Has The Nasty Decade Begun?
The 'nice decade' is over and we face the most serious economic storm in years. So why aren't the markets reacting?
A chart of Bank of England governor Mervyn King's comments this year reveals an alarming trend. In January he was talking about great challenges; a month later he reckoned the outlook was bleak; but the GIFF (governor's index of frantic forecasts) has hit a new low with his latest pronouncement that the good times are over.
Thanks to a nasty combination of stubborn inflation and slowing growth, it looks like we're going to suffer what may be a recession – wait for King's next forecast – without more interest-rate reductions to ease the pain. This is good news for savers, lousy for borrowers and a sledgehammer for share prices.
However, apart from a recent big blip when markets took fright at another sudden escalation in the oil price, the FTSE has sailed serenely on. Many investors took the collapse of Bear Sterns to signal a turning point in the financial crisis but, as far as the wider economy goes, they seem to be guilty of buying the recovery before the victim has even been admitted to the casualty ward.
True, many mining and oil companies in the FTSE 100 are enjoying the inflation roaring through their commodity markets, but even allowing for that, the stock market recovery has been remarkable. It is telling that the currency markets are singing a very different tune: sterling has fallen 12% since its peak last July. Bond markets too are signalling worrying times ahead.
So should we believe the doom-laden forecasts of people like George Soros who, earlier this year, warned that the world faced the most serious financial crisis since the Thirties? I'd be more inclined to follow Mervyn King's judgement that there's a possibility of recession for Britain, not a probability – and, with unemployment nothing like what it was in the early Eighties or Nineties, it's likely to be a shallow one.
There's no need, in other words, to jump out of windows, but we should nonetheless brace ourselves for a much tougher time.
What economists mean when they talk about a nice decade is non-inflationary continuous expansion. Most of the forces driving that are now definitely behind us. The steady fall in Chinese prices, which kept inflation down, has reversed; sterling has slumped; and the capacity for further public spending is exhausted.
The UK economy is hardly doomed, but the 2010s will certainly not be as pleasant as the decade we've just enjoyed. Only time will tell just how bad it turns out to be.
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