| | | | | | | | | | | | | | | International Economic Background
The economic facts concerning the global economy are still deteriorating. The US, the UK, the Euro Zone (including Ireland) and Japan are all technically in recession. Emerging economies such as China, India and South East Asian economies are all experiencing a significant deterioration in economic conditions. Unfortunately the downward momentum in almost all economic indicators in these countries has still not been arrested.
The US economy has been in recession since the final quarter of 2007 and GDP contracted by a massive 6.2% in the final quarter of 2008. Since January 2008 the economy has shed 3.6 million jobs and the unemployment rate has jumped to 7.6% of the labour force. House prices are still falling and consumer confidence is at historically low levels. GDP is expected to contract by up to 2% in 2009.
In the UK, GDP contracted by 1.8% in the final quarter of 2008, house prices are still trending downwards, manufacturing and service sector activity are still contracting, and consumer spending is extremely weak. Real GDP is forecast to contract by 2.4% in 2009.
Growth has been contracting in the Euro Zone since the second quarter of 2008, with the German economy now under particular pressure. Manufacturing and service sector activity is contracting across the Euro Area and consumer spending is very weak. In the final quarter of 2008, year-on-year growth in the Euro Zone contracted by 1.3%. GDP in France fell by 1% and by 1.7% in Germany. Real GDP is forecast to decline by 1.8% in the Euro Zone as whole in 2009.
Given that the global economic momentum is still in a downward direction, it would be very naïve to believe that a sudden return to stronger activity will be seen anytime soon. There are some reasons to be hopeful however. Authorities globally are currently reacting very aggressively to the difficulties besetting the global economy. Interest rates are crashing down, fiscal policy is being loosened wherever possible, and oil prices and food prices are declining. On the fiscal side, many governments will continue to proceed with fiscal stimuli packages, but the big one is being delivered by President Obama. Furthermore, efforts to re-capitalise the global banking system are still ongoing.
The hope is that all of these response factors will eventually re-ignite global economic activity. However, it will take some time and once the economic indicators eventually stabilise, the recovery path is likely to be slower than one would normally expect. This is due to the dramatic nature of the financial crisis that has occurred over the past two years and the accompanying destruction of personal wealth and bank balance sheets. In the US in particular falling house prices and equity markets have destroyed considerable personal wealth, and when combined with soaring unemployment, it will take some time for US consumers to start spending again. The story in the UK is similar.
Globally, the personal and corporate balance sheet damage, and the ailing banking systems should militate against a so-called V-shaped recovery. However, before we talk about any recovery we will need to watch out for signs of stabilisation. Those signs are definitely not apparent yet. The consensus view is that there will be a return to modest global growth in 2010, but the risks are on the downside at this point given the unprecedented nature of the global financial crisis.
International Economic Forecast | | | | (Real GDP) | 2008
| 2009f
| 2010f
| | US | 1.3% | -1.5% | 2.0% | | UK | 0.7% | -2.4% | 0.8% | | Germany | 1.3% | -2.5%
| 0.8% | | France | 1.6% | -1.8% | 0.9% | | Italy | -0.5%
| -2.2% | 0.7% | | Euro Zone | 0.9% | -1.8% | 0.8% | | Japan | -0.4% | -2.9% | 0.6% | China
| 9.0% | 7.7%
| 8.5%
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| | Source: Bloomberg Forecasts
| | | Interest Rates
The stance of monetary policy has altered dramatically over the past year in the face of the economic and financial crisis.
The Bank of England has cut rates to 0.5%. Rates could well fall to zero over the next couple of months given the very difficult economic and financial background.
The ECB has now cut rates to 1.5% from 4.25% at the beginning of October. Activity in the Euro Zone is still very weak and the inflation rate is falling sharply. The rate of consumer price inflation currently stands at 1.1% and looks set to fall further over the coming months. Against this background it seems possible that the ECB could cut rates to 1%, or perhaps even lower. Taking rates to zero does not appear likely at this stage, but events over the coming months could dictate otherwise. The ECB has also signaled an intention to use unconventional quantitative easing to reduce long-term interest rates and increase money supply, thereby improving liquidity in the financial system.
With rates in the US and Japan now virtually at zero, there is not a lot more that can be done in either jurisdiction other than try to expand money supply and inject more liquidity into the system. |
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| | | |  | | | | | | | The shape of the yield curve has normalised in recent months. However, the 5-year rate at 4.89% is 281 basis points higher than Germany. Given that Ireland is in a monetary union with Germany, this differential is very high and is indicative of the deteriorating risk profile of Ireland as a result of the rapid deterioration in the public finances and the problems in the financial system.
Equity Market Update
The global equity market background has been extremely difficult over the past year. The table shows the performance of the key markets in 2008 and to date in 2009.
Equity Market Performance | | | | | 2008 | Jan 1st
- Mar 6th 09
| | FTSE 100 | -31.6% | -19.7% | | Dow Jones | -33.8% | -24.3% | | German DAX | -40.4% | -22.6% | | French CAC | -42.7% | -20.3% | | NIKKEI 225 | -42.1% | -19.0% | ISEQ
| -66.4%
| -14.7%
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| | | International markets are being hammered by a combination of the ongoing global financial crisis and the serious economic downturn that is now well established. There is little clarity on the corporate earnings outlook over the next couple of years and markets are not yet convinced that the global economic cycle has bottomed out. This uncertainty and nervousness looks set to persist for the foreseeable future and markets can certainly fall further over the coming months. Markets are unlikely to stabilise and recover until there is clear evidence that the global economic cycle has stopped falling. That still seems some distance away.
The Irish market remains under serious pressure due to the very difficult economic background and the dark clouds overhanging the banking sector. This does not look likely to change and any recovery in the Irish market looks some distance away. On a risk/reward basis, the Irish market does not look attractive to domestic or international investors.
JIM POWER
MARCH 6th 2009 |
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