The global financial crisis has brought in an era of low interest rates. Eight years on from the onset of the crisis growth remains subpar and interest rates have drifted lower still, sometimes into negative territory.
In their search for new ways of boosting growth some central banks have set interest rates below zero. The European Central Bank (ECB) became the world's first central bank to do so in 2014. Denmark, Sweden, Switzerland and Japan have followed the ECB and introduced negative rates. In a development that seems to turn the rules of finance upside down, private sector banks in these countries have to pay the central bank to keep their money. The same logic is at work in the government bond market where investors are now paying the Japanese, German and Swiss governments for the privilege of lending them money.
Negative interest rates penalise the holding of cash and are designed to encourage banks to lend to companies and households. Central Banks want to force cash out of bank vaults and put it to work in the economy.
Our sense is that negative rates in the euro area have reduced the cost of borrowing and helped weaken the euro. In these respects the policy is working. But, like an experimental drug, the effects of negative interest rates are unpredictable and unlikely to be wholly benign. The risk of unintended consequences are high.
Negative interest rates make it difficult for savers to generate income. The most prudent and cautious households and firms are penalised, while incentives are created to borrowing and risk taking. This "search for yield" creates a danger of a boom/bust cycle in risky assets like real estate and emerging market assets. It is just such behaviour which helped cause the financial crisis.
Negative rates put yet more pressure on banks. They have to pay – rather than receive – interest on their deposits with the central bank and face lower, or negative returns, on their holdings of government debt. When banks try to pass on negative rates, savers may respond by holding on to their cash rather than paying a penalty to keep it the bank. Negative interest rates squeeze bank profits and challenge traditional models of banking.
In time banks may feel they have no choice but to try to pass negative rates on to customers. Last week a German bank last week became the second to say it would begin charging for holding retail customers' deposits. The Royal Bank of Scotland investment banking division recently announced it plans to charge some financial institutions for holding their cash. So far such examples of consumers and businesses facing negative interest rates on bank deposits is the exception rather than the rule, but this could change.
Sentiment about emerging markets is prone to big swings. From the late 1990s optimism, bordering on euphoria, was the order of the day. That bubble burst more than five years ago. Since then, but with some conspicuous exceptions, sentiment about emerging markets has become increasingly negative.
China's long-term slowdown, widespread political turmoil, falling commodity prices, and the withdrawal of capital by foreign investors have all played a role. Emerging market equities have taken a hammering and growth has softened.
Gross Domestic Product (GDP) is the broadest and most ubiquitous measure of economic performance. But as a gauge of human welfare it is wanting. Many factors which contribute to welfare fall entirely or partially outside GDP.
Worse still, many things which contribute to unhappiness - such as crime, pollution or poor health - can raise GDP, at least in the short term. Thus the Gulf of Mexico oil spill generated a vast clean-up operation and a huge amount of work for lawyers and local and national government - which added to measured GDP. Conversely a permanent end to criminal activity would create a GDP-depressing fall in spending on the police, household security and purchases needed to replace damaged or stolen goods.
So far the economic effects of Britain's Brexit vote have been pretty localised. The pound and business confidence have plummeted and economists have slashed their forecasts for UK growth next year. But there are few signs of contagion from the UK to the rest of the world. The indicators of financial stress which were flashing red in 2008-09 following Lehman's failure, or in 2010-11 at the time of the euro crisis, are at low levels. Brexit is a huge political shock, but it is not a global economic shock.
The summer break provides a welcome escape from Brexit and an opportunity to spend some time catching up on reading. Our summer reading list provides six readable, thought-provoking articles to ponder on the beach or by the pool. All are available free and online.
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I hope you might be able to join me later today for a webinar in which I will examine the results of our latest CFO Survey and prospects for the UK outside the European Union. The webinar takes place today, Monday 18th July, at 1500 BST. To join, please logon to:
If you cannot make it today the webinar will be available on a listen again basis via the same link.
The two remaining candidates for the leadership of the Conservative Party agree that the UK will leave the EU. The difference at this stage is one of timing. Frontrunner Theresa May sees no need to start the formal process of leaving immediately by triggering Article 50. Andrea Leadsom says she would invoke Article 50 immediately if she became Prime Minister.
The decision facing UK voters in the polling booths on 23rd June was deceptively simple – to remain in or to leave the EU.
Now comes the hard part. It falls to politicians to interpret the vote and turn it into some sort of reality.
That reality could yet leave the UK as a member of the EU. Yesterday former Prime Minister Tony Blair said that the UK "should keep our options open" on leaving the EU and suggested that as the implications of Brexit emerge the "will of the people" may shift.
Pretty much everyone agrees that the UK's referendum has put us into a world of uncertainty and elevated risk. For once the use of the term "Earthquake" in the headlines was not hyperbole.
Saying that things are "uncertain" is obvious but not very helpful. Quite naturally theories, speculation and forecasts multiply.
Voting in this Thursday's UK referendum on membership of the EU takes place between 7am and 10pm. Unlike last year's General Election there will be no official exit polls, partly because of the difficulty of extrapolating from a sample to a wider population in a referendum. Nonetheless, the Financial Times reports that some hedge funds have commissioned their own exit polls in order to trade on early indications of the result. The movement in the value of sterling during the count of votes from 10pm on Thursday evening will provide one signal of market sentiment about the outcome.
The argument runs that for all the ups and downs of the stock market equities outperform other assets, such as cash or government bonds, in the long term.