Hamish McRae: Bigger issues than Brexit for a troubled world economy

The expectation that the Fed has gone dovish may be welcome in the short-term, for it helped the market recovery last week. But there are long-term costs that only gradually become apparent.

In Europe, where rates are even lower and the European Central Bank’s version of QE is to be continued, the recovery has been uneven at best. Cheap money supports asset prices, which is fine for people with the assets. The richer you are the more you benefit. The social costs in increased wealth inequality have become increasingly evident.

Two conclusions come from all this: first, interest rates in the US and Europe will remain low for the foreseeable future; second, this policy will probably not be effective in offsetting the downturn. Mercifully we also know that downturns don’t last forever. Phew.

The second big global issue to think about is China and in particular, its integration into the global trading system. What is happening there is part of the slowdown story, but only part of it.

Growth has slumped, and the Chinese authorities are figuring out ways to pump it up. Trade tensions with the US have not helped, but there are more embedded problems than that. These include the pile of debts built up in the aftermath of the financial crisis a decade ago, as China boosted demand by a massive investment programme, and the inefficiencies of the state-owned industrial sector.

Of course, the Chinese leadership knows all this. The former governor of the People’s Bank of China, Zhou Xiaochuan, was in London last week talking with Lord King — his former opposite number at the Bank of England, at an event organised by Enodo Economics. What struck me was his caution. One point he made was that tackling both the debt problem and state industry inefficiencies had to be done gradually and carefully. King agreed that financial liberation in China should not be rushed, given the lack of international co-operation on global imbalances.

China tends to get stick for running up large current account surpluses, but these are coming down fast. The country with the biggest surplus is Germany. However, tension between the US and China is not just about trade. It is about intellectual property and more generally about economic leadership. That tension will continue for the next few decades, and the present bout of trade aggro is a small part of a bigger game.

My third big issue is the direction of high-tech America. There has been huge downgrading since autumn, when Apple and then Amazon passed the trillion dollar valuation point. Microsoft is now the most valuable US company at $890 billion. The question is whether this downgrade is now settled or whether there are further falls to come.

We talk of the sector but its giant members are all very different businesses and so are vulnerable in different ways. Thus Apple is in trouble if people change their phones less frequently, whereas Amazon, Google and Facebook face monopolistic challenges. The new element is political — for example, the call this month by Senator Elizabeth Warren for high-tech giants to be broken up.

Something big is stirring and I am not sure where it will end.