Six years after Lehman Brothers collapse, the world remains fragile
Six charts try to answer the big question: Whether the world is headed for another bubble on the back of rising financial exuberance
Mumbai: Six years have passed since the collapse of Lehman Brothers Holdings Inc. on 15 September 2008 but rising asset prices in recent times would have us believe that world economy has moved on. However, the pick-up in real economic activity has been painfully slow, there is a huge debt pile-up in government balance sheets, while the private sector’s deleveraging record has been mixed. Here are six charts that try to answer the big question: Whether the world is headed for another bubble on the back of rising financial exuberance.
Economic activity remains sluggish in most large economies despite a slight recovery from the post-crisis lows. Real output in some euro zone economies such as Spain is still below their 2007 levels. Even in economies such as India which escaped the worst of the crisis, growth has stuttered and yet to revert to potential.
2. Signs of new housing bubble
Housing prices seem disconnected with the real economy. After a sharp correction in the years immediately following the crisis, the real estate market has begun heating up. The chart below shows that global housing prices have inched up successively for seven straight quarters. In the US, the Case-Shiller 20-city housing price index is at levels last seen in March 2008. This should serve as warning for investors since the roots of the Great Recession lay in the bursting of the housing bubble.
3. New financial exuberance
Housing is not the only asset class that has fallen prey to animal spirits. Equities are rising across the world. One of the hallmarks of the 2008 bubble was the heightened tendency of stocks across the globe to rise and fall in tandem. Something similar is beginning to happen again. The correlation between the S&P 500 and the MSCI Emerging Markets Index had been falling steadily after peaking in 2008 and 2009 but 2014 has seen a trend reversal of sorts. The correlation has again risen to crisis levels.
4. Global imbalances have improved
The financial crisis and global imbalances are closely connected. High savings of countries including China and oil exporters led to lower interest rates which in turn allowed low-saving Americans to borrow more fuelling the housing bubble, goes one account. To an extent, slower global growth has helped correct past imbalances such as the skewed trade balance between western economies such as the US and Asian economies such as China.
5. Private sector deleveraging uneven
Slow growth has also complicated debt problems for many large economies of the world. Yes, companies and households have cut down debt since the crisis, but the track record has been mixed. The US, for instance, home to some of the largest multinational corporations in the world has seen debt rise for its non-financial firms.
6. Massive fiscal stress; high public debt
Corporate deleveraging, however, has been accompanied by rising levels of public debt, as governments have taken over stressed assets and tried to stimulate economic growth by spending more. That sort of easy policy accommodation is going to come to an end soon, at least in the US, and threaten financial stability especially if the world can’t transition to investment-driven growth.
The fate of the global economy will depend a lot on how the world copes with the debt hangover.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!