When you consider the wall of bad news investors have had to contend with in recent months, this is pretty remarkable. There is the near panic among the central bankers, the wave of austerity being imposed across southern Europe, the fiscal cliff in the US, the slowdown in China – woe upon woe being piled relentlessly on top of investors and yet, on the admittedly crude measure of share prices, they are adequately upbeat.
Yet, a year ago they were equally chipper, actually a bit more so. On 11 July 2011, the FTSE 100 was 5929; on 29 July, it was down a little at 5815. And then came August. In the first 10 days of the month, it fell more than 800 points to 5007. Similar crashes occurred on the other main markets around the world. Why the sudden change of mood?
I haven't found a good explanation. The pat one is that suddenly investors flipped from focusing on reward to focusing on risk, the so-called "risk on/risk off" transition. But that does not explain why the mood should flip. With hindsight, we can see there was a pause last summer in several main economies, but not significant enough to lead to a market crash. There was the eurozone's continuing agony, but what's new about that? Oil? China? Those were worries, yes, but nothing really to justify a shift of mood.
Now we are back to that uneasy calm of a year ago, the principal differences being that the markets are a bit lower and many of the worst fears of last summer have proved correct. Thus the eurozone's inability to cope with its problems has become more evident, not less, while US growth is slower. So what should we think?
My instinct is that this uncertain mood will persist for some while yet, perhaps a couple of years, maybe longer, until the developed world has come to terms with its overhang of debt. I was much stuck by a statistic I saw last week, which was that between 1999 and 2008 British householders withdrew equity from their homes every year to boost their consumption. Since 2008, they have been paying back debt, every single year. If you have a decade of spending more than your income, you take a while to get that debt back under control, but – and this is the good news – in another couple of years people could feel much more comfortable about the need to pay back debt.
You can extend this across different forms of borrowing, different countries, different borrowers. My point is that you don't need to restore debt to zero, or even the level of the late 1990s, and that goes for personal debt, company debt, national debt, the whole lot. You just need debt at a level that people on both sides feel is comfortable. For sovereign debt, all we probably need to restore confidence is for it to start falling, not rising.
Of course, it is possible some new shock in the coming weeks will lead to another wicked August for the markets. We can all think of candidates for the role. But it is just as likely that we keep slogging as before, a weary trudge up the debt mountain – and share markets will, in their lacklustre way, continue to reflect that. Not wicked; just dull.
The aircraft industry is still flying high
The Farnborough Air Show, open this week, is just another trade show, albeit of what is perhaps the world's most glamorous industry. But it can also give us a snapshot of what is happening in the world economy, for it has in the past been one of the most cyclical of all industries. So what is the message?
Well, not bad at all. The world is lucky to have two hugely competent commercial airframe makers, Boeing and Airbus, locked in fierce competition with some smaller ones snapping at their heels. And it is also lucky to have three great engine manufacturers, producing yet more efficient and reliable engines.
But the industry is lucky, too, for incremental technical advance has enabled it to go on increasing production through the recent economic downturn, with further increases forecast. As fuel has become more expensive, it is even more important for airlines to buy the newest models.
Add in the fact that the fastest-growing markets are in Asia, and you can see why this downturn is quite unlike those in the early 1990s and early 2000s, both of which saw aircraft production slump. So, for one industry, this has been the least damaging recession ever, in fact no recession at all – almost the mirror image of banking, in fact.
h.mcrae@independent.co.uk
Amol Rajan
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