It is back to work now for most people, but sadly the economic outlook has not improved over the holiday break and has even deteriorated in many respects.

As a service to readers who may have been distracted by the festivities, the most important developments of the past fortnight are highlighted below, as a prelude to some investment thoughts for 2009.

One persistent theme that was hard to escape was the rapidly declining outlook for the nation’s retailers over the past two weeks of 2008. Even before the cash tills fell silent for Christmas, high street chains such as Woolworths, Zavvi and Whittard of Chelsea went under. Clothing chains Adams and Morgan followed them last week.

This week will bring the first of the post-Christmas trading updates, from Next, Debenhams, New Look, Marks and Spencer and J Sainsbury. Analysts expect only the last of the five to buck the trend of plunging sales and sagging profits hit by fierce discounting to lure in the shoppers.

Experian, the retail consultancy and credit checking company, reported a 12.8 per cent surge in shoppers seeking sales bargains in the last week of December.

But that was not enough to make up for shortfalls in the previous three weeks, leaving shopping visits for the whole month down 3.1 per cent on last year. Experian expects that 440 retailers will fail during the first four months of 2009, with one in 10 high street shops vacant.

Meanwhile, companies from a range of sectors are in talks with lenders to avoid breaching debt covenants now or in the next few months. Covenant tests have been deferred for builder Taylor Wimpey, chemicals group Ineos and newspaper publisher Mecom – among many others. Banks have been prepared to grant time for companies to find new sources of funding, rather than take further writedowns or face more debt-for-equity swaps.

Deloitte’s CFO survey, published on Monday, says the top priorities for finance directors are now maximising cash flow, bolstering investor confidence and curbing costs. The latter means that a 10 per cent cut in the pay bill is the least any respectable business can now be seen to contemplate. As a result, more than 1m employees will find themselves joining the dole queues this year, while one in three can expect their pay to be cut or frozen – further reducing their spending power.

Gordon Brown may have saved the world, but his government has yet to create the safety net for hard-hit small businesses promised in the pre-Budget report. There are still no details on the £1bn small business finance scheme to shore up working capital, or the £1bn of support for small exporters no longer able to get trade credit.

In spite of the chancellor’s promise to bring forward public spending programmes that could generate jobs in sectors such as construction, there is little sign of new ground being broken or concrete being poured. The £12.5bn spent on cutting value added tax would have had much greater impact if used to create jobs, at a time when the unemployment total is climbing inexorably towards 3m.

The Treasury is still forecasting an economic recovery in the second half of this year, but that is a view not shared by most leading economists, according to last week’s FT survey. They expect this to be the worst recession since the early 1980s – with one sagely pointing out that most forecasting models were just not built to take account of a massive credit crunch and consequent unwinding of debt.

In this rapidly deteriorating environment, investors will be turning towards the traditional defensive stocks. “Old economy” companies selling alcoholic drinks, tobacco products and groceries will prove more buoyant than banks, housebuilders and leisure businesses.

Discretionary spending on cars, weekend breaks and whizzy household appliances will be put on hold as householders continue to pay down debt and try to live more within their means.

Companies that provide goods and services to the public sector will prove attractive, even if the government does not go as far in throwing money at the problem as many economists would like. That includes defence contractors, construction companies working on infrastructure, train operators and the outsourcing businesses that increasingly provide front and back-office services for the public sector.

Finally, index-linked government stock will be a good hedge against the bout of inflation that could easily follow enthusiastic adoption of the “quantitative easing” and “helicopter money” policies endorsed by many economists.

The prospect of low or non-existent inflation – or even deflation – might make inflation-linked investments seem unattractive now. But over the medium- to long-term, the odds must lean towards a return of inflation, and the need for a shelter against its effects.

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