Sixty Second Summary
After the crash: the ten-year challenge
04 Mar 2019 - Estimated reading time: 1 minute
The collapse of global equity markets in the slipstream of the global financial crisis and Great Recession ended around the end of the first week in March 2009. In this sixty second summary, we take a high-level look at a very unusual decade and whether it can give any pointers to the next one.
A new normal
Conventional wisdom was that recoveries from financial crises tend to be slow and protracted … and so it has proved. Output in the major developed economies troughed in the first half of 2009. Between then and the final quarter of 2018, growth has ranged from 1.4% p.a. in the Eurozone to 2.3% p.a. in the US; the UK is in the middle at 1.9% p.a. Except for Japan, the pace of post-crisis recovery has been well below the pre-crisis trend. Any hopes that output lost in the recession would be recovered have long gone – indeed, most commentators expect that the subdued pace of growth in the last 10 years may be a good guide to sustainable trends in the future.
What growth there has been was supported by an enormous level of monetary easing around the world since 2008. There were some fears that massive liquidity injections would be inevitably inflationary, but the outturn has confounded them. Here it is the old normal that applies – the major central banks still use 2% p.a. CPI inflation as a “target” (interpreting the word very flexibly). Aided by some old-fashioned sterling depreciation just before the recession and, more recently, after the EU referendum, UK CPI inflation has been just above target on average in the last 10 years. It has been a little below in the US, well below in the Eurozone and not much more than zero in Japan. And although wage growth has eventually started to show some signs of life in the US, UK and Eurozone, inflation pressures still seem well contained.
Lower for longer
For most of the last 10 years, investors have expected monetary policy to be tightened much sooner than it has been in practice. But the “lower for longer” mantra is now less often heard than it was. The first rise in US interest rates in the current cycle was over 3 years ago, and interest rate futures reflected a “higher and sooner” mentality in the final quarter of 2017 and for most of 2018. US bond yields hit post-crisis lows as early as mid-2012, although the latest sustained rise in yields started in mid-2016.
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