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End of financial crisis predictions 'a fantasy' Expert opinion shifts towards more prolonged economic pain.

Byline: andrewfarr

FOR every pundit who was happy to predict the end of the recession, there was a bear in the wings, ready to warn of the dire consequences of economic complacency.

Now, the bears' ranks are being swollen, and the shift in expert opinion appears to be in their favour.

Most recent convert is the highly regarded Ernst & Young Item Club, which has warned that talk of a recovery remains "premature".

The forecasting organisation believes that we will see modest growth in this second half of 2009, but post-election tax rises and the repayment of consumer debt will lead to the economy struggling to achieve growth of 1% next year.

This Friday we should get the GDP figures for the third quarter of 2009, and they are expected to show growth rates of near zero. Meanwhile, across the Atlantic, woeful figures from Bank of America (City of London offices pictured) prompted Harvard University professor Niall Ferguson to comment: "The idea that the financial crisis is over is a fantasy and it looks like the numbers bear that out."

Some optimism is abroad. BT Business' research into 7,000 SMEs last month found that three-quarters (75%) were expecting an economic upturn near year, while 61% were confident about their business' viability in 2010.

But Professor Peter Spencer, the Item Club's chief economist, warned: "There could still be substantial pain to come for corporates and consumers. For a sustainable recovery the UK economy needs world trade to pick up and there is still not much sign of that happening."

The Item Club believes that the present optimism will continue while people make purchases in the remainder of 2009 in order to avoid the return in the VAT rate from 15% to 17.5%. However, 2010 will experience the introduction of the new 50p tax rate, an end to the stamp duty holiday on housing, an increase in national insurance contributions, the end of the car scrappage scheme and restrained government spending.

Prof Spencer added: "The stock market is absolutely rampant, industrial surveys all back in positive territory, but it's yet to show through in hard data for output and things like that. And when it comes to lagging indicators like unemployment, I'm afraid it's going to be 'feel bad' for quite some time to come."

Bank of America, the biggest lender in the US, has just recorded a $1bn quarterly loss, its second quarterly loss in less than a year, and worse than analysts had predicted.

While the group got a lift from Merrill Lynch, through activity such as trading bonds, currencies and stocks, as well as profits in its trading arm too, parts of the bank facing the so-called "real" economy have seen real trouble.

Something similar happened with JPMorgan Chase last week, with revenue from credit cards and mortgage banking down on the previous year. Bank of America also saw its losses on home lending and insurance more than double to $1.6bn, while losses on credit cards also rocketed. Meanwhile, US utility giant General Electric saw its third-quarter profits fall by 45%. It spooked investors because both revenues and orders had fallen.

So the lesson for investors is that they must distinguish between companies that are looking good through cost cutting, and those that are genuinely witnessing an upturn in orders. Of course, it depends on your strategy, but it doesn't necessarily follow that any kind of double dip will prove fatal - just so long as you remain careful.

Andrew Farr is managing director of Cardiff-based Oakwood Financial Planning. The views expressed in this column are personal and do not constitute advice.

Andrew Farr can be con tacted by e-mail at andrew.farr@oakwoodfp.co.uk, or at www.oakwoodfp.co.uk

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MIXED FORTUNES: Bank of America's poor results highlight the fact that the financial crisis is far from over, claim some experts
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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Date:Oct 21, 2009
Words:647
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