Share prices are rising, but growth is not. Is there a problem - and, if so, what should we do about it?

Our Chief Economics Commentator examines the strength or otherwise of the global recovery. Plus: the implications of sterling's sharp fall against the euro

Share

The contrast has become even sharper. On one hand, share prices are rising strongly, not just here but in all the major markets. Yet, on the other, growth forecasts are being downgraded, not just for the UK but for the eurozone and the US. This contrast leads to two debates.

The first – which perception of our economic condition is more valid? – has been discussed here and elsewhere. A middle-of-the-road conclusion would be that share markets, while partly driven by the switch from bonds that has begun in earnest, also judge that despite present troubles the world economic recovery will gather pace this year and beyond. There will be bumps, but share values are not stretched on a long-term view and if the recovery is indeed secure, then there will be further rises.

The other debate stems from this. If shares sustain their recovery, does this strengthen the economic recovery? The relationship is two-way. Equity prices reflect financial and economic confidence but they also contribute to that confidence. Most of the time, the former is the more important relationship, but right now a rise in share values might be particularly helpful in boosting the world economy. After all, it is not driven by an investment mania, as was the dotcom boom of 1999; nor is it fuelled by a surge in bank-lending, as to some extent was the boom that ended in 2007. Both those came at the end of booms; this recovery is much earlier in the economic cycle.

So what are the links? I have not been able to find a comprehensive computer model of how rising share prices contribute to increased demand, and I am not sure I would trust the results if I could. But common sense points to several ways in which higher share prices must be positive.

There is one specific mechanism here in the UK: what higher share prices do to cut pension fund deficits. In actuarial terms, these have been greatly increased by the Bank of England’s quantitative easing programme, because the lower bond yields have meant that, for any given level of benefits, the pension pot has to be larger. Mercifully, bond yields are now climbing, which will help a bit, and any rise in the equity portion of the pot will help even more.

We don’t know to what extent companies have postponed investment because they have had to set aside cash to top up their pension funds, but we do know that investment has recovered exceptionally slowly this cycle. Put at its lowest, any narrowing of the pension deficit will take pressure off company finances and that makes a company feel more able to commit to new investment.

This relationship will apply in other countries, such as the US and the Netherlands, which have similar corporate pensions, but everywhere a rise in a company’s shares gives it freedom to invest. If you have a weak share price, you have to rely on your bankers – and given recent experience, few finance directors want to do that. If you have a strong one, you have options: if push comes to shove, you can at least go back to the shareholders with a rights issue.

So what is the direct impact at a personal level? I suspect marginal, but helpful none the less. European Central Bank staffers did some work suggesting that higher eurozone share prices did lead through to a rise in consumption, but we would need a lot of evidence over a long period before being really confident about that. Even if the effect is marginal, though, it must be positive – higher share prices cannot reduce consumption – and in a tricky time that is a blessing.

Let’s wait and see. This surge in prices is very recent. But if sustained, then it could become more than a sign of renewed confidence in stronger growth, and turn into an engine of that growth. Either way, it is encouraging.

Easy money for some – but not for others

If people feel better off because their shares have gone up, they won’t feel it if they go on holiday to the Continent. Sterling has held up reasonably against the dollar but has fallen to the lowest level for a year against the euro, for one of the side-effects of the recovery in confidence in the future of the eurozone has been a rise in the euro.

The threat by the European Central Bank of buying unlimited quantities of distressed government stock has cut yields sharply. But it has had the side-effect of boosting the euro, an unwelcome development for eurozone exporters, and indeed for eurozone jobs. A further rise in unemployment, to 11.9 per cent, is expected to be revealed on Friday.

These movements have led to fears of “currency warfare”, where in a time of high unemployment countries devalue their currencies to try to gain competitive advantage. But it is more accurate to see the present situation as different countries seeking to boost demand by exceptionally easy money and accepting that some currency depreciation is the side effect of that. The moves so far are quite limited; if we start getting violent currency swings, then we should worry.

React Now

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

Volunteer Trustee opportunities now available at The Society for Experimental Biology

Unpaid Voluntary Position : Reach Volunteering: Volunteer your expertise as Tr...

Early Years Educator

£68 - £73 per day + Competitive rates of pay based on experience: Randstad Edu...

Nursery Nurse

£69 - £73 per day + Competitive London rates of pay: Randstad Education Group:...

Primary KS1 NQTs required in Lambeth

£117 - £157 per day + Competitive London rates: Randstad Education Group: * Pr...

Day In a Page

Read Next
Residents of the Gravesham constituency are 10 times closer to what Peter Hain scorns as the “Westminster elite” than are those of Linlithgow and East Falkirk  

Will no one stop the march of localism?

Jonathan Meades
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam