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Investment View

Don&#39t you just love it when government agencies fall out? The European Central Bank&#39s recent decision not to cut interest rates prompted a rebuke from the Washington-based IMF. The message was loud and clear – the ECB was not proving to be a team player.

On this occasion, Mr Duisenberg and his colleagues probably felt on strong ground. Inflation figures from Germany and Italy were well above the target 2 per cent. The ECB can point to the legal imperative of controlling inflation above all else. It is one thing to have smaller countries out of line, it is quite another to have the euro-zone&#39s biggest economy delivering inflation nearly 50 per cent above target.

But that is not the whole story. Not long after the German figures were published, along with statistics on producer price inflation showing that the weakness of the euro was pushing up manufacturing costs, data was released suggesting that growth in the German economy was likely to be much less than expected. Job losses in continental Europe are becoming an almost daily occurrence. Closures such as Motorola, Marconi and Ericsson are of concern in Europe but the US position is far worse.

Redundancies there have spread from the hard-hit new economy sectors into more traditional business areas. The indications are that corporate America is becoming nervous over the apparent lack of reaction to Mr Greenspan&#39s economic priming. The longer we wait for the US recovery, the more likely businesses will be to trim costs. When that trimming comes in the form of losing labour – which it inevitably does – then you have to consider the knock-on effect for consumer confidence and spending. Americans have not been saving recently, allowing the stockmarket to do it for them. If they are worried about losing their jobs, they may change their approach. Consumer attitudes are crucial in the US – they represent around two-thirds of GDP. The last thing Mr Greenspan wants to see is consumers retrenching.

Fortunately, they have shown remarkably little propensity to cut back spending recently. This is surprising, given the loss of wealth resulting from the pullback in US markets, but the strong performance of American shares over the past two decades will have given many investors a cushion.

If the attitude of the consumer in the short term is worrying, what might happen in the future could be of even greater concern. I have placed considerable importance upon the demographic push that baby boomers delivered to the US economy in reaching my generally bullish stance. From the end of the Second World War until the late 1960s, the birth rate boomed. This now mature generation has helped drive American GDP growth higher over the past decade or so.

Research suggests the peak will not be achieved until around 2013 but the conclusions of Barclays Global Investors, in its annual equity/gilt study, disagree – believing baby boomers reach their zenith this year. They take a broader measure than that which I follow, looking at the whole of the 35 to 54 age group. Even so, there must be concerns that the growth of American consumerism has had its best years and we need to look elsewhere for economic engines.

Of course, the seventh cavalry really does exist and probably lives in Eastern Europe, South-east Asia and Latin America. The real question is whether the ability of these parts of the globe to assume the spending mantle will come in time to counterbalance what could take place in the US. Only time will tell but it reinforces my view that markets will be less kind to us in the next decade than in the previous two. We need to ratchet down investment expectations. What a time to launch stakeholder pensions.

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