2010: A year of muted recovery?

By Ross Butters (pictured)

Following the near collapse of the global financial markets in 2008 it seemed that during the second quarter of 2009 a recovery was under way for most major economies.

Asset values which had all but collapsed during the latter part of 2008 and into 2009 began an upward trend that continued for the rest of the year. Both the residential and commercial property markets seemed to stabilise with mortgage lending up and improving values. But is the honeymoon period over?

Although the upward momentum of the world’s stockmarkets seem to have, for the moment, run out of steam, a brief review of current economic conditions would suggest that all the elements needed for economic recovery are in evidence; interest rates are at unprecedented low levels, inflation is low, house values and the labour market have stabilised and world trade levels are up.

However scratch away at the surface and the picture is different. The over indebted balance sheets of the household and financial sectors of the developed economies, the fundamental causes of the downturn, have yet to be eliminated. The key component of GDP, Consumer Spending, is unlikely to improve over the short term as households struggle to both reduce debt and raise savings.

Although low interest rates are normally associated with accessible credit this is not currently the case. Through the monetary expansion measures central banks have made funds available to banks however there is an overriding reluctance to lend as well as an unwillingness on the part of the consumer to borrow. The key to economic recovery is the balancing of the household balance sheet, this will however take time.

I am therefore predicting that we will witness during 2010 a period of gradual economic recovery. It is likely that although we will see a temporary rise in inflation this will stabilise later in the year and indeed will fall back. As inflation tends to be the biggest factor affecting the decision to change interest rates I do not expect to see any significant rise in rates during 2010 or indeed for the next few years.

Against this background I feel that equity markets will continue to improve throughout 2010, albeit at a more measured rate when compared with the previous year. In addition, bond markets should also present opportunities provided lower than anticipated inflation prevails.

The honeymoon period is over but like the newlyweds after the shock of an initial dose of reality we can look forward to the future with a degree of optimism but it is something that needs to be worked on!