I now have a slightly more cautious outlook for the US economy than three months ago although the US economic recovery is continuing.
The reasons include weakness in recent surveys of the service industry and softer production and labour market data. There is also the possibility of further falls in the US stockmarket. Any declines in equity prices would affect consumer and business confidence.
Despite this, I remain reasonably optimistic about the prospects for the US economy and do not expect a double-dip recession. Inventory levels and corporate investment have stabilised while retail sales rise.
Providing corporate earnings continue to improve, and consumer spending remains relatively strong, recovery should continue. The Federal Reserve cut interest rates by a surprisingly large 0.5 per cent last week in a bid to provide a fresh economic stimulus.
The outlook for the UK economy also remains positive. The current strength in consumer confidence and spending is expected to continue since the factors supporting the consumer remain in place.
Higher Government spending is also expected to play a significant part in boosting growth going forward. The main risk is the possibility that growth falls short of the Chancellor's predictions.
This could potentially jeopardise plans for higher public spending over the next two years or mean the Government has to raise extra funds to ensure its pledges are honoured. However, if the global economic background weakens further during the fourth quarter and the UK economy starts to struggle, the Bank of England may cut interest rates in late 2002 or early 2003 although last week's decision was to hold rates steady.
Prospects for continental European have deteriorated in the last few months. Current weakness in capital investment could intensify as conditions remain tough and business confidence is declining.
Weak consumer confidence data suggests that domestic demand is unlikely to grow and indicators point to a difficult fourth quarter for manufacturers. The outlook for Europe is now less optimistic than earlier in the year and the European Central Bank may cut interest rates in late 2002 or early 2003 in a bid to stimulate growth.
Japan's economic outlook remains negative. There is little evidence that growth recorded in the first half will be sustained. Data already points to a slowing rate of export growth alongside the more moderate pace of global economic recovery.
A temporary period of economic growth will not support sustained improvements nor will it solve the financial sector's woes. During late September, a government bond sale failed to attract enough buyers for the first time, indicating a lack of confidence domestically and internationally in government ability to stimulate a sustained recovery, halt deflation or resolve the banking industry's deep-rooted problems.
Despite expanding in the first half of 2002 on the back of rising exports, Japan remains the weakest developed economy. There are no indications that its government is tackling the problems.
In September, the Bank of Japan announced it would buy shares from various financial institutions to help shore up their balance sheets in the face of the government's inaction. This indicates the seriousness of the banking sector's woes.
The outlook for the rest of Asia is more encouraging, with cyclical factors expected to continue to benefit export-dependent economies.
Some countries, including Thailand and China, are set to to benefit from improvements domestically. China's government continues to implement pro-growth policies and the country is attracting much foreign investment. Rising domestic demand and consumer confidence should add support to economic growth in Thailand.
During the third quarter, the global economy continued to recovery from 2001's weakness. But recovery slowed, partly as a result of sharp falls suffered by stockmarkets glo-bally. Forecasts for global economic growth were also downgraded.
The US economy continues to expand. Although the rate of growth slowed markedly in the second quarter compared with the first quarter, we are expecting data to show the pace of expansion accelerated in the third quarter. This is based on recent strength in retail sales and durable goods orders figures, as well as the effect of higher government spending.
The UK economy remains in reasonable health, largely supported by Government and consumer spending. Low interest rates and low unemployment continue to underpin consumer confidence.
Although the global economic picture weakened further during the third quarter, recovery is continuing, albeit at a more moderate pace.
But certain risk factors could hamper recovery. Sharp falls in global equity prices would dampen confidence. War with Iraq or an escalation of troubles in the Middle East would dent confidence and put up the oil price. Further rises would push up inflation – hurting consumers and businesses alike. Since consumer strength is crucial to the US and UK economies, this would not be welcome.
Despite the fact that these risks have become more pertinent recently, the long-term outlook for the world economy remains relatively positive. Equity market falls have produced much more attractive ratings and, of course, markets always look and feel bleak at the bottom.