Taking a global market perspective

Europe may be problematic and Japan may continue to defy convention, but Barry Hughes, chief economist withCredit Suisse Asset Managementand a keynote speaker at this year’sFinancial Planning Associationannual convention, says he is “upbeat about the outlook” moving into 2004.

Hughes, who recently returned from a tour of Asia, acknowledges that the European economies remain a problem, but he dismisses suggestions that the US is facing problems with deflation or that the Chinese economy is at risk of overheating.

His positive views are endorsed by a director of leading economic consultancy,Access Economics, David Chessell, who says he believes the US economy is “going to accelerate for a while” in circumstances where “they have put their foot to the floor with every sort of stimulus”.

However, the chief economist with the Australian Chamber of Commerce and Industry, Steven Kates, suggests that the recovery in the US economy will be “half-hearted at best” and the European economies will continue to struggle.

Counter-balancing Kates’ pessimistic assessment of the US economy is his belief that, not withstanding ongoing drought conditions in many areas, the Australian economy is continuing to perform extraordinarily well, despite some of the negative international factors coming into play.

Chessell believes that many of the factors that acted to cause uncertainty within the US economy, such as Enron and other corporate collapses, have now been purged from the system.

As well, he believes the massive amounts previously invested in the technology sector are now paying dividends for the US economy, driving up productivity and income growth.

Chessell says that while there was talk earlier this year of the US experiencing a double dip recession, the chances of this occurring are now negligible.

Looking beyond the US at the global economic outlook, he says that after a number of false starts, the Japanese economy appears to have returned to growth, but the European economies appear still to be lagging.

Kates, Chessell and Hughes see the problems in Europe as being self-inflicted, with Hughes suggesting that the major European policy-makers have found themselves at something of a dead-end.

He says for the Europeans to overcome their problems there will need to be “an outbreak of pragmatism”.

Chessell says in economic terms “the world has become very lop-sided” with economies such as Australia performing well because the tough policy decisions have been implemented, while those in Europe have struggled because of an unwillingness to take the appropriate decisions.

Looking at the broad investment outlook, all three economists believe that it should remain generally positive, although Kates does not believe it has the makings of a bull market.

Kates says he believes investment returns are likely to be “steady rather than spectacular”. Chessell shares the view of steady rather than spectacular returns, believing that the markets probably bottomed in March.

However, he points out that the productivity gains that have been derived from investment in the tech sector are starting to feed through to corporate earnings.

Both Chessell and Kates remain concerned about the ultimate impact of Iraq on the US economy, with Chessell suggesting danger lies in the cost of the peace far outstripping the cost of prosecuting the war itself.

“One of the threats is the US getting bogged down in Iraq and this represents a thread within the fabric of the US economy that could unravel,” he says.

Chessell and Hughes, while both acknowledging the importance of China in the evolving global economic picture, disagree about the immediate outlook for the Chinese economy.

While Chessell points to the economic momentum being developed by China with growth of 7 to 8 per cent, he cautions that the Chinese economy is not immune to cyclical fluctuations and tying the Chinese currency to the US dollar could prove problematic in terms of over-heating.

But he says the overall picture for China is positive given its policy settings and the determination of the Chinese administration.

Hughes says there’s no danger of the Chinese economy over-heating, and that such views tend to flow from too literal a reading of the Chinese national accounts figures.