'Prospects for global growth have diminished markedly this quarter' says Barclays Wealth Economics Research

15 October 2010, New York

Barclays Wealth 'Signpost' reveals that worries about a US 'double dip' have risen

Barclays Wealth Q4 Economic Outlook Report 'Signpost' reveals that risks to the global economy continue.

Worries about a US "double dip" have risen
The US economy slowed significantly during the second quarter, and only very feeble growth looks likely in the UK next year
Barclays Wealth is concerned that faster consumption growth in the "new" economies will not offset sluggish expansion in the "old"

Barclays Wealth's Quarterly Economic Outlook report, 'Signpost,' published today, advises that despite fears of a "double dip", a "growth recession" entailing sluggish growth and little progress in lowering unemployment, is more likely than an outright fall in GDP.

Michael Dicks, Chief Economist at Barclays Wealth, said: "In Europe, a better-than-expected second quarter helped lift the gloom a little and assuage fears regarding defaults in the periphery. However, this optimism is misplaced. Growth will slow and fears will build again.

The worsened macroeconomic environment, and the increased risk of an economic downturn, has led to a number of changes to fourth quarter asset allocation."

Signpost also states that the pressure on policymakers to work harder to bolster demand, and keep the economic recovery going, means that Barclays Wealth has more confidence than previously that short-term rates will stay low for some time.

Michael Dicks commented: "Government bond yields are being pulled in two different directions - down by the (very real) likelihood of second bouts of quantitative easing, but up by the dire state of public finances. So, we doubt that they will change much.

The cuts we have made to our developed-country growth forecasts leave them below consensus expectations. That will make it tougher for equity markets to do well. We prefer the faster growing emerging markets."

Regions

The US economy slowed significantly during the second quarter, but the growth "hemorrhage" seems to have stalled, with GDP growth running at just under a 2% annual rate. Core inflation has halved over the last nine months.
While confidence towards the euro area improved over the summer, Barclays Wealth expects the recovery to stall as fiscal tightening kicks in.
Hopes of a strong economic recovery in the UK will likely be dashed, as much of the recent pick-up is being driven by temporary factors.
The economic recovery in Japan lost momentum in the second quarter, and a probable rebound in the third quarter will not last long. The government decided to intervene to weaken the yen after it hit levels against the dollar not seen in 15 years. More action could well be in store.
The successful policy-induced slowdown in China appears now to be nearing completion, and the authorities are shifting their focus back towards encouraging growth. However, inflation is still above target.
The "other" (smaller) advanced economies (OAEs) are recovering at a quicker pace than the "majors" and their recoveries appear more robust.
The recoveries of European economies will be sensitive to demand from the rest of Europe, and may struggle.
Growth in developed Asian economies looks set to slow, given the softer profile for overseas demand.
Emerging markets growth has eased slightly this year, particularly in countries where central banks raised interest rates to counter overheating risks. Policymakers are expressing confidence that concerted efforts at reducing inflation are bearing fruit, and slower GDP growth will help pull inflation down further in 2011.
Fiscal policy is now being tightened in many emerging markets, as governments move to reduce their budget deficits. But doubts remain about the sustainability of such programs in some countries.

Asset classes

Expectations of official interest rate hikes in the US have been pushed out to 2012, whereas overnight rates in the euro area have been inching upwards. In the UK, above-target inflation complicates the outlook.
Corporate bond markets recovered during the third quarter, as worries about imminent default in the peripheral euro area debt markets eased. Credit spreads now stand a little below their "fair value".
Equity markets performed well during the third quarter as a whole, supported inter alia by strong corporate earnings. However, investors remain concerned about a US "double dip".
Through the remainder of this year and into 2011, equity returns are likely to be weaker than in the third quarter.
Since the beginning of 2010, commodity prices have fluctuated along with global financial market sentiment. As a result, no substantive trend has emerged in the DJ-UBS commodity index this year.
However, during the third quarter, an unexpected turn in agricultural markets amid tight supply conditions provided a boost to commodity prices: a 28% rise in the agriculture component led to the DJ-UBS index rising by 12%.
With global growth likely to remain fairly subdued - and the outlook uncertain - commodity prices look unlikely to rise much further during the remainder of 2010.
The recovery in commercial property REITs stalled around mid-year as investor risk aversion weighed heavily on markets. However, since then, global REITs have bounced back - rising by a whopping 17% in the third quarter.
Commercial property markets now stand at more than double their lows reached in early-March 2009. However, the global FTSE ESPRA / NAREIT index is still about 30% below its peak level, reached in February 2007.
The G4 central bank rates are likely to be on hold for quite some time. But some, in OAEs, should continue to raise rates. Relative interest rate, growth and fiscal outlooks favor OAE and EM currencies over the months ahead.
The US dollar looks set to remain under pressure, due to possible further quantitative easing. Sterling's recovery is likely to falter as budget cuts slow growth and fiscal concerns should also continue to weigh in on the euro.
Commodity and emerging market currencies are likely to be supported by loose monetary policy over the months ahead. Beyond this, we favor emerging currencies due to their scope to appreciate and higher yields.