Dark thoughts


On Monday, Madsen wrote about the Telegraph's various reasons to be optimistic about the economy, and also noted the importance of optimism in driving recovery. Some commentators are less optimistic, and think we are experiencing a rally, not a recovery, and that there may be worse news still to come. They see a fundamental problem remaining in the housing market – essentially, that prices have got a lot further still to fall before they reach anything like historic levels. As MoneyWeek's Dominic Frisbee has written:

The average salary multiple over the last 37 years (1971 to 2007) is 4.54. At the 2007 average wage of £24,000, that gives an average house price of £109,000 – a fall of 40% from the peak. But if you exclude the bubble years (from 2001 to 2007), you get a 4.17 average salary multiple – which would give an average house price of £100,091, a fall of 45% from the peak.

There's also the fear that the market might over-correct, with prices dipping below historic averages. That's what happened during the last recession in the 1990s. Needless to say, that would mean massive problems for our weakened banks and could easily prompt another financial crisis (something the Bank of England is already worrying about). Throw in the fact that the banks haven't really felt the impact of consumer and commercial bankruptcies yet – there are lots of credit card bills and loans out there that are just not going to be repaid – and you can see how things might get sticky. All of which could undermine delicately rising business and consumer confidence.

The government isn't helping either. The rate at which they are borrowing money makes heavy future tax rises a near-certainty, deterring both spending and investment. What of quantitative easing? So far, it appears to have had little impact but some people, including the ASI, are still very uneasy. The drop in the RPI that was used to justify it is almost entirely a result of falling house prices, which are not so much 'deflation' as a necessary market correction. Meanwhile, the CPI continues to rise. Add in a weak pound (making imported goods much more expensive) and it's not hard to imagine that a severe inflationary episode is lurking round the corner.

So the good news is not unmixed, and the message might be this: hope for fine weather, but keep the umbrella handy.