Research published today by Barclays Wealth suggests that the Bank of England is likely to cut rates this month, while the European Central Bank will sit on the sidelines. The study, February’s version of Barclays Wealth Signpost Monthly Investment Strategy Report series, suggests that the chance of a recession in the United States has risen to close to 50:50. However, it is looking increasingly as if any slowdown will be short-lived – a V-shaped profile for GDP, rather than L- or U-shaped.
Barclays Wealth, 06 February 2008
Research published today by Barclays Wealth suggests that the Bank of England is likely to cut rates this month, while the European Central Bank will sit on the sidelines. The study, February’s version of Barclays Wealth Signpost Monthly Investment Strategy Report series, suggests that the chance of a recession in the United States has risen to close to 50:50. However, it is looking increasingly as if any slowdown will be short-lived – a V-shaped profile for GDP, rather than L- or U-shaped.
The study argues that Europe cannot escape the effects of a US recession, if there is one. Consequently, we expect pressure on the ECB to cut interest rates to build, as the US and global economy look set to perform poorly during the first half of this year. We judge that it is still too early for the ECB to cut rates this week. But it may well do so by the spring.
In terms of foreign exchange markets, a “no-grow” or “slow-grow” environment for the United States, accompanied by further fed rate cuts, may well entail further downward pressure on the US dollar. Sterling still appears substantially overvalued, and Barclays Wealth expect’s it to fall. The implication is that the European Central Bank (ECB) will be forced to cut interest rates, and that the Euro will therefore weaken. But, because of the markets’ expectations of further rate cuts, Barclays Wealth does not think there will be rebound in the US dollar in the short-term. Sterling is still above its long-term sustainable value, and the combination of bad economic news and market turbulence (to which the currency has historically been vulnerable) could force further depreciation when the Bank of England cuts interest rates.
The US Federal Reserve’s response to market movements in January was resolute with an interest rate cut of 75bps quickly followed by one of 50bps. George Bush’s proposed fiscal stimulus is substantial, and could be put in place relatively quickly. So monetary and fiscal policies are being deployed effectively along with other measures, such as the proposal to lift substantially the upper limit on conforming mortgages accepted by the Fannie Mae and Freddie Mac agencies. All this means that if there is a US recession (the chances are now close to 50:50), it will be short lived. The US and global economies will be growing at close to potential by the end of 2008. Our full year modal forecast for US GDP growth in 2008 is 1.3% (previously 1.7%).
Michael Dicks, Head of Research and Strategy, Barclays Wealth Investment & Product Office, said: "Hopes that European and Asian economies can go it alone, in the face of a US slowdown are misplaced. Consequently, we expect the authorities to remain under pressure to act to support activity. With all eyes on the outcome of Super Tuesday, what matters most in US politics, at the moment, is whether or not there is cross-party support for fiscal easing and timeline on such a package."
You must read the important information before proceeding.
" By using our collective wisdom, we can help you focus on what wealth means to you "
Products and services on this site may not be available in certain jurisdictions. In particular, these products and services are not being offered in Japan or the United States or to US residents. For full details of exclusions and disclaimers please see the Important Information before proceeding.
*Subject to system’s availability
