View From the Top from Spicers CEO Gordon Noble-Campbell
The Forecast Will Change
5 March 2009
As we move from summer into autumn, the seasonal change is usually gradual, but often sudden. While we know that winter will invariably be with us, we can’t precisely forecast when the weather will turn. While the current financial climate is decidedly wintry, it’s important that we continue to look for signs of change that herald improved investor confidence.
Economically, the fact that things are looking grim is no longer news.
Two specific news items over the past month stand out for me, for different reasons.
The first report noted that…
“…GDP across the 30 nations that make up the OECD fell 1.5% in the fourth quarter of 2008, the largest decline since OECD records began in 1960 (in Japan, the economy shrank in over this period at an annualised rate of 13%, the most severe contraction since 1974)”;
While the second announced that…
“…AIG reported a US$62 billion fourth-quarter loss, the largest in US corporate history, on turmoil in the credit markets and massive restructuring costs. For the full year, AIG lost $99 billion after reporting a profit of $9.3 billion in 2007.”
That GDP has fallen so dramatically is perhaps not so surprising. In most OECD economies, ‘consumption’ (the amount that people like you and I spend on goods and services through the course of an ordinary day) comprises the largest proportion of economic activity (in financial terms.) When we’re fearful of what the future might hold, we tend to close our wallets on the premise that tomorrow might potentially be a financially worse day than today.
So, in many respects, the downward spiral from slowing growth to recession becomes self-perpetuating. We spend less, meaning that businesses have less demand for their goods and services; in turn meaning that they will produce less and need less people to produce their product. This can result in a rise in the unemployment rate, with the outcome that there will be less income earned in the economy; meaning there will be less consumption of goods and service by people – and so the cycle continues.
The second news story has less to do with our ability as individuals to influence economic growth and more to do with the specific causes which have led us to collectively become much gloomier about the immediate prospects for a rapid rise in the value of financial assets.
‘Millions’ no longer seems to be the scope of the issue when it comes to corporate under-performance. Rather, ‘billions’ or ‘trillions’ has become the new currency of financial collapse. Referring to my recent article in Spicers magazine The Adviser, I see the AIG result as a healthy sign that the credit-fuelled excesses under-pinning the current economic cycle are continuing to be exposed and disinfected by the sunlight of public scrutiny.
Financial markets will adjust to this type of news quickly. In my view, the more quickly the scale of yesterday’s problems is factored into today’s asset prices, the greater the promise of a return to renewed growth tomorrow.
Both markets and consumers require confidence in order to break the current cycle of gloomy news and sentiment. Both of these news items demonstrate to me that while currently in short supply, confidence will progressively be renewed through an inevitable change in the forecast for financial markets.
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