City sees a bright horizon

CITY firms sought to look beyond another batch of gloomy economic news to a more cheerful 2002. Merrill Lynch sees cheap money fuelling a recovery. So too does Credit Suisse First Boston. Barclays Capital predicts another good year for the bond markets.

But all this is in the future. For now, the G7 countries' growth fell to zero for the third quarter of 2001, and the annual growth rate slowed from 1.2% to 0.8%.

UK jobless figures rose in November, the first time in nine years that they have risen two months in a row. The number claiming unemployment benefit rose 4,800 to 959,000, 3.2% of the workforce. The International Labour Organisation measure, which includes those not eligible for benefit, rose 29,000 to 1.52m.

Nonetheless, Merrill Lynch sees recovery coming through, and inflation staying down because of the slump in the new economy.

Interest rates will go much lower, and stay low for a long time, said its debt strategist, Cesar Molinas. He expects US rates to remain between 1.5% and 2% for all of 2002, Euroland rates to drop to 2.75% by March, and UK rates to fall to 3.5%. CSFB sees euro rates even lower, at 2.25%.

Merrill sees stock markets making 'single-digit gains' over the year. It was equally optimistic a year ago, but this time says the 40% drop in oil prices, on top of interest rate falls, should trigger recovery.

The broker sees the UK economy growing at 2% next year, the US and Euroland at 1%. CSFB sees 2.3% here. Global growth will be 1.4%, said the Economist Intelligence Unit.

Company bonds, which gave an 8% return this year, should do well again in 2002, said Barclays Capital's head of credit research, Gary Jenkins.