A decade after the financial crash we are soon due another downturn, but it won’t be as bad as the last one

We all know there will be a downturn, for we seem unable to escape the existence of the global economic cycle. But downturns, like upswings, vary in their timing and intensity

Might a crash in the value of high-tech companies in the US be associated in some way with the next economic downturn? (Getty)

Ten years since the Lehman crash, and the scars are with us still. Because this led to a serious recession in much of the developed world – the deepest decline in GDP of any recession since the Second Word War – it was at the edge of most people’s experience.

Actually, as more information is gathered about it, the crisis has begun to appear more ordinary: the decline in output not as deep as first assessed, the rise in unemployment less sharp than in previous recessions, and much of the emerging world escaping unscathed. But it was serious, and that shapes our feelings now and expectations for the future.

Feelings. If you feel grumpy consider this. The great classical economist Alfred Marshall wrote this of the world after a financial crisis in 1879: “The commercial storm leaves its path strewn with ruin. When it is over there is calm, but a dull, heavy calm.”

We did indeed experience that for several years. But now we have had nine years of economic growth (the bottom of the recession was in 2009), with strong demand for labour and the lowest unemployment in the UK since the 1970s. I know that millennials who have joined the labour market during this time feel disadvantaged vis-à-vis baby boomers, but you cannot choose when to be born and I march with Barack Obama that these are good times to be around. In a speech at an event organised by the Gates Foundation in New York last year he said: “If you had to choose one moment in history in which to be born, and you didn’t know in advance whether you were going to be male or female, which country you were going to be from, what your status was, you’d choose right now.”

Obama added that world has never been “healthier, or wealthier, or better educated, or in many ways more tolerant, or less violent, than it is today.”

That comment, if you accept it, puts in context the recovery of the post-Lehman decade. It hasn’t been too bad; indeed for the majority of the world’s population it has been very good. So why the sense of resentment, even anger, evident in much of the developed world?

The explanation is complex. Part of it has to do with the increase in wealth disparities in many countries. The “cure” for the world economy after the crash was for the central banks to flood the world with cash. That did inject demand, increased asset prices, and got things going again. But if you increase asset prices, the people who benefit most are those who already have assets. The richer you are, the better you have done. That goes, by the way, for the rich in the emerging world just as much as those in the developed world.

There is a further twist. The more sophisticated are the owner of the assets, the ones who could buy into private equity investments for example, the better the returns they achieved. Savers who kept their money in the bank lost out – still lose out now. This is grossly unfair and deeply damaging to the cohesiveness of society.

But against this there is one huge counter-force: the benefits of the communications revolution. Not only are these under-measured in GDP (how do you account for something that is free?). They also bring efficiencies that improve our lives in all sorts of ways, from avoiding traffic jams to seeing our children who live on the other side of the world. How much would people pay in order to give up their iPhone? This has been disruptive, as we who work on newspapers are very well aware, but there have been massive net benefits.

The companies that dominate this world are all American – with some Chinese imitators. The financial markets have recognised their triumph, making Apple the world’s first company worth more than a trillion dollars at the end of last month. Amazon passed though that barrier too, though it has now fallen back a little in value. The value placed on high-tech America carries risks. Are these companies really worth so much? What happens if they falter? Will regulation curb their growth? How do we make them behave better?

These are huge questions in their own right, but they lead collectively to a common concern: might a crash in the value of high-tech companies in the US be associated in some way with the next economic downturn?

We all know there will be a downturn, for we seem unable to escape the existence of the global economic cycle. But downturns, like upswings, vary in their timing and intensity. A lot of people in the US are talking about the boom coming to its close, though the general expectation seems to be that it will come in 2020 or later rather than next year. Quite how the markets will anticipate this is impossible to see. Robert Shiller, the Yale professor, Nobel Laureate and best-selling author, said last week that he thought US shares were highly priced but that did not mean that they might not climb higher still. He mentioned that shares were now being driven by “animal spirits”, the expression coined by the economist John Maynard Keynes in his 1936 book The General Theory of Employment, Interest and Money to explain why people sometimes acted with “spontaneous optimism rather than mathematical expectations” when making investment or economic decisions.

How dangerous are our animal spirits now? Well, by comparison with late 1999 at the height of the dot-com bubble, or the boast by Gordon Brown in the 2004 Budget speech that the UK had had “the longest period of sustained growth since the Industrial Revolution”, things seem quite tame. The world’s banking system is undoubtedly much safer than it was in 2007. Governments have, to a fair extent, repaired their fiscal positions, though the debts incurred in the past-Lehman era remain. Asset prices are inflated but not absurdly so. And we do have the experience of the Lehman crash to help keep our feet on the ground.

That surely is the best hope. The next downturn will not be a serious one because we have the experience – and the caution it generated – of the last one.