Markets think the worst may soon be over for the world economy. Governments must prove them right
- Fears of a market crash are out of date. Recent business confidence numbers from the US, China and even Germany show the global economy is not down and out. The world’s governments must seize the momentum and find new ways to fund sustainable recovery
There’s a new thinking sweeping the market that we may be over the worst in terms of risks to the future. Whether this should be deemed rational exuberance instead of excessive speculation is yet to be seen.
It’s not a question of feeding irrational exuberance in markets – it’s a question of policymakers striving for lasting recovery. There should be no return to market-crash fatalism.
If global growth is on the mend, who will be the main movers and shakers in the recovery? Conventional wisdom suggests the US and China should be in the vanguard, where policy efforts have been the most expansionist.
In fact, early signs of recovery are already in evidence. Recent business confidence numbers from the US and China show manufacturing activity is edging back into positive territory. In the US, business optimism is building momentum, with the IHS Markit purchasing managers’ index rising over the past two months to 52.2 in November.
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The good news is that, despite the global money overload in the past decade, market fear gauges like the Volatility Index and the spread of high-yield corporate bond spreads over the benchmark US Treasuries still seem reasonably subdued.
Deep-rooted fears about excessive speculation and irrational exuberance haven’t resurfaced, but policymakers must stay on their toes to harness those dynamic market forces more effectively as they arise in the future.
Our world is changing and economic policymaking must catch up. Quantitative easing and negative interest rates marked the start of a monetary policy renaissance back in 2009, but new initiatives are needed for governments to ditch fiscal austerity, along with new ways to fund fast and sustainable recovery.
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A better balance is needed between the US’ budget excesses and Europe’s fiscal attrition. The world needs mutually inclusive keystone policies to mend the economy, not destabilise it. Recessions can be bucked, economies can be fixed and new policies adopted for positive effect.
It may be a rocky road in the short term but, if the world’s governments can get it right in the next few years, there is no reason why the stock market rally can't endure for a lot longer and the post-crash world can’t see a golden age of economic reconstruction and revival.
World markets could soon be waking up to a new dawn of optimism, recovery and economic redemption.
David Brown is chief executive of New View Economics