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Andrew Milligan, Standard Life Investments

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There could be trouble ahead, says Standard Life

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Three years on from the global financial crisis, Standard Life Investments, a leading investment house, argues that while policy makers initially reacted well to the problems, preventing an even deeper recession, many of the most important and difficult decisions have simply been postponed. Accordingly, investors must prepare for slower economic growth and volatile financial markets for some time to come.

In the latest edition of Global Perspective, Standard Life Investments looks in detail at how the world economy and financial markets have recovered since the crash and considers some of the key issues for policy makers and investors over the next three years.

Andrew Milligan (pictured), Head of Global Strategy, Standard Life Investments, says: "Every downturn is different to some degree but the global recession and crisis of 2009-10 was unusual compared with recent history and the recovery is equally atypical. The good news is that some progress has been made by the corporate and financial sectors, the bad news is that many of the difficult decisions facing the government and household sectors have simply been postponed. This has important implications for investors: economic growth will be slow in the major OECD economies for some years, with financial markets showing a saw toothed pattern as they are affected alternatively by stimulus measures and structural headwinds.

"Every action has a reaction. An important conclusion from our analysis is that investors and policy makers must recognise some of the unintended consequences of the policy decision which were taken back in 2008-09. For example, the US government took several steps to support the housing market but a market clearing price was not achieved leading to an unusual lack of mobility of labour due to persistent negative equity. Another US example would be the adoption of QE causing depreciation in the US dollar and therefore contributing to higher commodity prices and imported inflation.

"Much of the strength of the global economic recovery has been dependant upon emerging markets, which via a strong consumer and an industrialisation process driving commodity demand, has been a chief driver of the recovery in global stock market profits. One risk to monitor is that GEM monetary policy is kept too loose, resulting in an unsustainable mix of consumer inflation, property bubbles, current account imbalances and foreign exchange accumulation. A repeat of the 1997-98 financial crisis when capital leaves an asset class too quickly, would be dangerous. The second risk is political disruptions leading to markedly higher commodity prices, especially oil. A supply side shock could severely squeeze growth prospects.

"While there has been a degree of rebalancing of the global economy since the crisis considerable problems remain. We expect historically low rates of OECD economic growth and volatile financial markets reacting to policy decisions in both the OECD and GEM. High levels of debt in some countries, high levels of savings in others, combined with unduly low real interest and exchange rates, are all resulting in sizeable sovereign stress. At best the world economy might be half way through the adjustment process, at worse the seeds are being sown for the next investment bubble and bust."

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