Dr. Gerald Lyons

'We think business should be far more concerned about downside risks in the global economy. Our view is that there is a 60% probability of a soft landing and a 25 per cent chance of a hard landing,' explains Chief Economist and Group Head of Global Research, Dr. Gerald Lyons.

'This is a change in our outlook. We have been upbeat on prospects for the global economy for the past four years. And it is true that the markets we operate in are still showing considerable strength.

'But in the US it is now a question of how much of a slowdown we will get with the pressures now on the US consumer, particularly with the housing slowdown. We don't know exactly how this will play out, although the inverted bond market is what we last saw in August 2000 before the last US recession.'

The Standard Chartered house view is that the US Federal Reserve will have to cut interest rates in response, but will still take rates 125 basis points higher by the end of 2007.

Oil prices are a difficult area for any forecast team, and Dr. Lyons points to the 'permanent oil shock of Chinese and Indian demand' as an unchanged factor. He also notes one study pointing to a recent surge in speculative oil trading which might imply that recent market weakness is more to do with the unwinding of a few large trading positions than a change in market fundamentals.

On the US dollar the Standard Chartered view is for longer term weakness. At the same time Dr. Lyons points out that the dollar rallied as a 'safe haven' currency in May when capital markets sold-off and that the same phenomenon might be repeated. Recession would also ease the trade deficit as Americans would not buy so much overseas.

Gold is not a special interest of the Bank. However, Dr. Lyons considers gold a 'fundamental buy' and dismisses recent weakness, although he is not sure about the outlook for the next two months. 'The outlook for a softer US dollar and demand for gold from the emerging Asian middle classes will keep the bull market intact.

'The worst scenario for the global economy would be a US dollar collapse with the economic imbalances of the US economy imploding. But Hank Paulson's appointment (as US Treasury Secretary) is a positive one for the US currency and he is pushing revaluation as a part of overall reform.'

In short, Standard Chartered Bank is telling its clients to take a more defensive view of the outlook after four years of correctly heralding the good times. Perhaps what has proven a good guide in the past is worth listening to now.