Outlook: ABN Amro sees no end to stock market's nuclear winter

Commerzbank; Ryanair/Buzz

The question can be posed and articulated in all kinds of ways, but essentially it comes down to something very simple. Can you really have a bear market in equities as deep and prolonged as the one we are going through without any apparent effect on employment, average earnings and consumption, or is the macroeconomic impact still to come? Gordon Brown, the Chancellor, and Sir Edward George, Governor of the Bank of England suggest you can, but for most people, the jury is still very much out.

Stock market crashes have in the past nearly always been accompanied by severe economic trauma, but while no one's denying that things look anything but extraordinarily rocky out there right now, the usual symptoms of economic collapse – falling consumption and rising unemployment – are almost entirely absent this time round, at least in the UK. Even in the US, where there has already been a shallow recession and where economic growth is once again grinding to halt, the impact on employment and living standards has so far been amazingly limited.

Three reasons are usually advanced for this benign state of affairs. The first is that we are not really experiencing a proper crash at all, but merely a blowing away of the excess in stock prices which developed in the last three or four years of the 1990s. What's happened is that the extreme peak of the bull market has been sliced off, as if it never happened. Well no, I can't quite buy that one either, but the argument is logical enough.

The second is that inflation is low, with important deflationary effects still at work in the world economy and unlikely to abate. This has allowed historically very low interest rates and a surplus of easy credit, enabling consumption and services to keep growing despite one of the most vicious business downturns in living memory. Perhaps as important, it has allowed businesses to survive in a way that might have been impossible in a higher interest rate environment.

The third reason is a related one – there's been no banking crisis, the usual bedfellow of any economic slowdown, at least in the UK and the US. We'll come later to Germany, where the early stages of a banking crisis is already in full swing. Recessions are nearly always preceded by a severe credit crunch. There's been nothing like that this time around, rather the reverse in fact. Credit for consumption and housing has never been easier. Unfortunately, the same cannot be said for great swathes of business, but the banks have to protect their underbelly somehow.

Sometimes referred to as the two speed economy, this juxtaposition of domestic and external demand is generally thought to be unsustainable, but on the old Keynsian principle of look to the short term and the long term will take care of itself, it is for the time being keeping the economy afloat. For how much longer?

New research by ABN Amro and the London Business School published yesterday finds that in the three years to the end of 2002, stock markets have lost $13 trillion of value, or $2,000 for every man woman and child on the planet. These are largely paper losses, but even so they will eventually have a profound impact on people's saving and spending patterns, as well as their propensity to take on ever larger quantities of debt.

I'm not sure I go along with ABN Amro's methodology, but there are some equally alarming forecasts for the future. The report extrapolates that on the basis of a 6 per cent rate of return, it will take until 2018 for the FTSE 100 to return to its end 1999 peak, and what's more, there is only a 50 per cent probability of that happening. Don't believe equity markets won't go down again this year just because they have never fallen for four years in a row before, warn the writers. Each year, the starter gun is fired anew, and there is every chance of another year of negative returns.

In any case, the longer the bear market persists, the deeper the eventual effect on consumption and employment. Already people's expectations for their saving and pension plans has taken a severe knock. Falling house prices would be the final straw. We may yet get safely to the other side of this economic soft patch, but we are walking on dangerously thin ice.

Commerzbank

There may be no banking crisis in Britain, but there is every sign of one developing in Germany. Commerzbank, Germany's third largest bank and a key lender to the Germany's industrial hinterland of small and medium sized businesses, yesterday posted a euros 372m pre-tax loss, the first reported loss in the bank's history. That loss would have looked even worse but for sale of the bank's stake in Credit Lyonnais. High costs, soaring bad debt experience and incredibly thin margins are combining to produce Germany's worse banking implosion since the second world war.

Time was when Germany's legion of business lenders would be cited by the Chancellor and others as a key reason why the German economy was more productive than our own. You don't hear any of that now. The Chancellor can only thank his lucky stars that the British banking system is a robust and profitable as it is. Germany is hugely over banked and now that the economy is heading south, this structural failing is becoming only too apparent.

Klaus-Peter Mueller, Commerzbank's chief executive, says he plans to cut costs by at least another euros 500m this year but nobody believes that will be enough to return the bank to profit. Mr Mueller desperately needs bad debt experience to abate, but nobody believes that's going to happen this year either, always assuming the bank is realistic in its provisioning. Business failures in Germany are expected to continue rising steeply, producing an exponential effect on the banks, who directly finance German companies to a far bigger extent than is common elsewhere.

Germany's post war economic miracle is fast disappearing down the plug hole and with seemingly everyone moving their industrial production to the low cost economies of China and the rest of the Far East, it's hard to see the bottom for this still heavily manufacturing based economy. Eventually the pain will get so bad that Germany will grasp the nettle of necessary structural reform. Plainly that moment has not yet arrived. Mr Mueller was dismissive yesterday of all talk of banking mergers, an obvious starting point for any process of banking reform.

Ryanair/Buzz

In recent years, the Office of Fair Trading has thought it necessary to refer to the Competition Commission such issues of vital public interest as the market in "aircrete blocks", incontinence care products and most curious of all, Blockbuster's proposed acquisition of six video hire shops in south-east London.

However, it didn't recommend a reference of easyJet's acquisition of Go, and on the same logic, it almost certainly won't recommend a reference of Ryanair's takeover of Buzz. There are good reasons for this, even though both takeovers are acquisitions of younger competitors for the deliberate purpose of closing them down. In both cases, the discounters are able to argue that when seen in the context of the airline market as a whole, these are fleabite acquisitions of virtually no significance.

Hardly any member of the travelling public I know agrees with that view. Nobody cares a hoot about the cost of aircrete blocks or incontinence products, but they do care about the cost and availability of air travel and although no one can fault Michael O'Leary when it comes to ensuring a good deal for the consumer, his takeover of Buzz is a highly anti-competitive move that demonstrably limits customer choice and increases the liklihood of higher fares.

There's a mismatch developing between what the Office of Fair Trading thinks is or isn't in the public interest and what the public itself thinks important. It's time for John Vickers, the OFT's chairman, to think about returning to earth.

jeremy.warner@independent.co.uk