InPerspective - Volume 2

During the opening quarter of the year markets continued to be supported by the highly favourable policies of central banks and governments and by investors' hopes that recovery in the global economy could be sustained. While such support remains, asset prices may well rise further, but its foundations are shaky. The revival of the global economy has been driven to a significant extent by government spending and by the renewed strength of export activity among the world's leading 'surplus' countries, rather than by the domestic demand that might fashion a more entrenched recovery.

Although economic activity has begun to recover from the slowdown that followed the global credit crisis, many of the world's major economies remain laden with the debt that triggered that crisis. Financial-sector 'leverage' has fallen considerably, but 'real economy' debt in the developed world has declined only modestly and, given the enormous increases that have occurred in public sector borrowing, overall debt levels in most large nations remain remarkably high. Policy stimulus has eased the near-term burden of debt to borrowers (principally through lower interest rates), but it has done little to reduce the scale of that debt.