Ten years on and what have we learnt?

On September 15, it will be exactly 10 years to the day since global financial services firm and investment bank Lehman Brothers spectacularly collapsed. On that date in 2008, the organisation — the fourth-biggest US investment bank at the time of its downfall — filed for bankruptcy protection after negotiations were unable to find a means of salvaging it. The bankruptcy filing, with $639bn in assets and $619bn in debt, was the greatest in history, and is thought to have had a major part in the unfolding of the global financial crisis which peaked that year — a financial crisis considered by many economists to have been the worst since the Great Depression.

A decade after the turmoil, the economy has recovered, with output levels having overtaken pre-crisis levels in most advanced economies and labour markets greatly improved, according to professional services network PricewaterhouseCoopers’ latest Global Economy Watch publication (at the time of publication). What’s more, the International Monetary Fund’s (IMF) mid-year World Economic Outlook Update anticipated world growth to hit 3.9% both this year and next. However, the IMF noted that the expansion is becoming more uneven and threats to the outlook are rising. Growth has become more unsynchronised and the expansion rate seems to have peaked in some major economies, it said.

“In the US, near-term momentum is strengthening in line with the April World Economic Outlook forecast, and the US dollar has appreciated by around 5% in recent weeks,” the update said. “Growth projections have been revised down for the euro area, Japan, and the UK, reflecting negative surprises to activity in early 2018. Among emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the US, escalating trade tensions and market pressures on the currencies of some economies with weaker fundamentals. Growth projections have been revised down for Argentina, Brazil, and India, while the outlook for some oil exporters has strengthened.”

What next?

In the World Bank Group’s Global Economic Prospects: The Turning of the Tide? June report, Shantayanan Devarajan, group acting chief economist, described the world economy as seemingly leaving behind the financial crisis’ legacy of the last decade, but said the medium-term prospects tell a different tale. He argued that “protectionist threats cast a dark cloud over future growth” and that a major emerging market credit event or a sudden tightening of monetary policy in the US leading to an interest rates spike could “roil” financial markets. This could prompt a slowdown, especially in highly-indebted nations. Since 1975, Mr Devarajan noted, there has been a financial market crisis around every ten years, with the economist adding that growing corporate debt in some emerging market economies has left them especially vulnerable to interest rate and exchange rate shocks. He referenced a finding that although current growth looks robust, potential growth will be lower, and concluded that policy and institutional reforms that build human capital and improve the business climate are required.

Mark Schofield from American investment bank and financial services corporation Citigroup said his firm would characterise world growth as “riding on the back of fading tailwinds while facing increasingly-strong headwinds”. This, Mr Schofield argued, increases the risk of an inflexion point at some point next year or in early 2020. Citigroup’s four obstacles to recovery following 2018 are greater interest rates, a China slowdown, an escalating trade war and more narrow financial conditions, which would be a by-product of bigger rates. Mr Schofield noted that a lot will depend on the behaviour of investors as and when markets correct.

“With that in mind, the increasing signs of volatility in asset prices [and] the increasingly-narrow stock market leadership … makes us fearful that a quite-sharp correction is possible once markets do turn,” he added.

On that note, Stephen Oh, global head of credit and fixed income at Pinebridge Investments, said that one aftermath of the financial crisis’ result has been a material decline in systemic risk, with the systemic risk of a banking crisis having considerably decreased.

“I think the real concern isn’t about the banking sector so much, but what will be the next causation of the next crisis, which may not be financial in nature, and what is the catalyst for causing that and what are the mechanisms to deal with such a matter because … there will be another crisis,” he said. “It’s just a matter of severity, the cause and the aftermath.”

Important developments

In September, American geopolitical intelligence platform and publisher Stratfor offered its 2018 Fourth-Quarter Forecast, which identified 11 key trends. The first four were ‘The White House’s Enduring Gamble Over Trade Policy’, ‘The Mounting Cost of US Unilateralism’, ‘The Global Oil Supply Contracts’ and ‘A Stressful Period for Emerging Markets’. The next four were ‘The EU Contends with Italy and Brexit’, ‘Storm Clouds Over the Korean Peninsula’, ‘No Respite for Beleaguered Iran’ and ‘Russian Weakness Will Be Exposed in Syria’. The final three trends were ‘Smoothing Out the Bumps in China’s Belt and Road Initiative’, ‘The Andrés Manuel López Obrador Era Begins in Mexico’ and ‘Ethiopia Drives Big Change in East Africa’.

Stratfor said: “The US will pile more tariffs on China, targeting $200bn worth of imports, and may ramp up the pressure further after midterm elections in November as trade negotiations stall. While the successful renegotiation of the North American Free Trade Agreement will mitigate the US administration’s threat to impose tariffs on automobiles and auto parts in North America, the EU will probably fail to avoid the measures.”

In further analysis, Stratfor anticipated that a steep decline in Iranian oil exports, along with looming production disruptions in countries such as Libya, Nigeria, Venezuela and Iraq, will constrict global oil supplies, prompting the White House to try to coerce Saudi Arabia to dig dangerously deep into its spare capacity. Meanwhile, US unilateralism in tariff and sanctions policy will push regional powers such as Turkey to “pursue ties with non-Western states and drive world powers such as Europe to reclaim their economic sovereignty”.

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