Thursday 22 March 2018

Markets are 'out of step' with global economic recovery

Bank of England deputy governor Charlie Bean said conditions were
Bank of England deputy governor Charlie Bean said conditions were "eerily reminiscent" of the pre-crisis era
Colm Kelpie

Colm Kelpie

BUOYANT financial markets are out of step with the shaky global economic recovery, the Bank for International Settlements (BIS) has warned.

In its latest annual report, the BIS – a consortium of the world's central banks including the Central Bank of Ireland – said the global economy was struggling to step out of the shadow of the great financial crisis.

And yet, international money markets have been "extraordinarily buoyant", the report said, in part because of the monetary policy measures being adopted.

Bond yields in Ireland have hit record lows, while borrowing costs in other debt-hit European countries, including Portugal, have also dropped considerably.

The yield on Ireland's 10-year bond is lower than both the United Kingdom and the United States.

Ireland, Portugal and Greece have all held over-subscribed bond sales this year.

"Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally," the Bank's report said.

The report suggests that investor confidence is stemming primarily from actions taken by unconventional monetary easing by the likes of the US Federal Reserve, the European Central Bank and Bank of Japan to keep interest rates low and help kickstart fragile economies.

"Financial markets have been exuberant over the past year ... dancing mainly to the tune of central bank decisions," BIS said.

The ECB earlier this month cut interest rates to record lows, the deposit rate to below zero and launched a series of steps to boost lending to companies.

The Basel-based BIS warned that while markets are responding to the measures from central banks, it is not reflective of the global economic recovery.

"The global economy continues to face serious challenges," it said.

"Despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions. And despite lacklustre long-term growth prospects, debt continues to rise. There is even talk of secular stagnation."

Central bankers say the new calmness makes them uneasy, because it can turn investors complacent, increasing chances for future market instability.

Last month, Federal Reserve Bank of New York President William Dudley said the slide in market volatility "makes me a little nervous." Bank of England Deputy Governor Charlie Bean said conditions were "eerily reminiscent" of the pre-crisis era.

On the economy, BIS said growth picked up over the past year and the consensus is for further improvement.

But it said the post-crisis period has been disappointing.

"The overall impression is that the global economy is healing but remains unbalanced. Growth has picked up, but long-term prospects are not that bright.

"Financial markets are euphoric, but progress in strengthening banks' balance sheets has been uneven and private debt keeps growing," it said.

BIS holds meetings of Central Bank governors every two months in Switzerland, providing an opportunity to discuss the world economy and financial markets.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business