Company News » Oil and food prices signal prolonged downturn

Oil and food prices signal prolonged downturn

The markets have been surprisingly robust, but global threats have worsened because of surging commodity prices. The downturn will be longer than previously predicted, with Europe facing increased risks.

The more positive tone in the markets, following the Bear Stearns bailout,
has produced higher share prices and a stronger US dollar. But surges in oil and
food prices have reinforced the dismal outlook for the world economy. Steep
commodity price rises, which depress growth and worsen inflation, are no longer
a transitory development. Fundamental forces, mainly supply constraints and
growing demand from Asia, will sustain high food and energy prices for the
foreseeable future, with harmful effects for growth and living standards in
countries that are net consumers.

The US economy is facing acute pressures. With house prices plunging and jobs
falling, we expect two to three quarters of negative US growth. It is now
accepted that weak US growth is likely to persist into 2009. US recession,
though mild, is probably unavoidable, but recent pessimism has been excessive.
The US position is stabilising in reaction to aggressive policy measures taken
by the Fed and the Administration. US growth forecasts, after being cut
repeatedly, have now stabilised and we have recently witnessed some upward

Sharp cuts in the Fed funds rate, from 5.25% to 2.00%, have ensured that the
downturn does not degenerate into a slump and have placed the US in a stronger
position to counter new threats to the economy. US interest rate prospects are
also being reassessed. The markets no longer expect cuts to 1.50%. One extra Fed
cut to 1.75% is still possible, but a minority believe 2.00% is the low point in
the present cycle.

The balance of risks is shifting to other regions, mainly Europe. Keeping
eurozone interest rates at 4% and the consequent strength of the euro has
damaged growth prospects. The huge gap in performance between Germany and
countries such as Italy, Greece and Spain, will worsen eurozone risks. In the
UK, house prices are falling and growth prospects have worsened. But, after poor
inflation figures, hopes of additional UK interest rate cuts are now in doubt.

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