Rock-bottom rates here to stay

FOR most of us this Easter weekend comes as a bit of a relief. A holiday, the uplifting Christian festival, the spring picking up some pace – and a break from politics. It is also a chance to take stock: of the economy, of the world of finance, and inevitably of the UK’s relationship with Europe.

As far as our own economy is concerned, the news is pretty positive – indeed, given what has been thrown at it, astoundingly so. Retail sales have surged. Inflation is below the target of 2 per cent. And job growth carries on, adding 179,000 jobs in the most recent three-month period.

There is an inevitable contrast to be made with the Eurozone, with France stagnating, Italy in recession and Germany within a whisker of it. German manufacturing output is now shrinking and the latest indicators suggest that may be happening in France too.

To say this is not to crow. That would be silly. There are plenty of problems in the UK economy,

by Hamish McRae and since Europe will remain an important export market, bad news there is bad news for us too.

But if this is what is happening despite the shenanigans over Brexit, it makes you wonder both about what might have happened were that referendum to have gone the other way or if a smooth exit had been agreed by now – and, more important, about the opportunities in the future.

More of that in a moment. A word about the changing global financial environment. There has been a big shift of expectations about monetary policy in the past few weeks. Put simply, it now looks as though global interest rates will remain very low for the foreseeable future. The US Federal Reserve, nudged perhaps by the Trump administration, has been rowing back on its plan to have two or three increases in rates this year. It is possible there won’t be any, and that the next movement is a cut.

The European Central Bank, for its part, has responded to the slowdown in the economy by reviving its version of quantitative easing, pumping money into the banking system. It seems clear that its interest rates will remain negative for the next year or more.

As for the UK, policy is frozen until there is some resolution to Brexit, but ten-year gilts yield 1.25 per cent. That says the market thinks that sterling interest rates will stay low for several years.

True, markets get things wrong, but if you want to know why shares have recovered over the past six months, a lot of the explanation is here. Markets think that easy money is here to stay. This may not be a good idea. The costs of the policy, in denying savers a return for their cash and increasing wealth inequality by boosting asset prices, are more evident. But it is better news for stock markets.

What does all this mean for us? We will continue to argue about Brexit, but I suggest we should try to argue less and observe more. British consumers will keep spending if they have the money to do so – and, ahem, sometimes if they don’t. Wages are rising faster than inflation, and since the supply of EU workers has declined, the demand for labour is sucking more women and older people into the workforce.

It is true that disruption is always damaging, but there is one area of the economy that may be recovering a bit: the housing market. People that have put off moving may be coming back into the market, while sellers have become more realistic about asking prices. Sooner or later people think they have to get on with their lives.

The business community is also learning to live with uncertainty. There had been quite a bit of disruption in anticipation of the UK leaving the EU on March 29. Some businesses have been stockpiling, others seeking new suppliers from outside the EU, or indeed within the UK. It is too early to see the big picture, but we can glimpse ways in which business is learning from the experience.

A final point. There is too much focus on the negative. Given the way the UK economy has performed that is absurd. The coming couple of years will see some sort of global slowdown, and I fear that the central banks just printing more money won’t fix it. So we need a cooperative relationship with all our trading partners, the US of course, the growing markets of the emerging world of course, but also Europe. Too much to ask? Surely not.

Coming years will see a slowdown. We need to cooperate with our partners