There has been a genuine improvement in market sentiment,
but it is difficult to justify US and European stock market gains of around 30%
since early March. Further declines can be expected, even if the lowest point in
the bear market is behind us.
The gap between Libor and overnight rates has fallen below levels last seen
before the collapse of Lehman Brothers. This shows that the stimulus injected by
the central banks is helping the money markets to function better. But recent
increases in risk appetite are excessive and potentially dangerous, given the
enormous scale of toxic assets in banks’ balance sheets.
US jobs fell “only” 539,000 in April, less than expected and the smallest
monthly decline since October 2008. But, at 8.9%, the US jobless rate was the
highest since September 1983.
Europe and Japan are sinking even more sharply than the US. In China,
investment and retail sales are now rising, but exports are still falling
sharply. Overall, talk of global recovery is premature.
Inventories were slashed worldwide, indicating recent improvements in real
activity may be temporary. A sustained recovery requires stronger final demand,
but spending by firms and individuals will be hampered for years by the need to
reduce debt and repair weak balance sheets.
Bond yields and commodity prices may signal fears over rising medium-term
inflation, but in the near term, inflation is falling, with the US, Japan and
China experiencing deflation.
Countering recession is still the policy priority. In the US, the Fed remains
forceful, and the European Central Bank, after cutting rates to a record low 1%,
pledged to buy e60bn in covered bonds issued by eurozone companies as part of a
credit easing programme.
The Bank of England expanded its £75bn quantitative easing programme to
£125bn, because of the fragility of the world’s banking system. There is now
hope that we will avoid a 1930s-type slump. But risks of a Japanese “lost
decade” remain very serious.
David Kern of Kern Consulting is economic adviser to the British Chambers
of Commerce. He was formerly NatWest Group chief economist