Larry Elliott
The F word is back. Back in the financial markets, back in the conclaves of central bank governors, back among the manufacturers and the high-street retailers. The four-letter word is fear. Back in the spring, few imagined that we would be approaching the third anniversary of the collapse of Lehman Brothers on 15 September with such a sense of unease. The belief in early 2011 was that economic recovery was now well enough embedded for central banks to start raising interest rates and for finance ministries to crack on with the job of reducing budget deficits.
Economic downturns usually go through five distinct phases: bubble, denial, acceptance, panic and recovery. This fifth phase officially started two and a half years ago, but the drip-drip of disappointing news from the around the world in recent weeks has made financial markets highly averse to taking risks. Higher unemployment, slower growth, currency tensions have all led to a rush for safe havens. The markets are now wondering whether this is one of the rare crises that has a sixth phase – relapse. At root, the suspicion is that the problems that caused the crisis in the first place have not been solved, that politicians are offering weak leadership, and that the next few months could see the start of phase two of the Great Contraction.
Economic downturns usually go through five distinct phases: bubble, denial, acceptance, panic and recovery. This fifth phase officially started two and a half years ago, but the drip-drip of disappointing news from the around the world in recent weeks has made financial markets highly averse to taking risks. Higher unemployment, slower growth, currency tensions have all led to a rush for safe havens. The markets are now wondering whether this is one of the rare crises that has a sixth phase – relapse. At root, the suspicion is that the problems that caused the crisis in the first place have not been solved, that politicians are offering weak leadership, and that the next few months could see the start of phase two of the Great Contraction.
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