Nearly half the world's economy is already in recession. There are fears that the rest of the world could follow.

Russia's financial problems are far from over

Cuts in the cost of borrowing in the US, the UK and Europe have helped avert an immediate disaster. However some analysts believe the recent recovery in share prices is unjustified, given the problems the world economy is still facing.

"(The rise in shares) leaves us at the end of the year looking rather nervous because frankly nothing has changed. Action may have been taken but the same issues are still there," said Justin Urquhart-Stewart, share expert at Barclays Stockbrokers.

Brazil's economy, for example, has been propped up by a loan from the International Monetary Fund. However money is still flowing out of the country at an alarming rate, raising fears that it will have to devalue its currency.

More bad news on the economic front is bound to hit share prices around the world.

The world economy could be heading for a sustained period of deflation, where prices fall as consumer demand dries up.

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The Centre for Economic and Business Research (CEBR), a leading economic think tank, predicted recently that prices would begin to fall in the UK by 2002.

Deflation would mean lower earnings growth for companies, which in turn would hit share prices.

Stocks are normally valued on potential profits and dividends. Lower earnings growth therefore depresses market valuations.

Jeremy Batstone, head of research NatWest Stockbrokers goes further. He says that City analysts will have to slash their earnings forecasts next year and that company profits are likely to be flat or even fall.

Economists agree that the UK and the world economy are heading for a marked slowdown next year, even if a full blown recession does not materialise.

Justin Urquhart-Stewart: 'The big word is confidence at the moment'

So far stock markets have shrugged off President Clinton's leadership problems. However as impeachment proceedings get underway next year Wall Street stocks in particular could be affected.

"The big word is confidence at the moment. Whether it is Operation Desert Fox or the impeachment....it is yet more spears being thrown at the balloon. In itself it won't do anything but it may be a catalyst for something else," said Mr Urquhart-Stewart.

Jeremy Batstone: "The Year 2000 computer bug could cause problems'

There is a final imponderable next year: the potential collapse in computer systems not able to cope with the year 2000.

"We don't think it will be a vintage year by any stretch of the imagination and at the end of the year we have ... the year 2000 computer problem which is an issue we have never been in before and nobody can really quantify," said Mr Batstone.

Reasons for hope

However there are reasons to be more optimistic about the prospects for share prices.

Justin Urquhart-Stewart: 'There is still more money coming in to the market'

Financial institutions have been wary about investing in stock markets for some time. That has left many with large quantities of cash. With falling interest rates, however, these cash reserves are not earning a good return. Shares may offer a more attractive investment and so institutional buying may bolster the market.

"There is still more money coming into the market and that money has to go somewhere," said Mr Urquhart-Stewart.

Slow earnings growth will prompt more companies to join forces to cut costs. Mergers and acquisitions are likely to buoy some stock prices.

In the UK there is likely to be a rush to buy existing savings instruments such as Personal Equity Plans (PEPs) before they are abolished this spring to be replaced by a new government saving scheme, Individual Savings Accounts, which have so far proved unpopular.

PEPs allow investors to save tax when they buy shares. So a surge in PEP sales will boost share prices.