It is a funny time isn't it? We have had all the troubling news from Egypt and we have seen the consequences of that in the oil price and on inflationary expectations worldwide.
We have had mixed news on the economy here in Britain, for as we were still digesting the initial estimate of a fall in GDP in the final quarter an upbeat survey came in on service-industry expectations. But we still have little feeling for the impact of the rise in VAT.
Elsewhere in the world, the news was mixed as well. There was a sort-of hint from the European Central Bank that it might start to increase interest rates soon, something that will send a shiver through the "Club Med" economies, but German growth numbers were strong. There was slightly better sentiment in the bond markets too. And in the US, there was an unexpected, if welcome, fall in unemployment and good job creation, but not much sign that the optimism of large companies was spreading to smaller ones.
So, a mixed bag. But what struck me as really interesting was the way in which – against this confused outlook – share prices around the world managed to do quite well. The FTSE 100 share index is really more driven by global conditions than by what is happening in the UK, and it managed to clamber back to within a whisker of the 6000 level. But it would have been hard to do that if British economic prospects were that grim. Put it this way: we all may feel twitchy about the economic outlook and we are probably right to do so, but shares at least are not signalling a double dip.
So what are they trying to say? There are several messages you can read into their behaviour. One is that the global recovery is broadening and deepening and that the UK will inevitably get some lift from that. British manufacturers are generally cheerful, both in their responses to surveys and in the evidence they give to anyone who troubles to go out and talk to them, including the Bank of England's agents around the country.
A second message is that while high commodity prices and oil above $100 a barrel may have troubling implications for inflation, at least mining and oil companies seem to be doing well out of it. Those are two sectors heavily represented in the FTSE index.
A third is that there is a lot of money around and it has to go somewhere. Those quantitative easing programmes have pumped money into the world economy and it would be odd if, given the low deposit rates, some of the cash did not find its way into shares. That is rather confirmed by a study by Barings of the sentiment of fund-management advisers. One of the strongest messages was that they were encouraging clients to diversify portfolios, getting funds into emerging markets of course, but also into investments that gave protection against inflation, such as equities generally. They were also concerned about the eurozone debt crisis, the ability of heavily indebted countries to cut their debts, and were advising people to switch from bonds to equities.
I suppose you might say that the traditional view that bonds are the safe haven and shares are risky is being turned on its head. The central banks may not be that worried about a resurgence of inflation but investors certainly are.
Overlaying this, for British investors at least, is a sense that even if the recovery were to falter, they would be able to look through the dip to the climb beyond. Employers seem to have been able to do so. The recent recession was similar in depth to the one in the 1980s and not as serious as the 1990s dip. But the fall in employment has been vastly less serious than in either of those periods, as the main graph shows. Now, there is a twist here. This time the fall in full-time jobs has been offset by a surge in part-time jobs. So you could say that the crude employment numbers conceal the fact that the new jobs do not pay as much as the old ones or, maybe, that they are of lower quality. To some extent, this must be the case, though many people actually prefer part-time work; it does make the work/life balance easier to manage.
Still, the fact remains that employers have preserved employment much more effectively in this cycle than in previous ones. That in turn raises questions about the ability of the economy to respond to increases in demand as and when they come along. The economics team at ING, which pulled together these numbers, also made some estimates of the output gap, that is the gap between what the economy could in theory produce and what it is actually producing. These are shown in the small graph.
You see the point. Not only is there a huge gap but growth will not be fast enough to close it. ING accordingly takes the view that inflation will be less of a problem than many expect and the next rise in interest rates is still some way off.
There is, however, a growing body of opinion that the Bank will act earlier than expected, with an increase as early as this coming week not totally ruled out. My own feeling is that this is most unlikely, for you really need to see what the rise in VAT does and to what extent the GDP figures are revised before doing anything. But the rumblings about a rise in interest rates do fit with the generally positive mood of shares. We will not get a rise in rates until the economy is strong enough to stand it, but you could see a set of circumstances in the next few months where that will be possible.
Conclusion amidst the confusion? I don't think it is sensible to confer on to share markets any great collective wisdom. They represent a host of different views and they can get things very wrong. But they do frequently signal turning points. Thus they managed to catch the turn in the developed world's economies in 2009 and give a three-month lead indicator of that. Right now they are not signalling a double dip in the developed world taken as a whole, and as I say, not really a double dip here in the UK either. And we should take comfort from that.
Any new regime in Egypt will have to tackle the shackles on private business
There is not a lot that economists can do to shed light on Egypt's tale of woe, for it is essentially a political story. But there is an economic dimension, caught by a headline on Al Jazeera on 14 January, a week before Egyptians took to the streets: "The real terror eating away at the Arab world is socio-economic marginalisation".
I have been intrigued by the comments of Hernando de Soto, the Peruvian economist, who writing in TheWall Street Journal, noted the work he and colleagues had done in 2004 about the scale of the underground economy in the country
The informal private sector is the largest employer in Egypt: 9.6 million people against 6.8m in the official private sector and 5.9m in the state sector. It gets worse: 92 per cent of Egyptians hold their property without legal title, so they are unable to use it as collateral to raise a loan. Dr de Soto calculated that the value of these unlicensed businesses and the untitled property was 30 times the value of the shares on the Cairo Stock Exchange.
Why do people operate outside the legal framework? No, it is not tax-dodging or not particularly so. It is bureaucracy. The study found it would take 18 months to get legal clearance to open a bakery and 10 years to get legal title to a bit of land. To open a business, any would-be entrepreneur would have to deal with 56 government agencies.
Egypt is not alone in lumbering bureaucratic burdens on to business and it is not just an Arab world problem, for there are big burdens in Italy and Greece too. In practice businesses manage to get round the red tape by going extra-legal. But this means, crucially, that they cannot unlock the value of the capital on which they sit and it also discourages inward investment.
The good news is that this should be fixable by a new regime. But whether that happens is ... well, we shall see.Reuse content