Uncertainty remains over whether the domestic rate cuts will have succeeded in pulling the US back f...
Uncertainty remains over whether the domestic rate cuts will have succeeded in pulling the US back from the brink of recession.
The third and fourth quarters of 2001 were the first successive quarters of negative GDP growth for some time. However, Steve Arnott, US fund manager at Threadneedle, believes this year will eventually see a return to positive growth, albeit at a sluggish pace.
'The rate cut programme was stepped up following 11 September in order to maintain confidence in the financial system,' he says. 'It appears to have worked as a lot of leading indicators show economic activity has started to increase, although it is still at relatively low levels.'
Arnott believes economic growth in 2002 will be less than many people are expecting, perhaps only 0.5% for the year. In a normal up cycle, the US economy is expected to grow by an average of 3%.
He accepts this estimate may be a little on the conservative side but is certain the evidence points to a slow but steady improvement over the course of the year.
He says: 'As a result of our overall view, we are expecting rates to remain stable this year. If there is an increase, we anticipate it will come towards the back end of the year, rather than the near future as many commentators are predicting.'
Arnott stresses the unusual nature of the current slump and points out that while unemployment has increased and continues to rise, consumer confidence also appears to be increasing. Corporate capital spending, which normally follows consumer spending, remains at rock bottom.
This topsy-turvy cycle, which has no historical precedent, makes analysing the impact of the Fed's rate cuts all the more difficult, says Andrew Milligan, head of global strategy at Standard Life Investments.
He agrees with Arnott that the economic environment appears to have stabilised and may be improving but says the picture is far from clear cut.
In comparative terms, he argues, equity markets, despite their end of year rally, are down year on year from where they were. Instead of depreciating, as one would expect in a period of negative GDP growth, the dollar has actually appreciated against other major world currencies.
'This means the efficacy of monetary policy has been blunted,' says Milligan. 'Perhaps a better way of looking at it is to say that monetary policy is working but not in the traditional ways. Investor confidence remains low and many could be waiting until the economy is very firm before they dip their toe back in.'
Although Standard Life continues to believe the tail end of the year will bring a US recovery, Milligan admits this is not the only possible outcome.
'History tells us that when the pendulum starts to swing in one direction, it tends to continue rather than stop halfway,' he says. 'But this doesn't preclude a double-dip recession, which is eminently plausible.'
Rate cuts seem to have stabilised US economy.
Many leading indicators positive.
Recovery predicted for the tail end of 2002.
Cuts haven't yet pushed US into positive growth.
Unpredictable business cycle.
Potential exists for a double-dip recession.
HL and Liberty SIPP slowest
Lifetime and annual allowances
'IFAs bore the brunt'
'Recovery or boom'