The global economy is in a fragile state

At its simplest level, you could say that - on economic grounds - this is an election you want to lose

In case, amidst the hubbub of the election, you haven't noticed, the world's financial markets have been going through rather a glum period of late. Yesterday turned out to be pretty good but the modest recovery did not change the big picture. In the US, Wall Street is still very close to its lowest level since the presidential election last November; while here, shares on the London Stock Exchange are close to their lowest since January.

In case, amidst the hubbub of the election, you haven't noticed, the world's financial markets have been going through rather a glum period of late. Yesterday turned out to be pretty good but the modest recovery did not change the big picture. In the US, Wall Street is still very close to its lowest level since the presidential election last November; while here, shares on the London Stock Exchange are close to their lowest since January.

Of course, shares always go up and go down, so you might simply think that this is just their usual background noise amidst the other signals of the world economy. But there are other disconcerting rumbles. The oil price remains close, in dollar terms at least, to its all-time high. Our own consumer price index yesterday was at its highest for seven years, giving rise to suggestions that, after the election, the Bank of England will have to implement another rise in interest rates.

Beyond all this, there are lots of signals around the world of tougher times to come, signals that are small in themselves but cumulatively stack up. Yesterday there were new figures attesting to a slump in confidence in Germany and a fall in housing starts in the US. Meanwhile the relationship between the two main drivers of the world economy, the US and China, has become increasingly bad-tempered.

Last weekend there was a tetchy meeting in Washington of the leading countries' finance ministers in the G7, where China was pressed to revalue its currency - a request summarily dismissed by the Chinese who had refused an invitation to the meeting.

So, while the fall in share prices may not be that important in itself, it is a reflection of wider concerns. Last year was a terrific one for world growth, the best for a decade. This year will be slower. Next year? Well, maybe it will be all right but as the professional observers rather irritatingly remind us, "the risks are on the downside".

This does have a political significance here in the election. At its simplest level, you could say that - on economic grounds - this is one you want to lose. There is, to put it at its lowest, a probability that the next four years will not see as favourable economic conditions as the past four. Governments should not, in all fairness, be blamed for the state of the world economy, even if politicians try and claim credit when things are going well. But electorates are not always fair, particularly if they face stagnating living standards.

The central charge is that the UK appears worse placed, if there were a global slowdown in the next four years, than it was when it faced the last slowdown in 2001. Chancellor of the Exchequer Gordon Brown inherited what was, in world terms, a particularly competitive economy - one that has, if you believe the league tables, slipped somewhat since. He used the tax revenues generated by the late 1990s boom to build up a war chest that he could then draw down to keep the economy growing through the post-millennium flop.

It was a hugely successful policy and has given the UK remarkably stable growth. The trouble is that he is much less well-placed for facing the next downturn. We don't know when this will come, but we do know that on the Treasury's original post-slump plans of 2001, there would now be a budget deficit of just over 1 per cent of GDP. As it has turned out the deficit is some 3 per cent of GDP.

That is about the comfortable limit for public borrowing: it is the EU's Maastricht ceiling, insofar as that matters. And while the US is borrowing even more, the States has a huge ability to attract foreign capital and, in any case, seems to be running risks for the dollar with its present policy.

For practical purposes, there is now nothing in the kitty. The necessity, after the election, will be to repair public finances. Quite aside from financing the plans for increased public spending, the next government will have to get back to something close to a balanced budget so that it has the leeway to raise its borrowing when the next downswing of the world economic cycle hits us.

We need three or four fat years, as we had in the middle and late 1990s, to set things up for bad times ahead. If the markets are signalling that bad times are closer, and they turn out to be right, then it is hard to see the UK coming through the next cycle in as good shape as it came through the last one.

This is really a much bigger issue than the present political tussles about fine variations between the three parties' plans for public spending and the implications these might have for taxation. These differences are well within the normal plus or minus variations that take place in tax revenues.

It is easy for governments to run their finances properly in good times. A few years of strong growth, with the extra revenue that should bring in, can cover up a lot of errors. The big issue is how well we get through a downturn and that depends, in large measure, on when it comes.

Back to the markets. There is not, in the share markets at least, the "irrational exuberance" (Dr Alan Greenspan of the US Federal Bank's phrase) of the late 1990s. You could say that the recent caution is actually rather encouraging - a sign that the professional investors are keeping their heads.

It is not so good, of course, for pension funds and the pensioners who depend on them. But if the late 1990s boom has taught us anything, it is surely that it is better for markets to be realistic than for them to have wild emotional swings. The exuberance, such as it is, has been in global property prices: the surge in UK house prices are just one example of property booms around the world. And as we know, that particular boom seems to have reached a plateau.

The big picture that the markets are painting, then, is one of a troubled, uneven recovery with many unresolved stresses. They cannot predict the timing of the next global downturn with any precision; in fact they cannot predict it at all. But they can remind us, as they have been doing for the past couple of months, of the underlying fragility of the rapid growth that the world economy has recently enjoyed.

If you accept that, it follows that the next British government will have to start straight away to put public finances on a sounder footing. It may have a year, two years or three years of decent global growth to help it to do so in the least painful way. Cutting public borrowing is an insurance policy - the insurance policy that Gordon Brown took out in his first term of office, but has failed to do in his second.

The sooner the next government sets to work, the safer it is for all of us, even if the immediate consequences are less agreeable than any of our politicians are prepared to admit.