Tomorrow is the 10th anniversary of the Lehman bankruptcy. So how does the world look now? It depends on where you are. The U.S. has got its mojo back, Europe and emerging markets rather less so. In short, the fall-out is by no means over.
1. From a U.S. perspective, recovery has delivered both strong economic growth and big equities gains.
On page 2, we briefly summarize the economic and market fallout from the Lehman bankruptcy and the policy response. The Fed led the way here and, from a U.S. perspective, policy intervention – which went further than simple quantitative easing (QE) – has delivered the goods. U.S. economic expansion, while initially weak, has been sustained. U.S. housing prices have rallied, although starts and new home sales remain significantly below pre-crisis highs. After widening sharply, credit spreads have fallen to multi-decade lows. U.S. equities have made 10 consecutive yearly gains. And U.S. financials appear much healthier than in 2008, with the total debt to assets ratio at its lowest level for a decade and healthy earnings growth.
2. Europe is still some way behind, with political and structural problems still clouding the policy response.
From a European perspective, the post-Lehman decade may have been rather less positive. This was illustrated, in rather different ways, by the European Central Bank (ECB) and Bank of England (BoE) meetings yesterday (page 3). The ECB is slowly edging closer to the end of QE but an interest rate rise looks very unlikely before autumn 2019: in other words, policy “normalization” is still a long way off. For its part, the BoE is coaxing along a sluggish UK economy, with uncertainty around Brexit a significant dampener. Arguments will doubtless continue for many years on the extent to which economic and social dislocation resulting from the Global Financial Crisis fostered populist sentiment and thus the Brexit decision, as well as political shifts elsewhere in Europe (e.g. Italy). Some economies (e.g. Germany, as discussed on page 4) have come through the crisis better than others, but it is difficult to give Europe as a whole a clean bill of health.
3. And China and other emerging markets may now be suffering from indirect post-Lehman effects.
Current tariff tensions can also be seen as an indirect result of the Lehman collapse and the subsequent popular disillusionment in the U.S,. and to a lesser extent elsewhere, with the existing global economic order. Such tensions are already having an impact on China, as we discuss on page 5. But emerging markets more broadly are increasingly caught, a decade after the event, in a post-Lehman double-whammy. They are suffering not only from trade concerns, but also from the implications of a strong USD (itself, indirectly, the result of the U.S.’s very effective crisis response). As always, investor worries are encouraging a more skeptical look at emerging market fundamentals and we expect a few more months of volatility here, before trade concerns slowly subside and sentiment
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