There are solid grounds for optimism about economic prospects for next year, but further dollar weakness remains a threat, according to a new review from Friends First.
Interest rates remain low, fiscal policy is expansionary and inventories are low, according to its economist, Mr Jim Power. The US will lead the global economy, with consumer confidence there looking good and business spending strengthening. The labour market "remains a cause for concern" but the likelihood is that as corporate America becomes more expansionary, jobs will follow, he believes.
In Europe, the UK economy should remain firm and, while the big euro zone economies are lagging, there are grounds for optimism that they can benefit from stronger export markets.
"One of the biggest risk factors for the global economic recovery and particularly that in Europe and Japan would be a further sharp fall in the value of the dollar against the yen and the euro," Mr Power writes.
The course of the dollar in 2004 is very uncertain, he says. Based on economic fundamentals, a strengthening of the currency would be expected as the US recovery outpaces the euro zone and US interest rates start rising.
However, the currency markets are currently focusing on the US current account deficit and the consensus is that the dollar could weaken in the first half of next year, before recovering.
This consensus could well materialise, according to Mr Power, and further dollar weakness in the early months of 2004 "would do serious damage to the European and Japanese recovery prospects". If the US currency falls towards $1.30 to the euro, there might well be some central bank intervention to support the dollar, he argues.
Looking at the interest rate outlook, Mr Power believes the Federal Reserve Board is set to start pushing up rates by mid-2004.
This view was echoed in the Bank of Scotland's December Economic Comment, where chief dealer Mr Dermot Dolan says he expects the Fed to start raising rates in May, with further increases during the year. The weak dollar will make it difficult for the treasury to sell the amount of debt required to fund the budget deficit, he says.
"These factors will maintain long-term interest rates at current levels and push them higher in 2004 as investors demand a higher return for increased supply."
