February 2009

Tradition dictates that financial market soothsayers present their opinions at the beginning of each calendar year about prospects for the coming twelve months. Aside from the expedient optimism of diehard Wall Street bulls, the consensus outlook has rarely been as uniformly gloomy as it is currently.

The pundits may vary in their assessments when it comes to details, but there is general agreement that 2009 will be very weak economically speaking, with a correspondingly subdued atmosphere in the financial markets, and even the most fearlessly optimistic forecasters predict little or no economic recovery until 2010.

The crystal balls are cloudy for good reasons. In the US, President Obama has inherited a budget deficit projected to exceed $1 trillion (excluding a recently approved additional $819 billion stimulus program). Given the cost of bailouts and spending packages against a background of substantially lower tax revenue, trillion-dollar deficits are expected to beset the US for several years. Meanwhile, US unemployment is increasing rapidly, with more US jobs lost in 2008 than in any year since 1945; over half of these losses came between September and December, suggesting an accelerating trend.

Europe’s troubles are not yet as dire as they are across the Atlantic, but threaten to become so if unchecked. The UK, whose debt-saturated economy resembles that of the US, has arguably fared worst among the major economies so far. Banks and retailers are among the most prominent casualties (several high-street household names have declared bankruptcy). In addition to evaporating domestic demand, the UK has also been badly hit by a slump in exports as the global economy contracts. In Germany, a strong export sector has helped the economy to weather previous recessions, but the current downturn will likely be too severe to accommodate this. Accordingly, Germany’s coalition government has announced a €50 billion stimulus package, while similar initiatives, of varying magnitude, have been launched in most other European states.

The outlook for developing nations is hardly brighter. Prior to the ongoing slowdown, growth hopes had been pinned on the so-called BRIC nations (Brazil, Russia, India and China), whose economies have expanded apace in recent years. Earlier forecasts saw these countries still attaining positive growth in 2009. Subsequent developments, such as oil-price related devaluations in Russia and a record decline in Chinese exports because of the slump in global trade, have caused those projections to be revised sharply lower.

According to an old saying, ‘the night is darkest before the dawn’. For investors, the sun will only rise when confidence is restored. Until then, darker times may lie ahead.