This is not a joyful Eastertide, and I fear there will be more misery in the coming weeks. But Easter is a time of hope, and we should try to use the break to reflect on the financial and economic pressures that lie ahead – and how we should tackle them.
We are allowed to feel worried, but we are not flying blind and there are solid reasons to be positive. For a start, we know the world economy has proved itself very robust, given everything thrown at it in recent years.
The pandemic, the invasion of Ukraine, Trump’s tariffs have all been pretty big deals, yet global growth has cantered on at between 2 to 3 per cent a year.
In 2020, as a result of the pandemic, it did shrink by nearly 3 per cent, but then it rebounded by well over 6 per cent in 2021. It’s a tough old beast.
Next, the world has a lot of experience of oil crises, going right back to the 1970s. Oil was even more important then than it is now, but it still supplies a third of the world’s primary energy demand, with natural gas accounting for a further quarter.
So if the price of crude oil remains at $109 a barrel, having been $60 a barrel, there will be an inflationary shock that spreads right through the supply chain.
Looking ahead: Easter is a time of hope, and we should try to use the break to reflect on the financial and economic pressures that lie ahead – and how we should tackle them
This will show in the prices of everything, with some areas particularly hard-hit, notably air fares, because fuel is a high component of their costs, and food, because gas is a key feedstock for fertiliser.
How high inflation goes will depend partly on what happens to the oil price, obviously, but also on how central banks respond.
After the invasion of Ukraine, oil went above $120 a barrel, but the central banks regarded this surge as temporary and did not increase interest rates by enough to check other prices from chasing up too. So here in the UK we got double-digit inflation.
They will not make that mistake again. While I don’t believe the message from the market that there will be three increases in rates from the Bank of England this year, we should still expect the next move to be up, not down.
We should also expect inflation to remain elevated for two to three years at least.
We will have to pay more to borrow. That includes our Government. Since the war began the yield on ten-year gilts – UK Government bonds – has risen by 0.7 percentage points, the sharpest increase of any G7 country.
We also pay the highest rate, currently a little below 5 per cent, a signal that the markets don’t trust Chancellor Rachel Reeves. We all have to live with that.
But – and this is the message of hope – from what we know about similar crises of the past, this is not in economic terms nearly as serious as the banking crash of 2008-9, or the pandemic, or, in all probability, the aftermath of Russia’s invasion of Ukraine.
Should the Strait of Hormuz remain completely shut for another six months things will become much tougher. Right now it looks as though the world economy will keep growing, albeit at a disappointing pace, through the next 18 months.
That’s what stock markets are saying, with the FTSE 100 index still up nearly 5 per cent this year.
What should we all do? For people with their savings in equities the obvious message is to stay invested. It may turn out that this will be the year when markets end down, but we’re not clever enough to know.
There will be a serious bear market in share prices at some point but it doesn’t feel imminent.
There is, however, a real threat from rising unemployment. All of our circumstances differ, but one element of Easter reflection should be about the job market.
This is not a good time for anyone looking for employment, and particularly for young people starting their careers.
The energy crisis makes an already troubling situation worse. How do we plan for ourselves? How do we help others?
My overriding view is that this is not the end of this economic cycle. It is still growing. This is a blow striking it in its middle age – all right, late middle age.
So there is time to sort ourselves out before the next global recession. We need to use that time hopefully and wisely.
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