Archive for October, 2008
« Previous EntriesRecession, yes… Depression, no
Posted by robin in Financial Articles Wednesday October 29, 2008 5:03 pm
The UK’s economy shrank 0.5% in Q3.
How much more is it going to shrink before it’s over? Some say depression not recesssion. And what’s a depression anyway? A slump in economic output of more than 10% offers one source. Anything less and it’s a mere recession.
The latest Charles Stanley newsletter reminds us what a depression looks like. In the 1930s, the output of the world’s seven largest economies shrunk by 20%, unemployment soared by a third and world trade collapsed by two-thirds following protectionist moves instigated by the Smoot-Hawley Tariff Act. A piece of legislation which slapped hefty tariffs on more than 20,000 US imports. All in, 9,000 US banks went bust.
With that as our benchmark, expectations of UK output growth in the next couple of years are a good deal less alarming presently…though who can say for sure in these febrile days.
As reported in The Sunday Times last week-end, a consensus is forming among economists of what to expect from the UK economy. Both the Ernst & Young Item Club and the National Institute for Economic and Social Research reckon we’ll see:
2008 1%
2009 -1%
2010 1%
With only 2009 expected to show up negative, this looks more an extended period of sub-trend growth than a full-blooded recession. Though with annual trend growth averaging 2.75% the cumulative damage over the period is going to hurt.
The outlook for unemployment is grim, naturally. From around 1.8m now it could top 3m again by 2010, a level not seen in the UK since the days of Margaret Thatcher. In the US, it is expected to rise from 6% to maybe 9%. A growing army of misery to keep politicians up at night as tax revenues shrivel and public deficits go through the roof.
Still there are the moderators. Interest rate cuts are coming down the pipe and flattened commodity prices and a trashed sterling help give a leg up to exports. And this time we’re not chained to some political construct like the exchange rate mechanism.
As for company profits, Citigroup says in a research note, it’s going to be a deep recession:
“…we think the current earnings downturn could be amongst the deepest and longest-lasting we have seen in the last 40 years…”
They expect global profits to slump by half over a 2-3 year period. To date we are 10% down and one year in.
The modest good news is this won’t be as bad as the biggest monsters of financial history. The Great Depression saw earnings fall 75% over three years and the Japanese bust saw earnings collapse 130% over a decade.
Stock markets have done much to anticipate this. Few more so than UK equities. The FTSE 100 started the year at around the 6,300 level and now sits a little over 4,100. They now look some of the cheapest around says Citi.
Deflated banks…
Posted by robin in Financial Articles Market Commentary Wednesday October 29, 2008 2:42 pm
Revealing before and after bank valuations courtesy of JP Morgan:
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