Comment: Rate rise prospect a cause for celebration

The Institute of Directors (IoD) has added its two penn’orth to the cold bath of realism on prospects for 2016 from International Monetary Fund (IMF) head Christine Lagarde earlier this week. Lagarde had predicted that global growth next year would be disappointing, partly due to the prospect of further interest rate rises in the United States and the economic uncertainty caused by the slowdown in China.

James Sproule, the IoD’s chief economist, focusing more narrowly on the UK, believes an increase in interest rates here in 2016 is both likely and necessary, but that it will make borrowing a less attractive option to big businesses and that the trend of ever-increasing profits in recent years is likely to come to an end.

The IoD man thinks it is a price worth paying, however. Otherwise, the longer we stay at virtually rock-bottom base rates there is a chance of asset bubbles developing as bankers chase yield in riskier areas, as they did with sub-prime mortgage lending in the run-up to the financial crash.

You can see his point. Even if it means corporate returns suffer a little bit in 2016, a modest, graduated rise in interest rates on both sides of the Atlantic is in reality a cause for celebration, not hand-wringing.

It would show that, as an economic patient, we are getting better, and able to get by without the drug of low rates. The past seven years have been an exceptional period, and the length of the downturn was correctly predicted by former Bank of England governor Sir Mervyn King before he handed over to Mark Carney.

But exceptional periods are just that. They break with the normal economic rules and cannot go on forever. Lagarde on the broader canvas, and the IoD in the UK microcosm, know getting back to “normality” cannot be done totally painlessly and this may make the economic performance next year a bit patchy. It is worth it.

After the flood

Accountancy major PwC reckons total economic losses from storms Desmond, Eva and Frank could come in at £3 billion. That doesn’t seem excessive given the scale of the flooding that has engulfed the north of England and parts of Scotland. Meanwhile, people prepared to live in or near a flood plain in future may simply be priced out of the market by insurance companies.