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THE INVESTOR
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Is it time to declare the global economic crisis over?
The performance of stock markets over the six or
so years since the credit crunch began suggests it
could be: earlier in the summer, global stocks finally
passed their 2007 peak
1
, while the performance of
the UK’s largest companies remains just below
their 2000 peak
2
; the US S&P 500 Index, however,
got there last year
3
.
There are undoubtedly clear indications that
the worst ravages of the financial crisis are behind
us. The US economy is recovering strongly, Japan
appears finally to have come up with a way of
ending a decade of stagflation, the UK is doing
better, China has not slowed as much as feared,
nor are there yet any signs of a debt crisis there,
and Europe is back from the brink, although
growth remains anaemic.
But there are also plenty of things to worry
about. Growing political uncertainty is one of
After more than five years at a record low of
0.5%, interest rates could finally be on the way
back up again by the end of the year. Rates had
been expected to stay low until sometime in 2015,
but the strong recovery in the housing market,
coupled with the growing evidence that the
economy is climbing out of its trough, prompted
Bank of England governor Mark Carney (right) to
say that an increase ‘could happen sooner than
markets currently expect’
1
.
Savers, who have suffered five years of
negligible interest rates on their cash balances,
should not get too excited, however. Carney
added: ‘Eventual increases in bank rate will be
gradual and limited.’
That is because the nascent recovery could
easily be stalled. Debt levels remain high: in
government, the financial sector and among
consumers. Sterling has risen sharply recently as
European growth has remained sluggish, which
could make life harder for our exporters.
There is also significant concern about the
impact of a rate rise on mortgage borrowers, who
have become accustomed to paying abnormally
low rates on their loans.While lenders insist there
is no evidence that borrowers are overstretched,
it remains to be seen whether the confidence that
homeowners have factored a rise in rates into their
budgets is well founded.
The Bank of England is trying to ensure it
is made aware of how much a rise will cost by
asking banks to ensure new borrowers can still
afford mortgage repayments even if rates rise by
markets
global stocks go from strength to strength
World markets indicate the worst of the financial crisis is behind, but
political uncertainty and global debt levels continue to worry
uk
Indicators point to interest rate rise
Positive UK economy could see increase ‘happen sooner than markets
currently expect’, says Bank of England governor
them. The march of insurgents in Iraq comes after
a series of crises to hit countries that include Egypt,
Syria, Ukraine and Nigeria. The banking system is
still not functioning properly in Europe and debt
levels across the developed world remain high.
And, perhaps most importantly for markets,
the pace of stock market recovery has, in many
cases, been ahead of economic and profit
recovery so that share prices are now discounting
nothing but good news.
Notwithstanding the political uncertainty, there
is no real reason to expect the economic recovery
to stall. But the scale of stock market rises may
well mean that returns in the next year or two will
be rather less spectacular than in the recent past.
A real recovery in corporate profits will now be
needed to fuel stock market growth.
1
2, 3
3% over the first five years of the loan.That was
part of a package of measures to cool the market,
which also included restrictions on the amount of
high-value lending that banks can undertake
2
.
That was in reaction to concern about the
pace of the recovery in the housing market, with
commentators ranging from the International
Monetary Fund
3
to incoming deputy Bank of
England governor Ben Broadbent
4
warning of the
risks of overheating. Some mortgage lenders have
already scaled back higher risk lending in London,
where the housing recovery is most pronounced.
The challenge for the Bank is to keep the
economic recovery going while preventing another
housing boom and bust. Carney’s frequent
comments on interest rate trends, coupled with
a new willingness to use other tools to prevent
reckless lending, can only help with that objective.
1, 2, 4
3
