Hamish McRae: The market panic needn't unnerve us

Share
Related Topics

We're not through this yet, are we? The main developed world economies, including our own, are inching forward and companies around the world are reporting a rise in demand. But the financial markets are back into panic mode, with share prices the lowest for nine months, banks becoming reluctant to lend to each other, and the weaker eurozone countries seeing their borrowing costs rising again. Is this a case of the markets doing one of their irrational blue funks? Or are they trying, in their incoherent way, to signal something more serious: that there will be another leg to the recession? Or is there something else?

There seem to be two immediate causes for the meltdown. One is a further knock-on effect from the crisis of confidence over Greece. The concerns over the national debts of the weaker European countries and the potential burden these place on the entire region have spilled over into the fear that more European banks will have to be rescued. Spanish banks in particular are under the cosh as they have lent so much to the country's property developers, but since so many European banks hold the sovereign debt of the weaker countries, the entire sector is under a cloud.

Unfortunately these fears have also affected British banks, with the result that the Government is back again with a loss on its shareholdings in the Royal Bank of Scotland and Lloyds TSB. We British taxpayers will have to wait a bit longer to get our money back.

The other trigger has been North Korea's threats against South Korea, which yesterday were ratcheted up a further notch or two. This, too, is a knock-on effect of an earlier issue, the sinking of the South Korean warship. Unless you believe that this will lead to armed conflict between the two countries it is hard to see why these concerns should be so much higher now than a couple of weeks ago. Still, to put it at its lowest, the tensions have come at a bad time for the markets.

But all this was known, at least in outline, a month ago when markets were still riding high. Perceptions may have changed, particularly with regard to the euro, but has the substance of the world recovery?

The first point to make is that economic recoveries rarely follow a straight line. It would be completely normal were there to be an interruption in growth, even a few months of decline, before the recovery is resumed. There are good reasons to expect this to happen this time, as governments correct their deficits and interest rates start to revert to normal. To take the UK, if this recovery were to follow the path of the 1980s, there would be a dip in the autumn before growth gets going again next year, and we will not be back to the peak of output reached in spring 2008 until 2012.

Nor indeed do stock market recoveries follow straight lines either. If you look at this recovery, starting from March last year, and compare it with previous ones, share prices had risen rather further and faster than the average. Or at least they had until a month ago. Now they have fallen below the average trend line. So you might simply say that whereas a month ago the markets were over-optimistic, they are now overly glum.

That "calm down, dears" reaction would be supported by the really rather encouraging evidence coming in from around the world. For example, we have just had a report from the US Conference Board that consumer confidence there has strengthened sharply; industrial orders in Europe surged in March; German exports are doing particularly well; and our own GDP for the first quarter was revised up a wee bit. Meanwhile – of course – Asia continues to drive ahead.

But if both the economic prospects and, at least viewed from a distance, the market prospects have not really changed that much, there is one thing that has changed quite radically in the past four weeks. It is the pace at which European governments will have to correct their deficits.

Whereas a month ago most European governments felt they had some time to bring down the deficits, now they know they have to move fast. The costs of not taking early action – a loss of confidence in the markets – have been shown to be much greater than the costs of taking such action. Every European government is reviewing its spending plans. Hardly a day goes by without some cut being announced or planned. Italy has become the latest country to join the line.

What no one can know is whether the boost to confidence from such action will offset the automatic loss of demand from lower spending: whether the private sector will replace the demand that is no longer coming from the public sector. But what is quite clear is that what is happening is not just a recession related phenomenon. As the region ages, Europe's whole welfare model will have to be reformed for ever.

So what is new is not the recession story; and certainly not the stock market panic. It is the questioning of something much bigger. Since European countries have reached their borrowing limits, how will they fund the social services and pensions for their ageing populations?

Ireland gets it right

It is a small cheer but a timely one. It looks as though Ireland may be pulling out of recession. The country has had about the most serious downturn of the entire eurozone. It has responded to a budget deficit comparable to that of the UK with savage cuts, starting much earlier than anyone else – right back in October 2008 – and much tougher than anything apparently contemplated here. But exports are nudging up and the fall of the euro should help the country even more. Ireland may prove that cutting spending does not condemn a country to a depression from which it cannot escape.

h.mcrae@independent.co.uk

For further reading

The OECD Observer on deficit reduction: www.oecdobserver.org/

React Now

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

Recruitment Genius: Administrative Assistant / Order Fulfilment

£14000 per annum: Recruitment Genius: An exciting opportunity to join a thrivi...

Recruitment Genius: Java Developer

£26000 - £33000 per annum: Recruitment Genius: An exciting opportunity for an ...

Recruitment Genius: PHP Developer

Negotiable: Recruitment Genius: One of the North West's leading digital agenci...

Recruitment Genius: Supply Chain Manager

Negotiable: Recruitment Genius: This company is a leading expert in immunoassa...

Day In a Page

Read Next
Health workers of the Red Cross and Medecins Sans Frontieres take part in training  

Are we starting to see the end of Ebola? Not quite, but we're well on our way

Tom Solomon
 

I loathe the term ‘hard-working people’. It's patronising, snobbish and wrong

Simon Kelner
Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea