Britannia Radio

Global slump to curb inflation?
This first article may be on the technical side but a sea change in
international economics has taken place this week. The vastly over-
priced Euro has slipped substantially, doubtless to the relief of
eurozone exporters who have been suffering. The dollar has resumed
its status as the world’s reserve currency , leaving sterling in the
mire. But this readjustment comes as a result of the reversal of the
soar-away oil price and world-wide investment circles expect a slump,
which in itself will temper inflation.

Meanwhile this has not fed throuigh to any improvement yet in the
French and German economies as the second article shows.

xxxxxxxxxxxx cs
==================

TELEGRAPH Business News 14.8.08
1. Big funds embrace dollar as crisis mutates into global slump
By Ambrose Evans-Pritchard

Mounting fears of a full-fledged global recession have caused a
profound shift in investor strategy over the last month, setting off
a powerful dollar rebound and a flight to relative safety in US assets.

The latest survey of fund managers across the world by Merrill Lynch
found that expectations of inflation have fallen to the lowest level
in six years, an astonishing shift in attitude from the scare of the
early summer.
"People think the credit crunch is mutating," said David Bowers,
chief consultant to the report.

"What started as a US financial crisis is morphing into a global
economic crisis. Investors now expect a downturn of such intensity
that it will prevent inflation from taking hold," he said. Half the
fund managers think the world will slide into recession over the next
year, and a quarter suspect that it may already have begun.

A blizzard of dire data from Europe, Japan, Canada and Australasia
has shattered assumptions that the world economy can decouple from
the United States, and there is a growing suspicion central banks
have been too slow to respond.

A net 18pc of investors now think inflation will fall over the next
year, the most "deflationary" count since 2002. Bets that central
banks would have to keep raising interest rates have been unwound
almost overnight. Cuts are now expected. "Inflation is viewed as
yesterday's story," said the report.

"We have seen an extraordinary sea-change, but this is very
controversial. Investors may be reading too much into the fall in oil
prices," said Mr Bowers. Energy analysts are deeply split over the
outlook for crude after its dramatic 22pc slide from a peak of $147 a
barrel in early July.

Merrill Lynch said there had been a "brutal reversal" across the
whole gamut of investments as funds switch to a radically different
strategy. The dollar has suddenly become the darling of the currency
markets.

A net 58pc of fund managers think the greenback is undervalued, the
highest level since the survey began. The euro is now the skunk at
the garden party: a net 71pc say it is overvalued and most think it
will fall next year.

David Bloom, HSBC's currency chief, said the greenback's moment of
schadenfreude had come, ending a seven-year slide that has called
into question its viability as the world's reserve currency. "It has
become apparent that other economies are deteriorating fast, and the
whole decoupling thesis has started to come apart at the seams.
Canada is frozen over. We have Arctic conditions in Sweden, a
landslide in Germany, and the UK is falling off the white cliffs of
Dover," he said

"Foreign exchange is a relative concept. It is not that the US is in
good shape, just that others are slowing sharply. Central banks have
been too worried about inflation when they should have been thinking
about growth," he said.

Merrill Lynch said the crowded bet known as "long oil/short banks"
had unwound viciously since mid-July, leaving some funds nursing
hefty loses. The decision by the US authorities to enforce a
temporary ban on short-trading on 17 bank and financial stocks set in
motion a swift "short squeeze" that compounded the pain.

"Long oil/short banks has been the dominant trade of the credit
crunch," said Mr Bowers. "It was almost the only game in town, so to
see such a dramatic reversal raises a lot of questions. Is there
something deep-seated in this slowdown?"

Karen Olney, Merrill's European equity strategist, said it was too
early to tell whether investors are turning their backs on
commodities or just taking profits. "You can only stretch a piece of
elastic so far before it snaps back. We think this pessimism on the
oil sector is overdone," she said.

Funds are still hoarding cash everywhere until the storm subsides. A
net 83pc think the earnings estimates of analysts are "too high" and
underestimate the margin crunch that is about to hit companies as
unit labour punches higher, especially in Europe.

"Watch out for the profits squeeze in the third quarter. Investors
have turned a blind eye to the second-round effects of inflation,
such as rising inflation. It will take several months of slowing
global growth to be sure that the inflationary dragon has been
slain," she said.

The new favourite among the big OECD economies is the United States,
where a disaster scenario is (arguably) already priced into battered
equities and where the Federal Reserve has taken pre-emptive action
to cushion the hard landing. A net 12pc are now overweight US stocks
and shares, the highest level of optimism towards Wall Street in six
years.

"US equities are back to 2001 levels of popularity. Sentiment has
moved a long way. Not so cool Britannia remains unloved," said
Merrill. The appetite for UK stocks is at revulsion levels last seen
in the depths of the dotcom bust.

In the wider world, Russia is still top dog with a net 56pc of funds
overweight, but the data was collected before the country went to war
in Georgia. Korea has slithered down the charts. The mood is still
jaundiced towards China, Poland, India, South Africa, Taiwan,
Malaysia, and Chile. Exporting commodities is no longer enough to
lure investors.

The survey is based on 193 fund managers managing $611bn. It is often
used as a contrarian indicator, revealing clusters of overcrowded
investment positions that are overstretched and likely to reverse.
================
AND
2. Europe falters as Germany and France contract
By Angela Monaghan

Europe's two biggest economies shrank in the second quarter providing
further evidence that the worst of the slowdown in the global economy
is not yet behind us.

The German economy contracted for the first time in almost four years
in the second quarter, while the French economy shrank for the first
time in nearly six years.

Germany's fall was the sharpest, with gross domestic product down
0.5pc when seasonally adjusted, compared with a 1.3pc rise in the
first quarter.

The French economy contracted by 0.3pc, contrary to the National
Institute for Statistics and Economic Studies' (INSEE) expectation
that it would grow by 0.2pc.

INSEE also revised down its previous estimate for growth in the first
quarter to 0.4pc from 0.5pc.

In Germany it was the first contraction of the economy - Europe's
largest - since the third quarter of 2004 when GDP fell by 0.2pc,
according to the country's Federal Statistical Office.

The struggle in the period was mainly the result of falls in
construction activity, consumer spending, and capital investment.
The recent strength of the euro and a lack of business confidence
also hit demand for German exports, which have helped power the
country's growth in recent years.

"The decline reflects a backlash from the strong first quarter as
well as a cyclical economic downturn," Matthias Rubisch, an analyst
at Commerzbank told Bloomberg.
"High oil prices, the euro's strength, and the weakness in global
demand are all clouding the outlook," he added.

After publication of the figures the euro was flat against the dollar
at $1.4930 and little changed against sterling at 79.78p

The German Government forecasts growth will slow to 1.7pc this year
from 2.5pc in 2007, slowing further to 1.2pc in 2009.

The data from Germany and France comes a week after Jean-Claude
Trichet, the President of the European Central Bank warned that
economic growth in the eurozone would be "particularly weak" in the
third quarter, prompting investors to increase bets that the ECB will
start cutting interest rates next year.

Yesterday the Bank of England gave its clearest indication yet that
the UK is likely to enter a recession.

Speaking as the Bank published its quarterly Inflation Report,
Governor Mervyn King said that because the central growth projection
was for broadly flat output, "it's bound to be the case that there is
the possibility of a quarter or two of negative growth."

A technical recession occurs when there are two successive quarters
of contraction.