A year of living dangerously - now global crisis looks set to worsen

“This is a very short-sighted approach. If you look back to past recessions, those who continue to market and expose themselves to prospective consumers tend to fare best when the good times return ­ and may even win business during the lean times. This is where we are in a different position to previous recessions, because we have a vast and mature digital marketing channel that is very cost-effective and measurable in its results.

“Companies that spend intelligently in the digital space will be in a good position to expose themselves to the market, while keeping a tight rein on costs. If it works, spend more, if it doesn’t, try another digital route to market and you should be rewarded,” he advises.

What about the prospects for an Obama-led US economy?
Luckily for the president-elect, the markets have already discounted most of the bad news. Trouble is, there might be more bad news to come for the US economy. “The main story for the start of 2009 in the US will be the inauguration of Obama as president and how his ‘cabinet of stars’ will handle the economic crisis and the ‘war on terror’, while fulfilling the campaign promises that his ‘Yes We Can’ run for the highest office in the land made,” says Jeremy Cook, chief economist at World First, a foreign exchange broker.

“We believe that the US housing market has not yet reached the bottom as unemployment has not rocketed as it can. With unemployment rising, foreclosures will keep on rising and further dampen property prices.

Whether the Fed will dip its toe into interventionist waters remains to be seen. In the short term, while we believe the US economy will be in a recession for the whole year, the Obama presidency will be good for the greenback and he will be helped by a strongly Democratic House and left-leaning Senate,” he adds.

We should, therefore, expect a strong dollar, weak pound and a strongish euro in 2009?
Predictions vary widely with analysts expecting the pound to be trading between $1.45 and $1.79. “We believe we’ll see a dip into the $1.40s before a recovery to the high $1.60s or $1.70s in the second quarter of 2009,” says World First’s Cook. “Sterling can no longer be labelled a ‘high-yielding’ currency after the shock 1.5% interest rate cut in November. With growth returning to the economy, we would expect sterling to perform better against most currencies over the course of 2009, although a poor start is entirely possible,” he says.

Marc Cogliatti, a currency strategist at HiFX, another UK-based foreign exchange broker, says, “We expect the pound to remain under pressure against all its major counterparts throughout the majority of 2009, as the Bank of England continues to cut interest rates in an attempt to stabilise and promote growth in the fragile UK economy.”

Cogliatti believes the US dollar is likely to continue to be a dominant force despite the Fed’s “ultra-loose stance on monetary policy and the crumbling US economy”. He explains: “The main reason for the recent surge in the dollar has been a flight to cash, with funds being forced to sell out of investments and repay their debt. With the global economy likely to remain under pressure throughout 2009 and also tighter controls on lending and borrowing, it seems unlikely we will see the sort of investment needed to reverse this trend.”

Cogliatti believes the euro will be the under-performer in 2009 as cracks continue to open up in the eurozone economy and the European Central Bank abandons its “hawkish” stance on interest rates.

So will emerging economies be powering global GDP in 2009?
Some predictions suggest all of the modest 2% or 3% growth in the world’s economy next year will come from developing economies such as Brazil, Russia, India and China (BRICs). Fitch Ratings says world GDP will grow at 0.9% in 2009, while BRIC GDP will grow at 5.7%. “Cheap labour, raw materials and other exp orts will continue to be central to BRICs’ export competitiveness and overall economic performance,” says City University’s Nesvetailova.

But even among the BRICs there are problems. Growth is slowing in China and there are also problems in Russia, which has seen the value of its financial market wiped out by 70%, says Nesvetailova.

“Without capital inflows into its financial market, with many banks exposed to securitisation losses and with oil prices below their peak levels in late 2007 and early 2008, Russia has lost a key source of its economic ‘strength’ and it is likely that it will be the most poorly performing BRIC in 2009,” she adds.

The failure of the banking system is at the root of many of the problems. Are we now over the worst?
The measures various governments have put in place should mitigate further crises, argues economist Geraint Johnes of Lancaster University Management School. But he warns, “These policies come at a real cost, in that they involve commitments by the taxpayer that will make consumers more cautious about spending. That will make it harder to pull out of recession. There is likely to be a lot more regulation imposed on the banking sector, and this will have an impact in three areas.

“First, it will force the banks to become more cautious about their investments, especially in derivatives where the precise nature of the risks have, until now, not always been well enough understood by investors. Second, there will need to be a realignment of incentives paid to workers in the banking sector, to ensure individuals are not rewarded for taking excessive risks. Third, the increased concentration in the banking sector that has come about as a result of the recent merger activity will have to be monitored in order to e nsure that banks’ customers are not exploited.

“If this regulation is properly implemented, then businesses and consumers should benefit from a safer banking system, though banks themselves will probably not welcome the constraints on their flexibility.”