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Grounds for hope

By RAOUL RUIZ MARTINEZ

[email protected]

Raoul Ruiz Martinez is the resident Independent Financial Adviser for Finesco Financial Services Ltd at the offices of euroFINESCOs.a. He provides financial advice to UK and European expatriates in Portugal with a high degree of client service and total confidentiality.

IT HAS been declared yet again “that timeless creed that sums up the spirit of a people: yes, we can”, Barack Obama summed up in his acceptance speech with a message of hope to an emphatic America and a poised, listening world.

The grounds for hope rest on two powerful forces, currently being unleashed on the world economy. First, that politics and policies will prevent a downturn becoming a depression. Second, that the decline in commodity prices will be as influential in boosting incomes and spending in advanced economies as their rise was in sparking a vicious circle of weakness that put further pressure on an already stressed financial system.

But the dark clouds that have engulfed the world over the past two months remain.

After the bankruptcy of Lehman Brothers, the world’s financial system started to implode, creating a synchronised economic slowdown that the International Monetary Fund (IMF) forecasts will spread across all leading economies.

Recent figures were again dreadful. In October, purchasing managers’ figures in the US, the Eurozone and the UK, and for both services and manufacturing were dire, generally falling to their lowest levels since surveys started in the late 1990s or, in the case of the US manufacturing index, to its worst reading in 26 years.

The feel good factor following the US election result could prove fleeting, given the magnitude of the economic problems facing the next president. One natural limit to hope will come in the form of US unemployment, expected to rise with corresponding jumps expected in the Eurozone and in the UK.

In the US and UK, the crisis has already morphed from financial to economic. There is clear evidence that consumers are finally cracking under the strain of lost wealth and the denial of credit as well as rising unemployment. Most economists say advanced economies are already in the early stages of a recession that will be worse than the downturn suffered in the early years of this decade.

To ensure economies avoid a slump, the recent 1.5 percentage point cut in interest rates from the Bank of England, alongside a half-point cut from the European Central Bank, are just one part of a series of extraordinary policy reactions since the summer.

Fiscal policy is, in all likelihood, the next option to be tried, with tax cuts at least in the US, some parts of Europe (including the UK) and the rest of the world. Mr. Obama, with his strong mandate and increased democratic majorities in Congress, is well positioned to cut taxes and try to reduce foreclosures. Something similar, but more limited, is expected this month in Britain where Alistair Darling, chancellor of the exchequer, is attempting to bring forward planned public spending and increase income tax allowances.

China has geared up for a significant fiscal stimulus, commended by the IMF, with domestic media indicating that close to 586bn euros additional expenditure is being planned on infrastructure and the rebuilding of areas destroyed by May’s Sichuan earthquake.

Feeling hopeful

In our side of the world, European leaders are also excited about the G20 meeting (and even for the Spaniards at this later stage).  Jean-Claude Trichet, ECB president, said yesterday that the Washington summit would seek to enhance transparency and avoid short-termism, while fostering “more discipline in macro policies at the levels of all major participants in the global economy”.

If such a turnaround comes, it will be on the back of cheaper energy and food. Germany’s inflation-sensitive consumers reined in spending when oil prices surged. Now, some beneficial effects appear to be feeding through.

The gains in real household incomes will be powerful in boosting expenditure next year, in particular in continental Europe (excluding the UK), where consumers are not saddled with large levels of debt. Lower oil prices, a weaker Euro and lower interest rates all offer grounds for hope, but it will be ‘several months’ at least before the effects feed through.

Reasons for hope exist in the world economy but there are also grounds for fear. The big danger is that a severe global economic downturn creates a massive second wave of credit losses on consumer and corporate loans, which further devastates the eroded capital bases of banks and other financial institutions. This could intensify the credit squeeze and may again require large capital infusions by the world’s governments.

Be prepared for the year and ensure that for 2009, you have your house in order to brace further shocks and prepare for a new up-side.

Raoul Ruiz Martinez is based in the Algarve office of euroFINESCOs.a. and regulated to advise on capital investments in both the UK and Portugal. He can be contacted either by telephone on 289 561 333 or on email [email protected]