We are delighted to have recruited the services of banking and finance expert, Professor Bullion, who will provide regular reports on the the global financial markets and economy.
There is growing talk in markets about ‘green shoots’ appearing in the UK and other western economies. The UK has taken its banking and property-related losses ‘up front’. The outgoing Brown Government responded well to the challenges of the financial crisis. And the new coalition Government has recently received cautious endorsement from the IMF on its proposed response to the crisis. Is the economic tide now on the turn?
In many respects, the global economy comprises two different worlds. Eastern economies are generally buoyant, whilst the Western economies have been much more fragile with their exposure to the recent crisis that began in 2007. China’s growth remains impressive and there are those (The Economist, October 2-8, 2010) who believe that as the global economy becomes more knowledge-intensive, the advantages that India has over China (especially India’s comparative demography and its democracy) will grow.
In several emerging market economies, central banks are considering when and how quickly they should tighten monetary policy. In recent month, many of these countries (including South Korea, Taiwan, Thailand, India and Malaysia) have raised interest rates. The concern in these countries is to curtail inflationary pressures that have begun to surface.
On the other hand, Western central banks face a different set of immediate challenges. Inflation is not (yet, at least) a major concern. The first priority is to pre-empt continued recession. In particular, the overriding aim is to avoid a double-dip recession. The need to tighten fiscal policies in many of these same countries should also help to keep rates low.
The world economy has recovered somewhat since the spring of 2009. It still remains fragile, but we may now be entering a period when talk about ‘Green Shoots’ begins to look a bit more realistic. In the three months to June 2010, the UK economy grew at its fastest rate since 1999. To be sure, we are not out of the woods yet. The longer-term aftermath of the crisis and the resultant public sector cuts remain uncertain and there may still be some new challenges that emerge. Sovereign (country) risk also remains a concern.
So why might we begin to think about and look for the ‘green shoots’ of economic recovery. There are several positive factors. First of all, it appears that the bulk of the banking and other losses associated with the crisis have been recognised and are being addressed. Second, new international banking regulations (‘Basel 3’) have been developed and will be implemented in a way that should help facilitate economic recovery. These new regulations have their own problems and they are certainly not all of the needed complete regulatory response to the risks revealed in the crisis, but they are a major step in the right direction. Thirdly, Western central banks (in the UK, the Bank of England) generally continue to pursue monetary policies (led by record low interest rates) that should help stimulate economic recovery.
Against all of these ‘positives’, the apparent continued reluctance of banks to lend remains a challenge. On the one hand, it is perhaps understandable that after the ‘lending spree’ that preceded the recent crisis, banks should be more prudent. Nevertheless, the importance of new (and prudent) bank lending in the post-crisis recovery cannot be underestimated. The new international bank regulations (Basel 3) have been modified to help facilitate renewed bank lending. Banks need now to meet these challenges.
Although serious challenges and major problems remain for banking regulators and the global economy, there are good grounds for some cautious optimism. In the UK, economic growth in the second quarter was more robust than many expected and recent CBI data show that retail sales in September were exceptionally buoyant. UK companies also appear to be availing of the Bank of England’s special measures to rebuild their balance sheets and to begin spending on investment.
A recent Daily Mail market report (October 1) began with ‘Six thousand here we come before 2011’. The Footsie index appears to be moving strongly towards 6000. The dramatic £35bn bailout of Ireland’s banks and Moody’s downgrading of Spain’s debt were effectively ‘shrugged off’.