Don’t panic - or at least, not yet. Yes, the slump in the stock market is bad news for investors, savers and companies seeking to raise funds. Yes, China’s handling of its slowdown and market has been problematic. But none of this means that a recession is on the cards in Britain. The global economy is still set to grow at a decent rate - and the Shanghai Composite index is still 50pc higher than it was 18 months ago, to put the chaos in perspective.
If fact, nothing truly substantial has changed over the past few days in terms of economic and financial fundamentals: the emerging market rout is still ongoing, dragged down by China, Brazil and other economies. The price of oil remains on a downwards trend, for reasons of supply as well as demand. American interest rates are still on a slow, upwards trajectory. The eurozone is still past the worst. Some aspects of the global economy display issues that are strikingly similar to those that faced the world in the bubble years of the mid-noughties; other worries are newer, such as the fact that the financial markets today are far less liquid, largely as a result of dramatically tighter regulations.
George Osborne’s warning that we now face a cocktail of new threats could thus have been delivered at any time these past few months. Some of the details have changed, of course, with the Nasdaq now into official correction territory, for example, but not the big picture. The Chancellor warns against complacency but that is exactly what many analysts worried he had fallen into when his Autumn Statement ditched many proposed cuts, relying instead on a massive, statistical windfall to balance the books.
So why did Osborne suddenly choose to make such a downbeat statement? There are several related reasons.
The first is that what he says remains technically correct, despite his own U-turn: Britain needs to continue cutting many departmental budgets. There will be much pain ahead, even if the belt-tightening won’t be anything like as large as previously planned, so it makes sense for the Chancellor to remind the public that those who seek a return to profligacy are deluded.
The second is that the public finances are likely to continue to underperform. If so, and the deficit ends up materially higher than predicted, Osborne will have got in his excuses early.
Last but not least, there are some who believe that highlighting the problems in emerging markets will help the “remain” side in the coming European referendum. Migrant crises help the “outers”; but turmoil in Asia and Latin America makes Europe look more appealing.
It is important, of course, for politicians to remind the public that the years of low interest rates they have got so used to will eventually come to an end. The Chancellor did as much in his comments on Thursday - or at least, that is how I believe they should be understood. Yet it is looking ever more unlikely that the Bank of England will hike rates in 2016. Retail wars and the continued drop in the price of oil will keep the consumer price index under check; and there is as yet no sign of an explosion in either nominal wages or the total amount of liquidity sloshing around the economy.
If the cost of borrowing does go up, it will be because the Bank of England decides to ration credit for some or all mortgages, using its macro-prudential tools rather than its traditional interest rate weaponry. There is now a real possibility of this: the authorities want to have their cake and eat it, keeping credit cheap for some but making it costlier for others. The first great worry is that central banks begin to fancy themselves as central planners, meddling and micromanaging, a course of action which never ends well. The second issue is that we could end up in a situation when one arm of government - the Treasury - would be promoting credit via its help programmes for homebuyers, while another - the Bank’s financial policy committee - was doing the exact opposite. It wouldn’t exactly be a case of joined up-thinking.
The news isn’t all bad, however. Lower oil prices are boosting net importer countries, of which we are now one; and the fact that commodity exporters and China are making less from selling their wares abroad is helping eliminate a key macroeconomic imbalance. Until recently, these countries were piling up massive reserves of foreign cash; because these were often stored in government securities, they had created a false market in bonds. Governments with strong reputations - such as the US, the UK and Germany - could print as many IOUs as they felt like, and find willing buyers. This pushed rates down artificially, fuelling all sorts of asset price bubbles, a process which may now be coming to an end.
It is thus good news, not bad, that China’s foreign exchange reserves have fallen from a peak of just shy of $4 trillion in 2014 to closer to $3.3 trillion. China still has ample cash to protect itself and mop up even massive banking losses, if required.
The world economy isn’t in the best of states - but at least credit may soon start to be priced more rationally.
All change at M&S
Good luck to Steve Rowe, Marks & Spencer’s new boss. He will need it. In an age of extreme fragmentation, digital disruption and intense competition from new players, it remains an open question whether anybody can turn M&S around. It may be that this kind of retailer has had its day; we will find out over the next five years.
On a personal note, I will miss Marc Bolland, an open and friendly CEO. He was right to step down when he did, and he fixed many of the technological and logistical problems that were crippling the retailer, while also overhauling the product mix. Let’s hope his successor is able to build on his progress.
allister.heath@telegraph.co.uk
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