It’s a correction, not a meltdown

WHEN America sneezes, the rest of the world catches a cold. That phrase actually was first applied to France in the 19th Century, but now it is the US that drives the world economy and we have certainly been coughing and spluttering over the past few days.

The FTSE100 index plunged into ‘correction’ territory, which means it has fallen by 10 per cent, and markets pretty much everywhere fell sharply too.

The trigger was the slide in US markets following a rise in US interest rates, something that unsurprisingly has caused a spot of bother in the White House.

Donald Trump is completely conforming to type. He has claimed that booming share prices are a validation of his leadership. So if they go down, someone else has to take the blame. So he attacked the chair of the Federal Reserve, Jerome Powell, for increasing rates.

‘It’s a correction that I think is caused by the Fed and interest rates,’ he said, adding that monetary policy ‘is far too stringent…they’re making a mistake and it’s not right.’

Property developers like low interest rates because they finance their projects with cheap money. See the Donald’s growl as the President of the United States attacking the Federal Reserve and this is outrageous. See it as a former property developer cross about rising interest rates and it’s what you’d expect.

Right or wrong, US monetary policy affects all of us. So what should we make of this?

First, share prices were indeed due for what the US Treasury Secretary Steven Mnuchin called a ‘natural correction’.

That may seem a euphemism, but despite the plunge last week the main US index, the S&P500, was higher on Friday than it was at the end of last year.

To say that sharp moves in share prices don’t matter would be silly, but it is no bad thing to remind everyone that prices go down as well as up. In the very long term, however, shares have proved a better investment than cash or bonds, and about the same as property. Periodic corrections are indeed ‘natural’.

Second, rising interest rates are inevitable if inflation climbs. There is the real and profound problem of the pile of debt that the world has accumulated over the past decade. We have focused on the indebtedness of British companies (see page 93) and that is troubling. Interest rates going up pushes asset prices down. This is a global issue, sweeping in everything from property prices in Canada (down 5 per cent yearon-year) to share prices in Shanghai (down, gulp, one-third since January).

Third, and more positively, there is no direct link between weak share prices and a weak economy. If anything the US economy is overly strong, for that strength is the thing driving up inflation. As for the UK, despite all the current anguish, unemployment at 4 per cent is the lowest since 1975. Of course, and quite apart from Brexit, there will be some sort of global downturn – we are not clever enough to avoid that – but there is still a bit of time to fix the roof before it rains. WHY has Europe not created great high-tech enterprises to rival the US titans? There is a new book out next week about the decline of Nokia, once the largest manufacturer of mobile phones in the world and Europe’s most valuable company, but now a networks and licensing business.

It is by the company’s chairman, Risto Siilasmaa, and is making waves because of a forthright attack on his predecessor.

But it is not just Nokia. Vodafone was once the largest mobile phone operator in the world. It is still huge but it no longer dominates as it once did. Take Dailymotion, the video hosting service founded in Paris in March 2005 just four weeks after YouTube was launched in California. Dailymotion now has 300 million users a month. But YouTube has 1.8billion. Dailymotion is now owned by the French company Vivendi.

So why have the UK and Europe not created the giants of tomorrow? Poor access to finance? Theoretical rather than practical education? Excessive regulation? Failure to celebrate entrepreneurs? Whatever it is, we need to do better.

We can’t avoid a downturn but there is time to fix the roof before it rains