One in two fund managers feels world about to enter recession

Poll's findings come as world's biggest markets struggle with all the economic basics, writes Proinsias O'Mahony

FUND MANAGERS are bracing themselves for a global recession, according to Merrill Lynch's latest monthly survey of global fund managers, with almost half of respondents saying they expected the world economy to enter recession in the next 12 months.

The survey, which polled 193 fund managers controlling $611 billion in assets, also found that almost one-quarter believe the global economy is already in recession. Two months ago, just 16 per cent of fund managers took that view. Considering that the managers were polled in early August, it's reasonable to assume that the figure might be higher again today, considering this week's wave of gloomy economic data that indicates that four of the world's five biggest economies - the US, the euro zone, Japan and the UK - are hovering on the brink of recession.

On Thursday, it emerged that the euro zone had shrunk by 0.2 per cent in the second quarter, the first contraction in its nine-year history and the first time since 1993 that the 15 countries who use the euro have seen a fall in output.

Germany, which accounts for one-third of euro zone output, saw its economy contract by 0.5 per cent while France, the second-largest economy, fell by 0.3 per cent, significantly worse than economist predictions of mild growth.

Italy experienced a similar decline, while the enlarged European Union of 27 members contracted by 0.1 per cent. Europe has been hurt by the strong euro, tighter credit and weakening exports as global demand stalls.

Looking at Europe's four biggest economies, only Spain could record any kind of growth at all, eking out a gain of 0.1 per cent.

Despite that, Davy Stockbroker's Rossa White echoed analysts' opinions by saying that Spain was "almost certain to shrink" in the second half of 2008.

With unemployment at 10 per cent and a severe property crash in motion, "a momentous economic slowdown is now under way", according to a new report by Morgan Stanley.

The report stressed "the deterioration in Spain is just in the beginning stages", with the "bulk of the pain" likely to be suffered in 2009. Spain's property market - the "Costa del Crash" as it's now being called - could mean real trouble for the country's biggest banks, the report says, warning that an economic crisis similar to the exchange rate mechanism debacle of the early 1990s could wipe out the capital base of many exposed lenders. Last month saw the demise of €5.1 billion Martina-Fadesa, Spain's biggest builder.

Morgan Stanley points out that loans to developers make up more than 26 per cent of total lending for Sabadell, Spain's fourth-largest bank, with other major financials similarly exposed.

Recession has also been on the minds of British investors this week. Wednesday saw Bank of England governor Mervyn Kind admit that there is "bound to be a quarter or two" of economic contraction as Britain suffers a "painful adjustment". In July, the UK experienced its largest monthly increase in unemployment since December 1992. Inflation this week hit 4.4 per cent, also its highest level in 16 years.

Currency traders are betting that the country is heading for its first recession since that period, driving the pound lower against the dollar on 11 consecutive days, its longest run of losses in 37 years.

Japan, too, appears destined for recession. Its economy shrank by 0.6 per cent between April and June, equivalent to a 2.4 per cent annual decline. Rising energy and food costs have damaged Japanese consumer confidence, which last month fell to its lowest level in 26 years.

The global nature of the slowdown has surprised advocates of the decoupling thesis, the notion that European and Asian economies have broadened to the point that they would be largely insulated from American woes.

Ironically, US equities are comfortably outperforming most international indices and the euro zone, the UK and Japan now look more likely recession candidates.

The SP 500 is down by 12 per cent this year whereas the MSCI Asia Pacific Index has lost 20 per cent and the EuroStoxx 50 is off by 24 per cent. The much-vaunted Bric markets - Brazil, Russia, India and China - are well down also, with the Chinese market losing 54 per cent of its value this year. However, China remains the only one of the "big five" economies showing decent growth this year.

The slowdown in the world economy has been reflected in the tumbling price of oil. In the US, oil demand fell by an average of 800,000 barrels per day compared to the same period last year. That was the biggest volume decline in 26 years. The Baltic Dry Index, which measures the cost of shipping raw materials and is thus often used as an indicator of commodity demand, offers further testimony to the sell-off in commodities in general. It's fallen by 37 per cent since its May peak.

Despite the SP's relative out-performance, American recession worries refuse to go away. Inflation this week hit an annual rate of 5.6 per cent, its highest level since 1991. Retail sales fell by 0.1 per cent in July, the weakest figures since February and with 87 per cent of the tax rebate stimulus package now delivered, few analysts expect a pick-up in spending.

Stephen Stanley, an analyst with RBS Greenwich Capital, says that the "toxic combination" of tightening credit, a weak housing market and the fact the fiscal stimulus is "essentially done" will likely trigger the first "consumer recession" since 1990-1991.

Furthermore, the latest results from the Federal Reserve Bank of Philadelphia's quarterly survey of economists offer few crumbs of comfort. Its so-called "Anxiety Index" asks forecasters to estimate the probability of a real decline in gross domestic product (GDP). More than 46 per cent expect a negative GDP reading in the fourth quarter. Since its inception in 1968, every quarter in which the index was over 40 was later deemed to be recessionary.