Well the world economy has gone a bit gloomy, even while the UK’s economy is seemingly doing well (bar real wages that is). The Bank of England’s Chief Economist, Andy Haldane, agrees and this week said “I have tended to view the economy through a bi-modal lens. And recent evidence, in the UK and globally, has shifted my probability distribution towards the lower tail.” There are more direct ways of putting it, but the Bank of England would probably not use that type of language.
Is it just a financial glitch which has rocked markets for the last few weeks? Clearly the normal course of events would be that as the US economy improves (like it has been), the rest of the world would eventually see their markets rise as expectations of exporting to the US grew. However, of more importance these days is the fear that as America improves, the extraordinary measures used by the US and others to boost money supply (QE, near zero rates etc.) will end. The problem is that unless the US was growing at an unprecedented rate, the impact of a reduction in monetary stimulus will mean fewer cheap dollars chasing assets around the world and thus we could see a steep decline in asset prices. Or at least that seems to be the market logic.
However it is also a real economy problem, not just a financial problem. Slowing demand in Europe and a credit crisis bubbling up in China is impacting real economic activity. One good indicator is the Baltic Dry Index, which basically tracks the cost of hiring a bulk carrier ship. This index has fallen from around 2330 at the beginning of the year to 930 today. People just don’t want to bother shipping iron and copper ore around if economic activity is slowing.
An amusing factoid in the FT this week is that in China, steel is now cheaper than cabbage. Mind you, I’m not sure that is so surprising.