At the current time, we are forecasting real GDP growth of 1.0 per cent for this year.
The scale of the Fed’s interest rate cuts since the start of the year, combined with a series of measures to pump liquidity into the financial system, demonstrate clearly the central bank’s commitment to taking whatever steps are necessary to bolster the economy. Indeed, January’s emergency intra-meeting rate cut of 75 basis points appears to have marked a watershed in the Fed’s thinking on the outlook for the economy, coming in the wake of a sharp rise in unemployment. Since then, the Fed has reduced rates further and we believe they could end the year at 1.5 per cent.
Recent comments from the Federal Reserve suggest that it has become more concerned over the inflation outlook, with global energy and food prices continuing to drive the headline figure. However, core inflation is showing signs of moderating, and we expect inflationary pressures to ease as the economy slows.
Encouragingly, the unprecedented action by the Federal Reserve following the collapse of Bear Stearns seems to have stabilised financial confidence, although it still remains fragile. Markets have reacted well to the Fed’s continuing injection of funds to ease the credit crunch, and the proposed takeover of Bear Stearns by JP Morgan has been well received.
Nevertheless, the period of slower growth is likely to extend into 2009, given the damage done to the financial system and the deterioration in business and consumer confidence.
The economic weakness in the US has led to a much tougher environment for US corporate profitability. We believe that broker estimates for 2008 earnings growth are too high, with a consensus figure of 15 per cent. Some downgrades to earnings estimates have started to come through, mainly for financials and consumer discretionary companies. However, at the same time the market has fallen to more realistic levels. Consequently, on a range of valuation measures, including P/E ratios and price to cashflow, US equities appear attractively valued by historic standards. This bodes well for the US equity market once there is greater clarity over the economic outlook.
Cormac Weldon, head of US equities, Threadneedle.
