Market comment: Watering the 'green shoots', weeding out wishful thinking

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Financial
Director Market Comment.

The flow of bad news remains relentless. US jobs plunged by
663,000 in March and the unemployment rate rose to 8.5%, the highest level since
1983. In the past five months, US job losses totalled 3.3 million. US house
prices fell sharply in March, to levels almost 30% below their mid-2006 peaks.
Industrial output and retail sales recorded disappointing falls. The news is
particularly bleak in Germany and Japan.

But there are some positive messages. In the US, UK and China, purchasing
managers’ indices are better than expected. The G20 London Summit produced
limited, but useful results: additional resources to the International Monetary
Fund, new loans for the developing world and help to increase export finance.
Most significantly, major banks such as Citicorp, Goldman Sachs and JP Morgan
reported better than expected results.

But it is too early to talk of “green shoots”. The economic numbers still
point to falling output, not recovery, though the decline in activity is
moderating from the pace seen in late-2008. There is no guarantee that the
positive trend will continue. A renewed relapse is a danger, but there is hope
that exceptionally aggressive fiscal and monetary stimuli is starting to
stabilise real economies and banks. Stock markets have recovered strongly from
their early-March lows.

Rates
In the US, Japan and the UK, interest rates are at, or near, zero and
quantitative easing is the main monetary tool. The Federal Reserve is the most
aggressive in implementing the policy, but it is still unclear if the Bank of
England is fully committed.

The European Central Bank cut rates recently to 1%, but remains unduly
concerned over inflation at a time when deepening recession is still the main
threat facing the eurozone. Inflation is a major medium-term risk, but deflati
on is now a fact in Japan, the UK and the US and remains a likely prospect in
Europe. The immediate policy focus remains on ending the recession, before we
tackle inflation and budget deficits.

David Kern of Kern Consulting is economic adviser to the British Chambers of
Commerce. He was formerly NatWest Group chief economist