Economic Studies: Growth is good, of course. But can there be too much too soon?

When higher interest rates come, a lot of borrowers will be squeezed

Share

Five years ago it was Wile E Coyote; now it may be “brick on an elastic string”. You know the first analogy. The economy, like the cartoon character, has run over a cliff but keeps running in mid-air until looking down, realises there is nothing underneath – and drops like a stone. That is what happened in 2008, when the economy kept growing and house prices rising for several months after the collapse of Northern Rock had made it very clear that there was something radically wrong with the financial system.

Now it is the opposite point in the cycle. Imagine the economy is a brick attached to an elastic string. You pull and pull and pull towards you and nothing happens. Then suddenly the elastic becomes fully stretched, the brick zips towards you – and maybe nips your fingers.

That seems to be happening now. We have had ultra-loose monetary policy for five years and notwithstanding all the stuff about the cuts, we still have ultra-loose fiscal policy, a deficit of 7 per cent of GDP. So the elastic was being pulled hard. But the brick remained stuck – or at least so official figures suggested. Actually some of us thought the figures understated what was really happening and that now looks correct. But whatever the truth, even the pessimists have to acknowledge that the economy is now growing fast. The brick has indeed jumped.

So the next issue is whether it may be growing too fast. It may seem premature to be fretting about that, given there is plenty of slack in the economy and unemployment is still above 7 per cent. But while not an immediate problem it is one that may appear next year, for we all intuitively know that the recovery is more likely to be sustainable if it takes place at a decent steady clip, rather than moving in sudden bursts.

There is some evidence, even now, of tightening spots in the economy. The London housing market is already quite tight, and prices overall are past their previous peak. Mortgage approvals are their highest since early 2008. In parts of the South-east there are more job vacancies than there are job seekers. This confidence is reflected in sterling, for the pound is close to its year’s highest level against the dollar and Standard Bank is forecasting it will rise above $1.70 by next January. And for what it is worth, the FTSE 100 index is only a percentage point off this year’s high and only another couple of points off its all-time peak, reached at the end of 1999.

As a result, expect the question in the next few months to shift from “how do we get the economy moving?” to “how best do we check its growth?”.

That will be tricky. Higher interest rates have to come sometime, maybe next year. But while the economy as a whole might be able to stand higher rates and many savers would welcome them, a lot of individual borrowers would be severely squeezed. The issue is whether the Bank of England guidance, which suggested that a rise in rates would not occur until 2015 at the earliest, will actually prove misguided.

Fiscal policy, too, has to be tightened and the issue here is whether the Chancellor will be able to claw back some of the ground lost since his original deficit reduction plan was launched. We will have to wait until 4 December for the Autumn Statement to know more about that.

The big point here is the game has changed. We have gone from desperate measures to pump up the economy, to the more subtle task of shaping the recovery to try to make it more durable.

London forges ahead with Islamic bonds

That London should be the first non-Islamic location for issuing an Islamic bond catches several themes in international finance. An obvious one is that since Islamic countries have in recent years been a source of around 20 per cent of global savings, it is natural that their preferred instruments should grow as a proportion of total financial activities. It is a niche market but an extremely important one.

Another is that an issue in London fits in with the long-standing role of the City as a centre for allocating global savings towards investment opportunities round the world. A century ago it dominated the world bond market; now it remains the largest single centre for cross-border fund management. This is a parallel move to it becoming the first centre outside China to set up foreign exchange trading in yuan.

Yet another feature of this deal is that it fits in with the shift towards financing through securities market instruments rather than bank loans. This is yet another example of finance going back to a more robust model. Finally the principle of Islamic banking – that you share in the profits of a venture rather than charge interest – is one that will, after the excesses of the last boom, seem rather attractive to many.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Savvy Media Ltd: Media Sales executive - Crawley

£25k + commission + benefits: Savvy Media Ltd: Find a job you love and never h...

Austen Lloyd: Corporate Solicitor NQ+ Oxford

Excellent Salary: Austen Lloyd: CORPORATE - Corporate Solicitor NQ+ An excelle...

Reach Volunteering: Financial Trustee and Company Secretary

Voluntary Only - Expenses Reimbursed: Reach Volunteering: A trustee (company d...

Recruitment Genius: Senior Project Manager

£45000 - £65000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

Read Next
Muslim men pray at the East London Mosque  

Sadly, it needs to be said again: being a Muslim is not a crime

Yasmin Alibhai Brown
In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty
Greens on the march: ‘We could be on the edge of something very big’

Greens on the march

‘We could be on the edge of something very big’
Revealed: the case against Bill Cosby - through the stories of his accusers

Revealed: the case against Bill Cosby

Through the stories of his accusers
Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

The Meaning of Mongol

Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible