LONDON, 8 December 2003 — This week’s US productivity figures for the quarter ending September 2003 showed an increase in output by 9.4 percent, the fastest growth in 20 years. Other reports showed a surge in job creation, and that the consistent labor initiatives added more hope for a sustained recovery in 2004.
An improvement in the US employment levels means that consumer spending will possibly remain strong. Moreover, the US is now witnessing the start of a rise in business investment subsequent to three years of downsizing and cost cutting. As a result, corporate capital expenditures, i.e. investments, increased by 14 percent in the third quarter and is expected to continue throughout the next year.
Europe is also predicting solid improvement in the EU economies as evidenced by the resurgence in consumer confidence for the euro zone. Euro interest rates have been on an up-trend since June and they have been rising faster than their US counterparts over the past three months. This would imply that the euro zone is picking up steam for faster economic recovery. Gross domestic product (GDP) is expected to rise by an annualized rate of around 4 percent in the last quarter of this year. This is not, however, as strong as the 8 percent growth registered for the third quarter but still remains 3 percent higher than that of the euro zone. A major contributor to this positive outlook has been corporate profits in the US which have risen by over 20 percent in the third quarter compared to last year’s.
Given the above scenario, one would expect global equity markets to remain resilient and investors buoyant confidence persisting. Bets are already being placed for the Dow Jones to surpass the 10,000 mark before this yearend, the highest level since May 2002! Similarly, the NASDAQ Composite exceeded the 2,000 mark last week for the first time in about 2 years. This is a dynamic and indeed remarkable recovery. Investors have simply regained their risk tolerance and went into the equity markets with justifiable enthusiasm.
Generally speaking, stocks have managed to hold their cross-sectional strength and are presently trading at new “recovery” highs. It is felt that stocks have not fully benefited from the economic growth, and it seems that all good news, e.g. strong economic growth, low inflation, etc., have been discounted to a large extent by this year’s stock market gains. It follows that the stock market up-trend that began in March of this year may continue through 2004, with possible interim corrections.
The currency markets continued to batter the US dollar that fell to 1.21 against the euro and there is evidence pointing to further weakness. The yen has also strengthened versus the US dollar prompting the Bank of Japan to intervene aggressively to keep it down. Commodities markets and precious metals are expected to remain firm with gold prices testing long-term resistance at $405/$408 per ounce.
In summary, most strategists believe US and euro zone economies will continue to grow next year but there are concerns: First is the diminishing effect of tax cuts and other benefits provided by the US Federal Reserve and the government and, second is the slide in the US dollar value against the euro and other leading currencies.
(Habib F. Faris is vice president at Clariden Bank, London)