All our major investment calls are based on a set of macroeconomic assumptions that can be summarised as follows: major economies will spend most of 2009 in recession, but there will be clear evidence of recovery by the end of the year. Inflation will continue to fall, as will interest rates, but sterling and the dollar will stage something of a recovery against the euro.
In more detail, we're assuming that:
■ It'll be a recession, but not Armageddon. Economists' consensus forecast is for UK real GDP to fall 0.9 per cent in 2009. This would mean the recession is milder than in 1991 (when GDP fell 1.4 per cent), 1980 (2.1 per cent) or 1974 (1.3 per cent). The Bank of England, for example, thinks real GDP will stop falling in the third quarter, and begin to rise in the fourth, and even the most pessimistic forecaster only expects next year to equal 1980's fall. Of course, economists may revise these forecasts, but as things stand, we're not going back to the 1970s, let alone the 1930s.
■ Inflation is going to fall sharply. Economists expect RPI inflation to turn negative in the February figures, reported in March. By September it could be as low as minus 2 per cent. That would be the biggest annual drop since 1933.
■ Interest rates will fall further. As the threat of inflation disappears and central bankers come under pressure to get banks lending again, they could fall to zero.
■ Ccommercial money markets will remain inactive and expensive. Futures markets expect the gap between three month Libor and the overnight indexed swap rate (a risk-free rate) to fall to around one percentage point by next summer. Although this would be less than half the current spread, it would still be much higher than the spreads that existed before the crisis began in August 2007.
■ There'll be more fiscal stimulus. Even the hitherto reluctant Germans have started to head down this road. However, the UK government here has already laid most of its cards on the table and has little significant room for further action in March's Budget.
■ Sterling is likely to stage a limited recovery later in the year, especially against the euro, as the European Central Bank has started cutting interest rates, and eurozone economies are in just as much of a mess as the British one. There is also likely to be some appreciation of the dollar against major currencies.
■ The US will recover quicker than the UK or Europe. Economists polled by the Philadelphia Fed's Livingston survey - the longest running survey of forecasters - expect output to fall by 1.9 per cent in the first half of this year, and then to rise 0.5 per cent in the second half, before the recovery gathers steam in 2010.
■ US house prices will stabilise. There is some evidence that this has already started to happen. It's important for two reasons: one is that more stable house prices might start to alleviate concerns about bad loans, thereby encouraging banks to start lending again. The other is psychological; it makes people feel better off.
