Feb 5 2009
The Bank of England has set its base rate to its lowest-ever value, the government has announced a second bailout of the country's banking system and the European Central Bank has also reduced interest rates. Consumers and businesses on this side of the Atlantic lack a Barack Obama figure to provide optimism and it seems that the temporary VAT cut has not improved consumer confidence.
It would appear that Gordon Brown is far from Mr Obama in voters' eyes, with polls in the UK showing that the so-called "Brown Bounce" - following his original bailout plan for the banks - has ended, and his popularity has sunk to pre-crisis levels. Environment secretary Ed Miliband has suggested that "light-touch" regulation ideals are in "crisis", following on from the very real crisis that prompted never-before-seen moves from governments and central banks across the world.
However, it could well be that we have not yet seen the last of these unprecedented measures. Barings predicts that unemployment will continue to rise in the US, Europe and the UK - where it has reached nearly three million. On top of this, 2009 will see corporate profits "probably fall by around 30 per cent".
However, good news could begin to surface in January of next year, in the USA at least. Barings said there was a "strong probability" for growth in the country, thanks to the low cost of borrowing and the $850 billion rescue package. However, in keeping with the general feeling of pessimism about the world's economy, it added that "a depression can not be completely ruled out".
Barings felt that other countries would follow along shortly after, although Europe would be behind, adding: "the UK, Australia and Canada are all likely to follow the US, maybe with small lags, while China has the most scope to engineer a decent recovery by the end of the year. In all these areas, we expect further initiatives to help the banking sector and encourage lending."
The UK government has sought to achieve this through an insurance scheme for banks' loans, while the Bank of England has set the base rate to a record-breaking low of 1.5 per cent. The Threadneedle Bull & Bear report for this month explains that equities in the UK are "very attractively valued" but warned that the recession in the country means that its position is "overweight".
Across the English Channel, the European Central Bank (ECB) announced that it was cutting rates from 2.5 per cent to 2.0 per cent. ECB president Jean Claude Trichet said that there would be no change to this in February, while March would be the next "important" meeting.
According to the JP Morgan weekly strategy report, the intriguing thing about his speech was the mention of a "liquidity" trap as a result of cutting interest rates too far. While the markets felt this was a "hawkish" statement, JP Morgan said that "Mr Trichet was more dovish, especially as the ECB is considering taking interest rates down through the two per cent floor that has effectively been in place". It added: "That the macro data are beginning to move so rapidly against the ECB speaks to Mr Trichet's comment that the economic forecasts are now out of date."
Barings claims that when the European recovery takes place, it will be Germany at the head of it. Chancellor Angela Merkel has said that her government may introduce a €100 billion fund to help companies in the country get access to credit.
In terms of the eurozone as a whole, the European Commission has said that the recession should begin to lift by the end of year, dependent on a number of factors, but added that it's going to be a painful 12 months, with GDP in the eurozone falling by 1.9 per cent in 2009. Threadneedle explains that Europe is also seeing "very cheap" equities, with the fall in the cost of oil easing input costs, but adds that the economy is in recession and lending is sluggish. However, it believes the eurozone to be in a better position than the UK, describing it as "[slightly] overweight".
On the other side of the world, in Asia, Japan is readying itself for more contraction in the next 24 months, while even the economic miracle of China has been struggling. It should be said however that it is still seeing growth, just of the single-figure variety. Barings expects government stimulus to deal with the problem, which saw the slowest pace in seven years during the final two quarters of 2008, of nine per cent and 6.8 per cent respectively.
Meanwhile, Barings also reports on Barack Obama's plans to help the US out of its current slump, including a $825 billion package which may see a so-called "aggregator bank" to deal with the large levels of toxic assets in the system. Threadneedle says that US valuations are "very attractive" with fears over inflation disappearing, and feels that Mr Obama's package should help the economy. However, it warns that unemployment is on the up, on top of the continuing recession and lack of credit - prompting it to label the US equities market as "underweight".
With predictions on just how bad this crisis has been moving closer and closer to comparisons with the Great Depression, many analysts appear to be fearful over making an exact estimate for the year ahead. Whether or not the world's governments' measures are successful will only be judged as events happen, although few are expecting a recovery until late in the year at the very earliest.
Whenever this is achieved, the real question may not be whether the stop-gap measures used to combat the crisis were the correct ones. The real debate may well focus on what the future of the world's banking systems should look like, and whether "light-touch" regulation ideals were to blame for the present crisis.
