Market instability has affected the three time zones in different ways

Hamish McRae On The Agenda For The Next Few Months

Markets can only manage to keep excited for a few days, so it should be no surprise if they now flop for a while. What last week has done, among other things, is to bring into focus the fact that the three different time zones have very different concerns. Everyone was worried - that much was common - but people in different time zones were worried for completely different reasons.

In the East Asian time zone, last week was the week of reassessment: the week when people realised that the whole region faced an inevitably long struggle to rebuild confidence. At best there may be just a pause in economic growth lasting a few months; at worst there is going to an 18-month recession. No one knows which way the coin will flop, but they are now aware that it is spinning. My hunch is that there is quite a lot of bad news still to come, largely because it will take more than a year for the excesses of bank lending and investment in non-productive assets to unwind. But more important, it would be wrong to see the time zone as a single economic entity. Some parts will brush off the market upheavals; others will be severely damaged by them for several years.

In the European time zone two rather different things have happened. There have been, quite independently of the market turmoil, some signs of perkiness in both the German and the French economies. There is nothing substantial happening - nothing that is going to make a serious dent in unemployment - but consumers in both countries seem a little less gloomy and export demand has continued to be quite solid.

Alongside this modest cyclical uplift has been an "EMU effect": the act of preparing for EMU seems to be starting to stimulate economic activity in a number of ways. Practical preparation for it costs businesses money: large companies are already having to invest in new systems for the exercise has now gone beyond the planning stage. To some extent this has come out of existing IT budgets, but in many cases companies are having to spend money they otherwise would not have spent. The result in the short term has been a rise in corporate investment. Meanwhile, companies may have been considering the downside of EMU, the longer-term structural implications for their business, but with a few exceptions (like ASEA-Brown Boveri last week) the employment implications of this have not shown through.

So last week the general market uncertainty stuck, in Europe, an economy which seemed at last to be recovering a little bounce. Will market uncertainty flatten this modest recovery? I don't know the right answer but I know that is the right question.

In North America, in a completely different cyclical position, the issue is whether a market-driven knock to confidence will be the thing which ends the boom. Something was always going to end the boom. The prime candidate would be rising inflation and the associated higher interest rates, but if markets turn down then maybe they will do the job by cutting into consumer confidence.

You can catch a feel for the different economic environment of Europe and North America by glancing at the graph. This comes from the new IMF World Economic Outlook out last month, and is already a bit out of date.

But you can see the contrast between the astonishing self-confidence of US consumers and the gloom of European ones, particular in the "core" countries of France and Germany. (The UK is not shown but would be swinging up towards the US levels.) It may well be that US consumers are so buoyant that they will completely override the market setback.

The likelihood of that is all the greater if sentiment continues to recover as it seemed to be doing yesterday. On the other hand, a sustained recovery would merely postpone the adjustment, and narrow down the margin of error for policy mistakes.

And us? It is difficult because Britain is a European economy which behaves like a North American one.

This is not just a cyclical point, though it is a bit of a relief that the fact that the UK cycle is out of line with the rest of Europe is at last accepted.

It is also a structural point. There are a number of ways in which the US and UK financial structures are different from the core continental ones.

The importance of home ownership is crucial: in the US and UK there is an easy availability of credit both for home purchase and for buying consumer items, a high level of assets in relation to income (a function of home ownership) but also a high level of debt (ditto).

Beyond this there is, of course, the flexible labour markets and the high rate of business start-ups. The result is that it is easier to stimulate domestic demand in the US and UK by a cheap interest rate policy; but both economies are also more vulnerable to a sustained rise in rates.

We may also be more vulnerable to a stock market reversal, though we don't know.

So the events of last week have set an agenda for the next few months. But it is a different agenda for different parts of the world.

We always talk of a single world economy, but actually there isn't one: not only do the three different time zones have completely different preoccupations, but even within those time zones there is differing economic performance.

Understanding this is going to be enormously important in the next few months. It is going to be a worrying time; the markets are going to be ill-tempered; investors are going to be on edge. The optimists are going to grab bits of good news and use this to reinforce their beliefs that all is well, while the pessimists are going to interpret each bit of news to reinforce their view that the long bull market is at an end.

I think things are going to be much more complicated than that. Some parts of the world will pull through in good shape, while others will blunder.

Life and Style
A view of today's Spanish papers
Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
Arts and Entertainment
Pink Floyd on stage at Live 8 in 2005. From left to right: David Gilmour, Roger Waters, Nick Mason and Rick Wright
music New album The Endless River set to overtake boyband for most pre-ordered of all-time
Arts and Entertainment
The last great picture - Winner 'Black and White' and overall 'Wildlife Photographer of the Year'
videoWatch Lynda Bellingham's tragic final Loose Women appearance
Arts and Entertainment
Benedict Cumberbatch films his performance as Smaug in The Hobbit: The Desolation of Smaug
ebooksAn unforgettable anthology of contemporary reportage

nflAtlanta Falcons can't count and don't know what the UK looks like
Arts and Entertainment
High notes, flat performance: Jake Bugg

Review: Despite an uphill climb to see Jake Bugg in action, his performance is notably flat

The Putin automaton will go on sale next month in Germany
videoMusical Putin toy showing him annexing Crimea could sell for millions
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London