Yesterday saw the first set of economic reports since the credit crisis first emerged. Meanwhile, in the US, markets were celebrating another day of gains as the Dow closed in on its all-time high.
Cast your mind back to the end of July and the first few weeks of August when the markets saw big slides. This was the period when the FTSE 100 saw its biggest one day drop for years, and at the close of play on August 14, the Dow Jones stood over 1,500 points below its peak from a month earlier.
With half the financial world on holiday, it seemed unclear whether it was just a piece of summertime madness, or whether there was a genuinely good reason for the fall. The weeks that followed told the story – no one seemed to know how much exposure anyone else had to US subprime debts – some departments within banks were even unsure how exposured other departments within the same bank were. Credit dried up – a certain British bank hit the rocks, and ‘crisis’ became one of the most commonly used words in the dictionary.
But yesterday, the Dow Jones passed the 13,900 market, and with a final score of 13,912.9, it finished the day less than 90 points shy of the record it set on 19 July. In fact there have only been six times when the index managed a higher reading – all on occasions in July this year,
The FTSE 100 is not quite so healthy – at 6,486 it finished yesterday 245 points down on the year-high set at the beginning of July. Even so, it’s 600 points above the low point it fell to on the 16 August.
According to a report on Bloomberg this morning, US corporate profits may well see their lowest growth in quarterly profit during the third quarter in six years – so maybe some more falls are ahead. But, on the other hand, it is still thought profits will be up; Bloomberg reckons around 3 per cent up on last year. It’s just that the US corporate scene had experienced 20 successive quarters in which year-on-year growth in profits was over 10 per cent.
So if markets are any guide at all, the crisis must be near its end now. Credit crises are like that; the LTCM-led crisis of 1998 was over in no time. In fact, even the 1987 crash, which saw the biggest peacetime fall in one day ever, soon turned, with shares passing their pre-crash prices within a few months.
Yesterday also saw the release of the first economic growth projections from the National Institute of Social and Economics Research (NIESR). “We expect the US economy to grow by 1.9 per cent this year and by 2 per cent in 2008, both forecasts having been revised downwards since our Spring report” said NIESR, yesterday.
As for the UK, it is predicting growth of by 2.9 per cent this year, by 2.2 per cent in 2008 and 2.5 per cent in 2009. It says the slowdown is led by a moderation in consumer spending growth due to a cooling housing market – even so, if they are right then the NIESR predictions are not bad at all, considering.
However, it did qualify the predictions somewhat, saying, “If the recent turmoil in financial markets were to prove more protracted than we have assumed then we should expect to see UK economic growth slow by more next year, as households and business respond to the associated uncertainty and increased cost of finance.”
As for the rest of the world, it is predicting growth next year in Germany of 2.2 per cent, 2.3 per cent in France , 1.5 per cent in Italy and 2 per cent in Japan. As for 2009, its is predicting growth of 2, 2.1, 1.7 and 1.7 per cent in Germany, France, Italy and Japan respectively.
Meanwhile, yesterday, the publishing company EMAP said that there had been no sign of a backing out from private Equity group APEX.
So, maybe then, that’s it. Maybe the crisis is over, and the 2007 credit crunch will show up in the history books as a tiny blip.
But then again, not so fast. Yesterday, Richard Syron, chief executive of giant US mortgage lender Freddie Mac, said there was now a 40 to 45 per cent chance of a US recession, soon, caused by the slowdown in the housing market.
Maybe the markets are simply rushing like lemmings to the edge of the cliff. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link
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