The financial markets are nervous and uneasy. The intense caution implied by
falling bond yields is inconsistent with the optimism indicated by large gains
in share prices.
These contradictions signal huge uncertainties over the scale and duration of
Huge inventory cutbacks, which have accentuated the recession, are now easing
and this will ensure a bounce-back in activity in the next few quarters. The
early stages of recovery in the next six to nine months could be strong, because
the stock cycle is turning. But recovery cannot rely indefinitely on
inventories, budget deficits and money creation. To be sustained, an upturn
requires strength in consumer spending, investment and net exports.
The US lost 6.9 million jobs, with the unemployment rate at 9.7% its highest
in 26 years.
The jobless rate in the eurozone is 9.5% its highest since 1999 and
unemployment in the UK rose more than 830,000 since the end of 2007. The biggest
obstacles to recovery in consumer spending are further increases in unemployment
and high levels of personal debt. As over-indebted individuals rebuild their
finances, the growth in personal consumption will be constrained.
The banking sector remains feeble and risk-averse, which limits the business
sector’s access to finance. Even companies with relatively easy access to
finance will not invest until they can expect rising long-term demand for their
products. Net exports can be a source of growth for some countries, but not for
the global economy. There is a clear risk that policy inconsistencies and trade
tensions will mount, if too many major nations rely on net exports.
The Bank of England has surprised the markets by increasing to £175bn the
quantitative easing programme. Governor Mervyn King supported a bigger increase
to £200bn. This was a correct move in spite of the risks. Other central banks
have been less aggressive. But it is reassuring that all agree it is much too
early to withdraw the monetary stimulus.
David Kern of Kern Consulting is chief economist at the British Chambers of
Commerce. He was formerly NatWest Group chief economist
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