We expect global economic growth to be slower in 2001. The main drivers of the slowdown have been higher interest rates and energy costs. However, inflation pressures have become less intense. We anticipate the U.S. Fed will cut rates several times in Q1 2001. Europe has been more vulnerable to the higher energy prices than expected and, in the short term, the European Central Bank may raise rates by 25 basis points.
Corporate revenues are under pressure from the slower growth.
Higher production and interest costs are putting a considerable squeeze on profit margins. In the equity markets, the unwinding of the TMT stocks has been particularly painful in Europe and valuations still remain at relatively high levels. Japan and several other Asian economies are especially vulnerable to a global slowdown and the reduction of business capital spending. The domestic side of the Japanese economy is unlikely to improve in the near term. Further weakness of Japanese equities will put substantial additional pressure on the balance sheets of the banking sector and insurance companies.