World growth slows

THE latest research from BT Funds Management is definitive when it comes to the forecasts for economic growth around the world.

Of the 13 major countries surveyed, expectations have been revised down in 10 this year and in nine next year. Norway and Switzerland appear to be the only two countries that are bucking the trend, with both getting slight upward revisions for the 2002 forecasts. Even though the inflation forecasts in eight countries have been revised up for 2001 and four for 2002, the overall inflation outlook is relatively benign. Generally, the inflation outlook is for stability around the world.

In 2000 we achieved a world economic growth rate of 3.9 per cent. This is forecast to drop to 1.8 per cent for 2001. The comforting thing is that the growth forecast for 2002 is for a slight increase to 2.7 per cent. The inflation forecast is at 2.2 per cent this year and 1.7 per cent in 2002. The 2002 figure is because of a lower expected inflation rate in the United States.

The interesting aspect of the week’s events in the US has been the surprisingly good profit-reporting season that has been rolled out. Several high profile technology companies have made positive announcements regarding their sales and earnings. The first of these was Microsoft, which reported that strong demand for some of its higher priced programs had led to stronger sales.

Motorola indicated that its third quarter revenue was expected to be 5 per cent more than the second quarter and Yahoo maintained its profit outlook for the rest of the year.

Even old economy stocks did well, with General Electric showing a 15 per cent profit rise in the second quarter. And companies such as Harley-Davidson and Wal-Mart also bettered analysts’ forecasts.

Simon Doyle of AMP Henderson’s says that, while it is early days yet (and companies with good news to report tend to do so early in the reporting season), these announcements are, nonetheless, significant.

As he sees it, the main drag on the stock market of late has been the continued bad news on earnings, particularly in the technology sector. This has worked to undermine the big rise in liquidity in recent months and improving signs across a range of economic indicators. Mr Doyle suggests that, once confidence returns, the worst of the earnings cycle is behind us and there is little standing in the way of a move up in equity prices.

Mr Doyle also highlights another threat to the global economy – the downgrading of the Argentinean credit rating. There is a fear that Argentina could default on its domestic debt, which would spark a re-run of the 1997-1998 emerging markets currency contagion.

Mr Doyle is less concerned with the likelihood of that happening.

The lessons learned from the last crisis should have taught most fund managers that emerging markets do present a higher level of risk.

As such, individual funds are less likely to have the same degree of exposure to the area as they did in 1997-98. Further, the likelihood of the exposure being leveraged by the fund managers is far less now than it was then.

Also, the Asian countries appear to be far less of a concern, with most countries now running surpluses and having floating exchange rates.

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