There is near-universal euphoria in the markets – what can possibly go wrong?

Optimism about a global economic recovery is understandable, but the problems will come later, with three main areas for concern, writes Hamish McRae

‘Every economy that has held back its activity is primed to burst out’ (Getty)

When the going gets tough, the tough go shopping. From Monday, all UK shops will reopen; pubs and restaurants will serve outdoors; and various other activities will be available again. The scars of the pandemic will remain, sadly, but high streets will begin to feel a little more normal again.

So, what next? There is going to be a boom. Try to get one of those outdoor restaurant tables or a booking in a hair salon and you will get a feeling for the pent-up demand. But this is not simply a British phenomenon; it is a global one, as every economy that has held back its activity is primed to burst out.

The US has largely opened up, and the stimulus cheques are hitting the bank accounts. In Europe, there is a hold-up, as rising case rates (and, I am afraid, deaths) have forced clampdowns in both France and Germany. But vaccine rollout is speeding up and in that sense, Europe is only six to eight weeks behind the US and UK. As so often in economics, the differences are less important than the similarities.

The financial markets have made up their mind. Shares are mostly at record highs, with only the UK among the major markets lagging a bit. Residential property is also at record highs just about everywhere, though the market for office and shopping space is uncertain for all the obvious reasons. Raw materials, particularly those scarce minerals needed for batteries, are soaring in price. The questions that trouble the investment community are more about what might bring this boom to an end and when that might happen, rather than questioning the solidity of the boom itself.

The economic forecasters have also flipped from the gloom of last year to predicting the strongest recovery for at least 40 years, with the IMF last week expecting 6 per cent global growth this year. 

Just as it was deeply unfashionable to be optimistic about the resilience of the world economy a year ago, now it is equally unfashionable to be cautious. Olga Bitel, global strategist at William Blair Investment Management, caught the pervading mood in this comment to Bloomberg: “Specifically, the US and Europe are likely to experience the mother of all recoveries over the next several years.” 

That is strong stuff. Given this near-universal euphoria, you might ask: what can possibly go wrong? Well, I don’t think much will go wrong this summer. It may well be that markets have gotten ahead of themselves and will fall back until the surge in corporate earnings that this boom in demand will generate is confirmed. It may well be that inflation jumps, as demand for everything rises and the supply struggles to meet that demand. The difficulties of getting a booking for a haircut or a holiday rental won’t easily subside. But the central bankers will fight hard not to increase interest rates, and the world’s finance ministers are not going to increase taxes any time soon.

The problems will come later. What might they be? I can see three main areas for concern.

The first is inflation. That is certainly what Andy Haldane, chief economist at the Bank of England, worried about in a speech in February. Prices will rise through the summer – there is no question about that – and the real issue is whether this will lead to sustained inflation even when the emergency is past. 

The next is some sort of market disruption. I am not predicting a Wall Street crash in October, as such – though I would just remind people that financial crashes do happen and that present share values are historically high. No, disruption could come any time and take any form. I am actually more worried about bond markets than I am about equities or property. We just need to remember that all booms do come to an end, and the trick will be to end this one in a way that does not undermine the real economy.

The third possibility is that there may be some external political event that pushes the present tense relationship between the US and China into something akin to the cold war with Russia. There is no gain in speculating as to what that might be, though there are several usual suspects.

The point is that the world economy needs the major powers, notably the US and China, to get along. There is a decent chance that the world will experience another Roaring Twenties, but it will only do so if the global giants continue to trade adequately amicably with each other.

Meanwhile, let’s enjoy the next steps of the journey back to normality, hope that Covid-19 continues to be beaten back, and try to behave thoughtfully and decently through this bumpy summer to come.