DABERIAM L

September 2009

Global Economic Indicators

The summer months have slid by without any new major economic mishaps. Stock Markets drifted higher and the statistical recovery started to appear. That is the rate of decline year on year flattened out giving a warm impression that the end of the crisis was at hand. 

September and the return to work has brought a little reality back into the Stock Markets which are likely to be confused over the next month or so as everyone waits to see what the autumn brings. While the US economy has stabilised and Government stimuli begin to take hold we are seeing both 
a real and statistical upward movement in the economy; however real GDP growth is unlikely. Private sector borrowing, which was adding 1-2% to US GDP over the last 4 to 5 years, is now quite naturally turning into savings to pay down debt. These savings must produce a very considerable drag on US GDP growth. The good news is that the US will import much less and its balance of trade will improve. The savings in the short term will help considerably towards funding the Government and State deficits. The US business sector reacted exceptionally rapidly to the economic downturn with the result that the majority of US industry has cut its borrowing requirements and maintained productivity to a remarkable extent. All this sets the stage for an improvement in the Government’s revenue from corporate taxation, a rising stock market over the next few months but little comfort on the employment front. The 2 icebergs, clearly visible in the economic sea, are the Government deficit, how fast will it melt away, and the huge liquidity bubble that the Fed has pumped into the system which could turn into inflation if it is not reabsorbed.

World Economic Growth (IMF Figures + Projection)	2009	0.50%	2008	3.40%	2007	5.20%
Base rates: 31 August 2009	USD	0.25%	EUR	1.00%	GBP	0.50%
MSCI World Equity Index	31/08/2009	201.726	31/12/2008	181.894	YTD %	10.90%
Gold (PM London Fix $ per  ounce)	28/08/2009	955.50	30/12/2008	869.75	YTD %	9.86%
Oil (WTI Crude $ per barrel)	31/08/2009	69.96	31/12/2008	44.60	YTD %	56.86%

China, a country whose economic management should be a case study for all central banks and Finance ministers, seems to be reducing Government stimulus in order to prevent an asset price bubble developing. The Government’s effort to redirect the economy from export led growth to internal growth is gaining momentum. Chinese Government initiatives to collaborate with Taiwan and Japan are particularly pragmatic. The same drive to work with India is more difficult owing to political tensions along the Himalayan border and potential conflicts over water which is in short supply on both sides of the mountain range. China’s efforts to redirect its economy will have considerable impact on the prospects for inflation in the West. The supply of consumer goods to the Western market, which has been a major contributor to lowering the price of goods over the last 5 years or so, is declining. 

South America and Australia did not fully participate in the economic boom that was driven by the 
borrowing of the Anglo-Saxon world, prospering as with China. However they continue to prosper as China and the other Asian countries stabilise and increase their imports of food and raw materials. Europe, on the other hand, is suffering with its Governments of economic ostriches. Germany, unlike China, plans to continue promoting its lopsided economy by favouring exports over internal growth, ignoring its massive internal imbalances. The Mediterranean countries continue to hide within the € currency their massive Government deficits leaving France in the middle pursuing its own, and I have to say, pretty successful brand of state sponsored corporate socialism. Britain remains the oddest animal in the Zoo. Its unfundable Government deficits, without the protection of being in the €, could at any moment collapse Sterling and ignite inflation. We will, as a country, have to wait and hold our breath until after the next election before there is a chance that a coherent economic policy can appear. 

In general we go into the autumn with an improving Global economic picture but with the worry that the pain after the party of the last 5 years is going to be felt by the most vulnerable parts of society. Unemployment is likely to be the biggest social problem in the aftermath of the boom 
years.

Damon de Laszlo 
September 2009