The CBI struck a note of caution yesterday. Merrill Lynch was more downbeat on the US, but played a happier tune on Europe. But what does it all mean for the dollar and pound?
“I can bring you one important piece of news from my travels around Britain’s businesses,” said CBI Director General Richard Lambert last night. “Contrary to what you might expect from the news background, the sky is not falling in.”
Mr Lambert was speaking at the CBI South West Annual Dinner. He contrasted the crisis today with 1929, but said there was one “big difference,” central banks and authorities are “acutely aware of the dangers of systemic risk.”
Mr Lambert is right. Fed chairman Ben Bernanke made his name in academia with his studies on the US depression of the 1930s.
Mr Lambert said: “All this explains why we came up with the view that the recession will be mild and shallow, and that things will start to look better in 2010.”
Then again, an increasing number of economists have said the policies followed by Hank Paulson are similar to those adopted by Andrew Mellon, US Treasury Secretary in 1929.
Yesterday, Merrill Lynch released revised forecasts for the global economy for next year. It expects the UK to expand by 0.3 per cent. That is not good, but neither is this especially gloomy. In fact, the OECD also predicted a 0.3 per cent growth rate for the UK recently, while the CBI forecast a 0.6 per cent expansion. Last month, the IMF predicted 1.1 per cent growth for the UK in 2009.
Perhaps of more significance than Merrill’s forecast for the UK is its prediction for the US; it expects the US economy to contract next year by 0.2 per cent.
The investment bank, which is becoming a part of Bank of America, expects modest growth next year in the Eurozone and Japan.
Actually, the Merrill Lynch forecast does make sense. One of the oddities of economic performance this year is that countries such as Germany and Japan, where consumer debt is much more modest, seemed to have suffered quarters of negative growth first, and before the highly indebted economies.
But it appears that in both cases the main factor in the two economies dragging growth down was the high price of oil and other commodities. (By the way it is consumers and business who have modest debt in Japan; government debt is enormous.)
It was the recent weak performance in the Eurozone which led to the sharp rises in the dollar, but if the US does indeed contract next year, while the Eurozone grows, then it would seem likely the dollar may fall back.
It is also the case that GDP measured in dollars is much higher across most of the Eurozone than it is when measured at purchasing power parity. This is also the case with the UK.
By contrast, in most developing countries GDP measured at purchasing power parity is much greater than GDP measured in dollars.
This may suggest the dollar is overvalued against currencies in the developing world, but undervalued against the euro and pound.
Incidentally, the gap between GDP measured in dollars and at purchasing power parity is greater in the UK than in most Eurozone countries – suggesting the dollar is even more overvalued against the pound than the euro.
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