Phew! We have got through 2021, the year ending with a strange mixture of optimism and gloom.
World equity markets have soared, with US prices at all-time peaks and the Footsie having the biggest annual gain for five years.
Yet there will presumably be some new clampdown in the next few days, and please don’t book a skiing holiday in the Alps just yet.
Asset boom: World equity markets have soared, with US prices at all-time peaks and the Footsie having the biggest annual gain for five years
Leave aside whether government policies around the world are well-judged. The plain fact remains that the drag on economic activity from Omicron will continue to be felt through the next few months.
How can we get some perspective on all this? The key thing is to distinguish between economics and finance. I am not worried about the global economy this year. I am worried about financial markets.
As far as the economy is concerned, it will be a success story. That is partly because it is easy to have a great leap forward if you start from far enough back.
Even now, while the US is ahead of its past peak, the UK and the main European economies are only around where they were two years ago.
And every country, including China, is behind where it would have been had there been no pandemic. There is a lot more catch-up to come.
But it isn’t just catch-up. We are learning new ways of doing things. Some are obvious, such as using technology to speed things up. Others are less so.
We have only begun to think about ways healthcare around the world could be improved once the pandemic recedes, or how shorter supply chains can cut costs.
Some of the string of ‘unicorn’ companies floating on stock exchanges around the world will flop, but others will help transform our lives…for the better.
London has begun to claw back its position as the go-to place to raise money for these ventures. This year we should see the benefits of recent changes in regulation with a further stream of business.
But what about financial markets more generally? We have all been here before. This does not feel quite like the mad excesses of the dotcom boom of 1999, or the bank and mortgage lending frenzy of 2008.
But last year marked a clear turning point. It was the year when interest rates started to go up, not down. The Bank of England started to tighten policy last month, but long before that the money markets had started to move.
Last year started with ten-year gilts yielding around 0.3 per cent. It ended with them just under 1 per cent. That is still absurdly low given that inflation is already above 5 per cent and heading upwards, but at least the broad direction is set.
If you look at what has happened to asset prices in general when the global interest rate cycle starts to turn up, in the early stages at least things can be quite positive.
But the challenge with all bull markets that are in danger of getting out of control is how to let the air out of the balloon slowly.
This is a global issue and the key global player remains the Federal Reserve. With US consumer price inflation at 6.8 per cent, there is a lot of air to be let out.
So there will be tension. On the one hand there will be the genuinely improving world economy. The UK will get its share of that growth, with our main problem being the shortage of people to do the jobs on offer. If that drives us to use scarce labour more efficiently – and indeed to improve the way working people are treated – that is all the better.
And, of course, if there are more people at work, earning higher wages, that brings in more revenue for the Treasury, and corrects the still-huge deficit more swiftly.
I think the Chancellor will go ahead with the National Insurance increase in the spring, but in another year’s time the pressure for higher taxation will with luck have eased.
On the other hand there will be the growing concern that this global asset boom has to stop somehow. Take one asset that matters to millions of Britons, UK house prices.
Last year they were up, according to the Nationwide, by 10.6 per cent. That is the fastest for 15 years. Maybe the boom is over.
Halifax now expects prices to be broadly flat this year. If that is right, and it proves typical of asset prices globally, then a year of general calm would be the benign outcome.
That is what we all need, isn’t it? A bit of calm. I hope we get it.
