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The world seems like a much more uncertain place today than it was before the financial crisis. The International Monetary Fund reckons that macroeconomic risk is running at twice the level it was before the failure of Lehman in 2008. The backwash from the crisis, debt-laden governments, low productivity and risk averse businesses and banks, has spelt weaker growth.
Uncertainty has also been fueled by shocks such as political surprises and natural or man-made disasters. In the last few years markets have had to contend with a stream of worries, from conflict in Eastern Ukraine and the Middle East, to Brexit, the Gulf of Mexico oil spill and Donald Trump’s surprise victory.
But what lasting effect do such external shocks have on markets and economies?
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Despite speculation that the result of the election could mean a closer long term relationship between the UK and the EU, CFO concerns about Brexit have risen.
Perhaps we shouldn’t be too surprised. Following the financial crisis the Bank of England slashed interest rates and printed money to kick start the economy. Consumers have responded in text book fashion.
Last week a Times headline proclaimed that “Austerity is Over” in the UK. It may have been an exaggeration, but the headline captured the spirit of the time.
Labour’s anti-austerity rhetoric played well with voters during the election campaign. The Conservatives, who ran their 2010 and 2015 election campaigns on the need to reduce public debt, have gone quiet on austerity. As Torsten Bell at the Resolution Foundation notes, the deficit got a mere three mentions in the 2017 Conservative manifesto, down from 17 in 2015.
Equity markets seem to be partying like there’s no tomorrow. After a surge in recent weeks equity markets in the US, Germany and the UK are close to all-time highs.
If you had bought UK equities a year ago, five weeks before the EU referendum, you would have made a 27% return.
Western politics has developed a more nationalist character in recent years. In Europe populist parties claim to champion national interest against globalisation while in the US Bernie Sanders and Donald Trump have broken with the free trade consensus that has lasted since 1945.
Slow productivity growth is one of the biggest topics shaping current economic discourse.
It is hard to overstate the importance of productivity in driving improvements in living standards. Since 1850, UK GDP per head has risen 20-fold, transforming our standards of living. If productivity had remained flat over that period, GDP per head would only have doubled.
UK labour productivity rose at around 2% a year from the seventies but has stagnated since the financial crisis. British productivity now remains only slightly higher than its pre-crisis peak at the end of 2007.
The last Deloitte survey of UK Chief Financial Officers shows a further easing of the Brexit shock that hit corporate spirits last summer. The full report is available at:
CFO perceptions of external macro-economic and financial uncertainty have almost halved since last year’s EU referendum. Business optimism, which dropped to the lowest level in nine years last July, has risen to an 18-month high.
It is perhaps odd that despite gloomy news stories about the risks to growth the world economy is recovering. And this is a rare thing, a synchronised global recovery with activity strengthening in developed and emerging markets for the first time since 2010.
Leading indicators for growth are flashing green. Singaporean export growth, a barometer of global demand, has hit a two-year high. Chinese electricity consumption has rebounded.