RSS feedsThe more positive tone in the markets, following the Bear Stearns bailout, has produced higher share prices and a stronger US dollar. But surges in oil and food prices have reinforced the dismal outlook for the world economy. Steep commodity price rises, which depress growth and worsen inflation, are no longer a transitory development. Fundamental forces, mainly supply constraints and growing demand from Asia, will sustain high food and energy prices for the foreseeable future, with harmful effects for growth and living standards in countries that are net consumers.
The US economy is facing acute pressures. With house prices plunging and jobs falling, we expect two to three quarters of negative US growth. It is now accepted that weak US growth is likely to persist into 2009. US recession, though mild, is probably unavoidable, but recent pessimism has been excessive. The US position is stabilising in reaction to aggressive policy measures taken by the Fed and the Administration. US growth forecasts, after being cut repeatedly, have now stabilised and we have recently witnessed some upward revisions.
Rates
Sharp cuts in the Fed funds rate, from 5.25% to 2.00%, have ensured that the
downturn does not degenerate into a slump and have placed the US in a stronger
position to counter new threats to the economy. US interest rate prospects are
also being reassessed. The markets no longer expect cuts to 1.50%. One extra Fed
cut to 1.75% is still possible, but a minority believe 2.00% is the low point in
the present cycle.
The balance of risks is shifting to other regions, mainly Europe. Keeping eurozone interest rates at 4% and the consequent strength of the euro has damaged growth prospects. The huge gap in performance between Germany and countries such as Italy, Greece and Spain, will worsen eurozone risks. In the UK, house prices are falling and growth prospects have worsened. But, after poor inflation figures, hopes of additional UK interest rate cuts are now in doubt.
