While there are plenty
of positives, it is not a
normal recovery by
any means
ANALYSIS
FranklinAllen, the life professor of nance and
economics at theWharton School, University
of Pennsylvania, and executive director of the
Brevan Howard Centre for FinancialAnalysis
at Imperial College Business School. It is
slower than previous recoveries and has been
built on a platform of ultra-accommodative
monetary policy.
‘A recovery, yes, but not a solid recovery,’
says Dr Gianluca Benigno of the London
School of Economics, who points to
continuing weak spots such as the housing
market (US pending home sales slipped
1.1% in the month to the end of June)
2
and
some forward indicators like the Purchasing
Managers’ Index (PMI ) coming in below
expectations. He also notes that last quarter’s
uplift in GDP‘was largely due to increases in
consumption and non-recurring build-ups of
inventory.We would like to see more from
business investment.’
Allen cites concerns about the labour
market.‘New jobs are being created, but the
participation level is still at historically low
levels. Future earnings growth and promotion
prospects for young people do not look good.
And while household debt is down, people
feel less secure about the future and are
unwilling to spend.’
He adds that‘keeping interest rates too
low in the early 2000s created bubbles in the
housing market. Now we have had low rates
for longer [than at the start of the century]. It
is perfectly ne to keep interest rates low for
a short period, but if that goes on for years the
economy adapts to it. Japan became hooked
on low interest rates and is nding it very
di cult to break away [from ultra-low interest
rates]. It’s very dangerous in the long run.’
ProfessorArvind Krishnamurthy at Stanford
University, California, says:‘At the peak of the
crisis in 2008/09, quantitative easing [QE]
added liquidity to nancial markets at a time
when liquidity had vanished, and thereby
helped to stabilise markets and the economy.
‘Later, as the crisis abated, the Fed’s
purchase of mortgage-backed securities
THE INVESTOR
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