumer spending and services. Retail sales rose by 0.4 per cent in December after a rise of 1.6 per cent in November. The December rise surprised analysts, who had been predicting a fall of 0.7 per cent after the strong rise in November, which was fuelled by 'Black Friday'. Consumers were reacting to lower prices in shops. The Office for National Statistics reported that average store prices fell by 2.2 per cent in December, as suppliers passed on the benefit of lower oil prices to consumers. In addition, prices at petrol stations fell by 9.7 per cent during the month, leaving more in consumers' pockets to spend on other things.
The manufacturing sector in Europe has been boosted by the lower oil price. Markit's composite purchasing managers' index for the Eurozone in December rose from 51.4 to 52.2. Anything above 50 generally signals growth for manufacturers. It is believed that orders are growing at the fastest rate for 5 months in Europe and employment rose slightly in December. Interestingly, France remained week and German only showed a small recovery and so the biggest benefits are being felt in other European countries. These figures reflect the early benefits of lower oil prices coming through and a further boost should be received from the fall of the euro.
The UK consumer can look forward to further downward pressure on retail prices and this should lead to another increase in consumer spending. However, if the imbalances in the UK economy are to be addressed, British manufacturers urgently need to invest in order to increase productivity, which remains weak. David Cameron has set a target of doubling British exports to £1 billion by 2020. This can only be achieved by greater investment.
And that is where peer-to-peer (P2P) business lending - also known as marketplace lending - comes in. Many of Britain's exporters are relatively small companies and they are still finding it difficult to borrow money from the banks in order to fund investment. Marketplace lenders, such as Money&Co. a newly launched business of which I am CEO, can focus on cashflow lending and can help companies looking to invest in machinery to help increase productivity and allow growth.
The University of Cambridge and NESTA published a survey at the end of last year and this showed that just under 30 per cent of loans sourced through platforms like Money&Co. were going to manufacturing businesses (well above the percentage that manufacturing represents of the UK economy). Marketplace lending is assisting the manufacturing sector to invest and grow and this will ultimately help the UK economy to achieve a rebalancing.