House equity

HAMISH MCRAE: The economy cries out for calm


The economy calls for calm: The challenge with all bull markets is how to slowly let the air out of the balloon, says HAMISH MCRAE










Phew! We have lived through 2021, the year ending with a strange mixture of optimism and gloom.

Global equity markets have soared, with US prices reaching all-time highs and the Footsie posting the biggest annual gain in five years.

Still, there will likely be another crackdown in the next few days, and please don’t book a ski vacation in the Alps just yet.

Asset boom: Global equity markets soared as US prices hit all-time highs and Footsie posting biggest annual gain in five years

Leave aside whether government policies around the world are well judged. The fact remains that the slowdown in Omicron’s economic activity will continue to be felt in the coming months.

How do we get some perspective on all of this? The main thing is to distinguish between economics and finance. I am not worried about the global economy this year. I am worried about the financial markets.

As far as the economy is concerned, it will be a success. Partly, that’s because it’s easy to take a big leap forward if you start far enough back.

Even now, with the United States ahead of its past peak, the United Kingdom and major European economies are only at their level two years ago.

And every country, including China, is lagging behind where it would have been had it not been for a pandemic. There is a lot more catching up to come.

But it’s not just catching up. We are learning new ways of doing things. Some are obvious, like using technology to speed things up. Others are less so.

We have only started to think about ways to improve healthcare around the world after the pandemic has subsided, or how shorter supply chains can cut costs.

Some of the “unicorn” companies floating on stock exchanges around the world will collapse, but others will help transform our lives… for the better.

London has started to reclaim its position as a favorite place to raise funds for these businesses. This year, we should see the benefits of recent regulatory changes with a new stream of activities.

But what about the financial markets more generally? We have all been here before. It doesn’t quite sound like the senseless excesses of the dotcom boom of 1999 or the bank lending and mortgage frenzy of 2008.

But last year marked a turning point. This is the year that interest rates started to rise, not to fall. The Bank of England started to tighten policy last month, but long before that money markets had started to move.

Last year started with ten-year-old gilts bringing in around 0.3 percent. It ended with just under 1%. This is still ridiculously low considering that inflation is already above 5% and rising, but at least the general direction is set.

If you look at what happened to asset prices in general when the global interest rate cycle begins to pick up, at least in the early stages, things can be quite positive.

But the challenge with all the bull markets that risk getting out of hand is how to slowly let the air out of the ball.

This is a global problem and the main global player remains the Federal Reserve. With consumer price inflation in the United States at 6.8 percent, there’s a lot of air to escape.

So there will be tensions. On the one hand, there will be a real improvement in the world economy. The UK will get its share of this growth, our main problem being the lack of people to fill the jobs on offer. If this prompts us to use scarce labor more efficiently – and even improve the way workers are treated – so much the better.

And, of course, if there are more people at work, earning higher wages, that brings more revenue to the treasury and corrects the still huge deficit faster.

I think the Chancellor will go ahead with the increase in national insurance in the spring, but in another year the pressure for a tax increase will hopefully have eased.

On the flip side, there will be growing concern that this global asset boom must somehow stop. Take an asset that matters to millions of Brits, UK property prices.

Last year they were up, according to the Nationwide, 10.6 percent. It’s the fastest for 15 years. Maybe the boom is over.

Halifax now expects prices to remain broadly stable this year. If this is true, and it turns out to be typical of asset prices globally, then a year of general calm would be the benign outcome.

That’s what we all need, isn’t it? A little calm. Hope we get it.

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