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Double Dip Woes - John Redwood Comment

June 15, 2010

John Redwood Comment
15th June 2010

Double dip woes

This year should see continuing world growth, led by China, India and the other Asian centres. Most forecasters expect a respectable 4% plus out turn for the world economy as a whole. The US recovery will progress and even most of the European countries will be in positive territory. 

Despite this, the markets are not happy. Instead of being serene and dull as a slightly sub standard recovery works through to the profits and dividends of leading companies, the markets are having a bad attack of the jitters. There are three big problems coinciding to produce difficulties.

The first is the continuing drive to more and more output coming from Asia, as the Asian economies remain super competitive compared to the most in the West.  The second is the crisis of the Euro, as the creators of the currency discover late in the day they need to control the borrowing levels of all the members of the zone to have orderly markets. The third is the spread of Credit Crunch fears to sovereign debt, as rumours circulate that some countries will not be able to meet all their interest and capital repayments.

The UK has just produced new independent forecasts for the economy, which point to a lower long term rate of growth of  around 2.1% compared to the post war norm of 2.5% and the previous government’s assumption of 2.75%. There are fears that tough action to cut spending and curb deficits in several Euroland economies will lower growth rates there still more. In many countries the banking systems are still quite stretched and under new regulatory controls to limit lending and rebuild capital. This makes it more difficult for private sectors to pick up the running as public sectors are curbed.  In Asia China is still reining in credit after the explosive turn round from the world Credit Crunch. India needs to tighten money further to control her rapid inflation.

We have switched some foreign currency bonds into sterling bonds for sterling accounts, to enjoy an increase in yield and to cut currency risks. The main world currencies are still engaged in a chase to the bottom. Sterling was an early winner of this race, but now faces stiffer competition as fears grow about the Euro. We continue to recommend cautious and balanced portfolios.

Regards,
Evercore Pan-Asset Team 

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