HAMISH MCRAE: Bear markets are a familiar beast

The extended holiday weekend offers a moment for reflection amidst current economic headwinds. This period is far from a positive economic and financial juncture, necessitating a pause from the prevailing uncertainty.

Navigating the Economic Landscape: Six Key Expectations

Let us take a broader view and concentrate on probable developments in the coming weeks. Here are six key points to consider regarding the near-term economic outlook:

1. Resolution of Trade Disputes Expected

The current state of disruption is unsustainable and will not persist indefinitely. The escalating costs are universally detrimental. Consequently, resolutions to the trade conflicts initiated by certain nations are anticipated in the near future.

While these resolutions may be imperfect or temporary, the present elevated level of instability is unlikely to extend beyond the summer months.

2. Global Business Resilience Demonstrated

The international business community has shown remarkable adaptability. Evidence of this can be seen in how Russian firms have circumvented sanctions imposed by various Western nations. Russia has maintained its export of commodities and import of necessary goods. Although these disruptions have elevated expenses and prices, global trade has largely continued.

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3. Worldwide Inflationary Pressures Increase

A rise in global inflation is expected. This is partly attributable to tariffs, which inflate prices, but also to the prevailing political sentiment favouring inflationary policies in the United States.

The current administration has openly criticized the head of the Federal Reserve for a perceived slowness in reducing interest rates, disregarding the potential consequences of excessively loose monetary policy.

While the precise timing is uncertain, excessive money printing by central banks inevitably leads to increased prices. Should the U.S. experience a resurgence of inflation, this pressure will likely transfer across the Atlantic, impacting the UK. Furthermore, the UK is also susceptible to generating its own inflationary pressures, with the Bank of England projecting the Consumer Prices Index to exceed 3 percent by autumn.

4. Understanding Bear Markets and Market Volatility

Considerable historical data exists regarding bear markets, defined by a market decline of 20 percent or more from a recent high.

The sharp decrease in U.S. equity valuations directly and indirectly impacts the UK. Directly, through holdings of American equities, and indirectly, as UK markets are also experiencing downward pressure.

While each bear market possesses unique characteristics, historical analysis of the U.S. market over the past century indicates an average duration of nine months with a 35 percent decline.

This suggests two potential outcomes. If current U.S. market behaviour is typical, further equity price declines are likely, but a recovery phase could begin towards the end of this year.

5. UK Economic Outlook: Slowdown or Stagnation?

How might this affect UK markets? The promising upturn in the FTSE 100 index, which reached over 8,900 intraday last month, has been undermined by developments in the U.S. markets. The index has returned to its starting point for the year.

Although UK equities currently present better value compared to their U.S. counterparts, further significant declines in the U.S. market would likely negatively affect the UK market as well.

Given these factors, will the UK experience a significant economic deceleration, potentially a recession? Forecasts for the U.S. economy are mixed, with some economists predicting a recession, while others anticipate only diminished growth.

For the UK, consensus points toward stagnation rather than a severe economic contraction. The impact of recent tax increases on businesses is considered more influential than transatlantic economic fluctuations.

Furthermore, service-based economies generally exhibit greater resilience to economic shocks than manufacturing-led economies. The UK economy is more reliant on services than any other major global economy. Services constituted 56 percent of UK exports in 2023, a proportion seemingly unparalleled elsewhere.

6. Potential for Unforeseen Economic Shifts

Finally, the possibility of an unprecedented economic event, outside of recent historical experience, always exists. This year could potentially trigger an economic disruption comparable to the 2008-9 financial crisis or the recent pandemic. However, it is equally plausible that the current situation represents a temporary mid-cycle slowdown.

It is expected that pragmatic approaches will prevail, allowing growth and trade to recover, stabilize, and return to normal activity in the coming year and beyond.