Outlook: Don't get too optimistic just yet

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The Independent Online
CRACK OPEN the champagne, dust down the dinner jacket - boom times are here again. Or at least that's what you might think had you cast a cursory eye over the financial pages lately. Barely a day goes by (including yesterday) without some sort of record being set by shares on Wall Street or in London.

Business confidence is surging again and according to yesterday's Merrill Lynch fund managers survey, bulls of corporate profits outnumber bears for the first time in the survey's history. Short though that history might be, this is quite a finding. House prices are on the up - by as much as 10 per cent in some parts of the country. The luxury end of the market is said to be doing particularly well. Some commentators even sense the first green shoots of recovery in that perpetual laggard, Japan.

So is everything as rosy as the financial markets would have us believe? Not really. Obviously, things are not as black as they were back in October, when the markets and the global financial system were both looking decidedly sick. Alan Greenspan's decision to cut US interest rates and organise a bailout for Long-Term Capital Management succeeded in heading off the risk of global calamity.

On the other hand, it did nothing to address the deep structural problems that exist in many of the world's economies - exceptionally high levels of corporate indebtedness, an appaling lack of information about the ins and outs of banking systems, and inflexible labour markets, to name just a few.

There are signs that many of these difficulties are slowly being dealt with, but they will take years - not months - to resolve.

All this suggests that the markets' enthusiasm is a little misplaced, and that policy makers need to keep alert - surging business and consumer confidence can easily turn into inflationary pressure. History suggests there is a real danger this could happen.

Back in 1987, the US Fed cut interest rates in order to stave off perceived financial disaster, and was then forced to apply the brakes to quell the subsequent consumer boom. Policy makers are determined not to repeat those mistakes this time round. In most of the world's major economies, the next move in interest rates is therefore likely to be up. Enjoy the current mood of economic optimism while it lasts. It may not be very long.