Current Issues in Pensions (12 November, London): Review of session on 'Global economics and markets - where next?'

Since 2008, a consensus has been evolving on how the events in 2008 came to pass and how the macroeconomy has changed.  The session started by summarising the credit boom before 2008 and how the governments have been using monetary and fiscal policy to deal with the fall-out.

Looking forwards, with use of various stimuli we could see a normal cyclical recovery in 6-12 months.  However perhaps more likely is a slow bumpy recovery with growth around 1-2% pa (from population/productivity changes alone) and little new debt.  Volatile growth centred on this low level could easily lead to more periods of recession.

One of the main things that will determine which direction the economy takes is which sectors, if any, are willing or able to start borrowing again.  In the past, the path to growth has generally been to find someone willing to borrow, with the government being the “borrower of last resort”.  Three possible tail risks to recovery are the US fiscal cliff, break-up of the Euro-zone and a hard landing in China.

A lot of the expected changes to the economic outlook are already priced into markets, so opportunities to make money may be limited.  The exception to this is government bonds, as central banks are actively discouraging people (including pension funds) from investing in gilts.  Equities currently seem to be fairly priced.

We have already had around 5 years of instability, and could easily see another 5 or more years as the current imbalances take time to be resolved.  With a reduction in debt driven growth the “new normal” may not feel like a recovery.  Watch this space to see how things develop.

The session gave a useful summary of some of the areas of the global economy that I hadn’t previously considered.  Questions at the end were generally limited to specific queries on future levels of inflation and bond yields rather than any discussion.