City & business: They think the worst is over: it isn't yet

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LULL or turning point? That's the question, and more and more people are replying: "turning point" or, in the terminology of the day: "the worst is over".

The London and New York stock markets backed up this tender rebirth of optimism last week. The FT-SE 100 index closed at 5,438.4, its highest point since the beginning of September. The Dow Jones industrial average close at 8,592.10, up 14 per cent from its low of 7,539.07 on 31 August.

Banks remain in trouble. On Thursday, Deutsche, Germany's largest, reported heavy losses in Russia. These depressed third-quarter profits by 83 per cent against a year earlier. But Deutsche's troubles seemed almost orderly compared to the near-panic that overtook US banks when the high-flying hedge fund, LTCM, had to be bailed out.

Brazil remains in trouble. No one knows if the austerity plan announced last week will get through the country's legislature or, if it does, whether it will bring interest rates down from their current 40 per cent level. But the frenzied withdrawal of international funds that has left much of Asia and Russia in deep recession looks like it might have blown itself out before precipitating a flight of capital in South America's largest economy.

Japan remains a worry. In spite of such unorthodox measures as the distribution of gift vouchers by the government to spur consumer spending, the OECD last week forecast its economy would contract by 2.6 per cent this year. In spite of signs, at last, of a restructuring of Japan's banks, some commentators are arguing that the country's bad debt could be four times the $500bn (pounds 290bn) conventional estimate.

Still, policymakers seem to have events under control. The Bank of England looks set for another 0.25 per cent interest rate cut on Thursday. The US Federal Reserve has signalled its intention to supply whatever liquidity it takes to avoid a US banking crisis. There are even signs the hard money men in Germany and the Netherlands may agree to cut the convergence rate at which the European Central Bank will begin charging interest on the euro on 1 January next year, from the estimated 3.2 per cent.

Meanwhile, Group of Seven finance ministers announced their plan to reform the world's "financial architecture" on Friday (see Hamish McRae, page 28).

So why, then, are so many people in industry and finance still so uneasy? Why does a CBI report released today show that companies believe the economy is headed for serious trouble over the next 18 months? One answer is that bankers and industrialists are still so traumatised by the financial crisis that they are still not thinking clearly.

A second answer is that the focus of attention has moved from the financial crisis to its effects on the global economy overall - where the picture is not panicky anymore, but still frighteningly unclear.

Certainly, few businessmen are saying: "OK, we're in for a bad 18 months while we recover from the crisis and deal with a cyclical slowdown. After that, though, it's going to be all right." Rather, people are saying: "It's less bad than it was but I'm still worried. I don't know what's coming next."

The crisis pricked a financial bubble. Assets as diverse as Russian government debt, US shares, and British pigs have been devalued. You can argue the bursting of this bubble was needed, as well as overdue.

But the crisis also dented globalisation itself - the notion that, lightly regulated, global flows of capital are a guarantee of economic growth. Globalisation has not been invalidated. But few are likely to blindly trust in its beneficial effects again.

This is the root of the malaise in business circles. Washington is working explicitly to rebuild trust in globalisation. But it was Washington that failed to pre-empt the firestorm of events that dented faith in globalisation in the first place.

So where does this leave New Labour? We shall know more on Tuesday after the Chancellor makes his pre-Budget statement. The leaks coming out suggest Mr Brown will ram home two points. First, he will be at pains to demonstrate his numbers add up. He will try to show that, despite lower forecasts for growth next year, he can deliver on what the Government has promised in terms of educational and health improvements and a measured scaling back of the welfare state.

Second, he will dwell on the need for UK plc to become more productive as the opportunities for our exporters get scarcer in the face of an expected downturn in world trade.

Mr Brown's numbers probably will add up, with a slight tweaking here and a marginal additional cutback there. The Government is probably better placed than any previous Labour government, or indeed the government of John Major, to hang tough in the face of the inevitable calls for tax and spend. There is, furthermore, little doubt that UK plc needs to up its game in terms of productivity. The problem the Government has is that it conceived its economic programme during the 1990s boom. It bought into globalisation Washington style. It launched a long-term programme to improve productivity in the belief that globalisation would give it time to see this programme through. It is now hoping that financial crisis will prove nothing more than a hiccup in this plan. If, however, the recession is deep, or if the financial crisis has revealed a structural flaw in the globalisation model, then the Government has no fallback position.

As the air hisses out of the global asset bubble, indeed, the true contours of many Labour economic programmes are being ruthlessly exposed. The New Deal, for example, has been billed as a cornerstone of its plan to gear up our labour force, and so position UK plc for a bigger slice of the globalisation pie. But with each passing day, the New Deal looks more like an Old Labour job-creation scheme with a few bells and whistles attached. The risk is that it will not accomplish very much and the pounds 5bn in windfall taxes raised for it will have been squandered.

It may be beyond the scope of any government, but the fundamental task facing Labour is to graft the best of British culture - inventiveness, individuality, steadiness, scepticism - on to the new imperatives for UK plc to compete harder against other industrial nations.

These imperatives are real. Three years ago I watched an American middle manager employed by General Electric of the US chew out the Hungarian bosses at a GE light bulb plant for not meeting their targets. The Hungarians were sophisticated former Communist Party apparachniks, and they used their considerable wiles to excuse their performance. They tried every trick to avoid committing themselves to the new targets. But the American manager was so dedicated to his job and GE that he beat them down. Everything they threw up as cunning obstacles, he doggedly batted down.

Britain under Labour, thank the Lord, is not about to reorganise along the lines of GE's quasi-totalitarian culture. But the unswerving faith in meeting business targets as an end in life is what UK plc is up against, not only from competitors in the US, but also Asia and Germany.

The Chancellor will, no doubt, strike a balance between sounding tough and cautiously optimistic on Tuesday. If he were candid, he would say: "We've had one or two good ideas. Fewer than we thought now that we've learned from the financial crisis. Suggestions welcome."