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OPINION

Trade threat to savers

Trade threat to savers
October 1, 2015
Trade threat to savers

Dutch statisticians reported last week that the volume of world trade fell in July and has grown by just 0.8 per cent in the past 12 months - far below its 20-year average of 4.9 per cent. The CBI says this is hurting UK manufacturers. And official figures next week should confirm this; they are expected to show that the UK's trade deficit widened in the third quarter.

I've already said this is bad news for equities, because there's a strong correlation between world trade growth and annual returns on the All-Share index. But it matters too for interest rates.

This is because weak world trade is bad for the public finances. Quite simply, weak exports mean low profits and employment for many firms, which depresses tax revenues.

Even more simply, every pound borrowed by someone is a pound lent by someone else. Right now, the rest of the world is a net lender. In Europe, weak housing markets are making households net lenders while companies are still reluctant to borrow. In much of Asia weak welfare states and fears that banks will not extend credit mean that households and companies are saving heavily. With so much of the world being a net saver, somebody else must be a net borrower. That somebody happens to include the UK government. This explains why bigger-than-expected government borrowing in recent years has coexisted with lower than expected bond yields: both are the counterparts of high global net saving.

Such high net saving won't disappear quickly. There are structural reasons, such as ageing populations, why households are saving so much, and the secular stagnation that is making companies loath to invest won't vanish overnight. If this is the case, then the UK government, among others, will have to continue to be borrower of last resort.

But here's the problem. The government's fiscal charter commits it to achieving a surplus on public sector net borrowing by 2019-20. But if much of the rest of the world wants to remain a net saver, this won't be achievable. Worse still, the fallacious belief that the government is in control of the public finances might cause the Chancellor to tighten fiscal policy by more in a (self-defeating) attempt to attain that surplus.

This is where savers could continue to get hurt. Such tightening would tend to weaken domestic demand and would therefore require even looser monetary policy if the Bank of England is to achieve its inflation target. Such policy might not be wholly bad for savers: QE would boost share prices albeit perhaps not sufficiently to offset the depressing effect of weak overseas economies. But it might also take a new and nasty form; as Bank of England chief economist Andy Haldane said recently, negative nominal interest rates are theoretically possible.

This is, of course, just a risk. But it's a genuine one. Twenty years ago, Harvard economist Richard Freeman asked: "Are your wages set in Beijing?" The answer's no - but maybe your interest rates will be.