What is happening to the economy?

The stock market is in free fall, the house price bubble may be about to burst and the returns on bank accounts are flatlining. And yet we're spending like never before and the economy continues to perform pretty well. So what on earth is going on? And when will share prices start to recover?
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The Independent Online

There's an air of panic in the stock market. Shares are at their lowest levels for five years. Investors are losing their shirts. Stockbrokers are losing their jobs. Employees are losing their final-salary pensions. Is this the end of capitalism as we know it? Is the dark wolf of recession just around the corner?

Well no. This is not 1973 all over again, and it's definitely not 1929. This is a correction, not a depression. It's painful. It's worrying. And no one can say when it will be over. But it is not a cause for panic.

The simple fact is that the economies of the Western world – and Britain's in particular – are in pretty good shape. We have the lowest inflation for a decade and the lowest interest rates for two decades. Employment levels have never been higher. With house prices still going up, plenty of us feel well off. We still shop till we drop – certainly enough to make the Bank of England fret about booming consumer spending.

So why is there a problem with the stock market? In the past few years we have seen a technological boom as companies came to terms with a new way of operating thanks to the internet. Like the invention of the telephone or the internal combustion engine, it caused a sea change in thinking and operating.

Between 1997 and 2000, companies were galloping to exploit net technology, and investors were desperately trying to keep up, throwing money at the markets. Everyone knew most of these TMT (telecoms, media and technology) stocks were overvalued, but they could not be sure which ones. Now that the tide has gone out, we are discovering who is not wearing swimming trunks. Enron, an oil company which used the internet to grow, Global Crossing, WorldCom, Xerox, et al were all discovered to have made their swimwear out of paper.

The bad news has drip-fed into the market. It is not surprising that investors have fled from the City. But as most of us are still in a job, where do we put our money? In the bank? Not at 4 per cent interest rates, thank you. Into property then? House prices are rocketing, but will the boom turn to bust?

This is a time for battening down the hatches and not taking risks. But unless there are some economic shocks, the stock market will turn. It merely has to find its level. But that could yet be somewhere way below where it is today.

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