Market Update Feb 2008
In our regular eye on the markets and the economy in general, Steven Grover provides an updateThe debate on whether or not the global economy will slip into recession continues to take a substantial share of the financial pages.
One view is that talk of a world recession is overdone given that the global economy has experienced four years of annual growth of around 5% - something not seen for the last three-and-a-half decades.
While the US economy slowed considerably at the end of last year, expanding at an annual rate of only 0.6% and prompting a rate cut of a combined 1.25 percentage points in eight days, some other economies around the globe continue to grow.
China, India and other emerging economies are growing rapidly and of note in China is that consumer spending, rather than exports and investment, made the biggest contribution to growth last year, with retail sales up 17%. While the slowdown in the US may influence the Asian markets, economic growth in China is still estimated to be 10% for 2008.
Another point to consider is that even though America's gross domestic product was four times that of China last year, China's economic growth of 11.4% made a bigger contribution to the world economy than America's growth of 2.2%.
In addition, once the economic performance of India, Russia, Brazil and the OPEC countries is taken into account, it is anticipated that over half of global growth in 2008 will be generated by countries outside the G7. The International Monetary Fund (IMF) has forecast global growth of 4.1% this year, which is down on last year's 4.9% but still strong when compared with the average of 3.3% a year between 1998 and 2003.
While all of this looks positive, not all economies are closely tied to the fortunes of the countries highlighted above. The UK, for example, is more closely linked to the US and the rest of Europe, for whom the IMF is predicting growth of 1.5% and 1.6% respectively.
On the interest rate front, the Bank of England has lowered the UK to base rate to 5.25% as anticipated by all but two of 61 economists surveyed by Bloomberg News. The move, which is intended to stimulate growth in the UK economy, hasn't been matched by the European Central Bank (ECB), which has kept interest rates on hold at 4%. High oil prices and an increase in the cost of food have increased inflation in the eurozone at a time when economic growth is slowing. However, there is still an expectation that interest rates will fall later in the year as economic performance is anticipated to slow further.
Turning to currencies, the euro has continued to fall against the dollar and the yen to stand at USD1.4523 and 154.49 yen. There is a view that the ECB will have to reduce interest rates eventually and that the euro will fall to USD1.40 by the middle of the year.
Following the Bank of England's interest rate move, the euro rose against the pound to 74.66 pence.
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