Economic activity fell sharply in the wake of the tragedy of 11 September. With the fighting in Afgh...
Economic activity fell sharply in the wake of the tragedy of 11 September. With the fighting in Afghanistan, possibility of further terrorism and the new bio-terrorism threat, the short-term outlook for economic growth remains uncertain.
Recent statistics do not shed much light on current levels of activity. Looking back prior to the attack, economic releases in the US in August suggested that the first stages of a recovery were in place.
In particular, US manufacturers outside the technology sector had cut inventories to levels at which demand would lead to increased production. Consumption was expected to be maintained in spite of rising unemployment as incomes benefited from both the receipt of tax rebates and lower mortgage costs.
In the final quarter, the favourable factors supporting consumer incomes will continue, with mortgage refinancing costs falling further, although the increased number of layoffs will have affected confidence.
In the UK, activity also suffered a sharp setback in the second week of September, but retailers, particularly outside London, are already reporting a recovery in trading levels. Interest rates have been reduced twice in the last three weeks in spite of the upward pressure on public sector wage costs and continuing strength in the housing market.
Recent surveys show declining levels of business confidence in the service sector as business costs are trimmed.
Growth in GDP over the year will fall short of government forecasts, with a resulting deterioration in the budget surplus but growth will exceed that in both the US and Europe, helped by the increased spending on public services.
European economic data continues to show economies slowing with both consumer and business confidence declining. The ECB responded to the Fed's rate cut in mid-September, trimming rates by 50 basis points. However, recent comments from Central Bankers indicate a return to the previous cautious policy and any fiscal stimulus will be constrained by rising government deficits.
The recent Tankan report on business conditions continues to paint a bleak picture for the Japanese economy. Although the Bank of Japan announced a modest easing of monetary policy in the third quarter, there has been no concerted action to stimulate monetary conditions and engender economic growth.
More recent comments from the Governor of the Bank argued against further monetary loosening although the Bank did supply large amounts of liquidity in mid September.
The favourable liquidity background provides a strong base for markets. In the near term, however, the impact on consumer and business confidence from the terrorist attacks, ongoing military action and possible reprisals makes the economic outlook uncertain.
The actions by central banks to ease monetary policy together with increased government spending will eventually lead to stronger economic conditions. Plentiful liquidity and economic recovery is a background against which equity markets will outperform other asset classes.
Good liquidity background.
Increased Government spending.
Sterling's strength hurts UK.
Possibility of further terrorism.
Bleak outlook for Japan.
ECB could return to former cautious stance.
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