THOSE who used to watch the television series, Star Trek, will remember Captain Kirk’s habitual mid-combat information request (most often to Chief Engineer Mr Scott) for a damage report. The response, in the brief lull as the Klingon aggressors circled for another attack on the Starship Enterprise, was usually that sundry engines couldn’t function, the shields were at half-power and the weapon systems were down to the last few photon torpedoes.
Today, a month on from the sharp correction in share prices that came on the heels of the downgrade to America’s credit rating by Standard & Poor’s, there is a strong analogy to the current state of investment markets.
Our recent experience has been uncomfortable, and the precise degree of damage sustained to economic growth is still being assessed.
Some slowing has certainly occurred, with most concern being generated by sentiment measures across consumer, service and manufacturing sectors throughout the developed world, which have registered sharp falls.
We are now collectively holding our breath to see how much this translates into diminished real activity levels, which could tip the already sluggish developed world into recession.
The alarm bells are certainly ringing loud and clear in the form of continued strength in safe haven investments such as gold and so-called super sovereign government bonds.
Nevertheless, there are also good reasons to believe that, just like the Enterprise, the world economy will prove to be resilient.
If the dip in confidence indicators can be largely attributed to the unusually concentrated series of highly theatrical political missteps in Europe and America in July and August, putting these behind us should provide rapid relief.
In the meantime, to continue the earlier analogy, the twin engines of global economic activity are corporations in the West and consumers in the developing world.
Both remain in robust good health and are to some extent already braced against shocks.
The “shields” (the banks – who traditionally absorb credit losses and recycle excess savings) are not fully functional, but they are far from the state of complete failure that characterised the credit crisis of 2008.
Finally, although heavy weaponry has been used, the monetary armoury is certainly not empty.
America is clearly willing to deploy hi-tech novel approaches, while Europe and emerging markets have more prosaic, traditional interest rate options still available.
There is, however, at least one important respect in which my light- hearted analogy jars. One of the important factors in extricating the stricken Starship from its plight was always strong leadership. Particularly in the eurozone, this is lacking.
Time and again, measures designed to provide a firebreak against contagion have floundered as minority interests have diluted or delayed them.
Recent developments have engineered some breathing space, but there is a sense that this may be only a temporary lull in hostilities.
This is because Italian and Spanish bond markets are likely to come under fire again, unless the resources of the European Financial Stability Fund are increased.
Our ability to withstand further shocks is not infinite.
John Haynes,
Head of Research,
Investec
