10 November 2008

A greater arsenal

Whether or not they are justified, there have been a whole host of claims that the current position in which we find ourselves can only be matched by the Great Depression of the late 1920s and 1930s.

It is more than likely that on balance these claims are overdone. It is also a particularly difficult comparison to make, not only because the underlying conditions are rather different (the world was starting to find its feet after the expense and carnage of the First World War) but also because the world today is much more of a global village.

General improvements in communication, propelled at great speed by the surge of the internet, largely peaceful decades since 1945 (with some exceptions of course) and the willingness of the global financial powers to act together in a coordinated fashion would all have appeared fanciful eighty years ago.

This joined-up approach by the major financial powerhouses is both necessary and desirable. For the moment, the US remains the world’s largest economy, with the likes of the BRIC (Brazil, Russia, India, China) countries continuing their general growth apace. The co-dependency of these economies has become even more evident in recent months, and the “decoupling” which some economists had predicted (on the basis that the likes of the Chinese economy had grown sufficiently to stand alone) has nit come to pass.

From a market perspective, the very fact that the contributors to the global economy in the form of individual governments have begun to dig deep and provide stimulus packages is something which provides some comfort. The latest of these came in the form of a near $600 billion (c £400 billion) package from China, which will inject capital into infrastructure, housing and reconstruction resulting from the recent earthquakes, over the next two years. Little wonder that the economics of John Maynard Keynes have been given another airing over recent weeks – to paraphrase one of his many contributions, it would be better to build pyramids and dig holes, thereby keeping employment up, than to do nothing at all.

In addition to any monetary actions such as the slashing of interest rates, it appears likely that fiscal stimuli may soon also follow. The Prime Minister has already hinted that there is the possibility of tax cuts in the UK, which would be announced in the pre-Budget report later this month (and could even be extended to other members of G-20). Meanwhile, the new President elect in the US is also widely expected to add another fiscal stimulus to the one given to US households this summer as a matter of priority when his role commences in January.

Of course, even these measures in aggregate will not be enough to prevent a recession which may already be in train in most developed economies. Even from a Chinese perspective, for example, its steps may only be enough to give itself some protection. But the fact remains that such actions are likely to limit the damage and repercussions of the global economic downturn, even if some economists have been continually making the point that these measures could have been introduced earlier.

And the fact that the market is a discounting mechanism which looks forward and is therefore much more likely to recover before the real economy is also positively buoyed by the news of such financial stimuli. It remains likely that 2009 will be a largely uncomfortable year for many economies, but even now the defences are being shored up in anticipation of the next wave of weak economic and corporate data.

The fact remains, though, that what has happened cannot now be undone. The best that the global powers can hope for from here is that the ramifications of allowing economies to boom on easy credit is now coming home to roost – but that a committed, ongoing and coordinated approach adds so much more weight to preventing the global malaise than any economy could possibly hope to achieve individually.

Richard J Hunter
Head of UK Equities
Hargreaves Lansdown Stockbrokers

10 November 2008

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