In 2001, we expect the US economy to expand by less than half the rate recorded last year. Growth in the Japanese economy is also sluggish, but the downturn in Japan has continued for ten years. 4  BIS Review 19/2001  At the beginning of the 1990s the financial bubble burst, following a sharp increase in stock and property values in the preceding years. The banking industry faced serious problems, which have still not be solved. In addition, government debt has increased sharply in recent years, but neither strong growth in public spending nor near-zero interest rate levels has sufficed to boost growth in the Japanese economy. BIS Review 19/2001  5  Growth in Europe was weak in the mid-1990s. The situation has shown a substantial improvement, particularly from 1997. Growth has picked up and unemployment has declined in an environment of moderate price and wage inflation. The US and Japan account for close to a third of the world economy. When their economies deteriorate, the question is whether the upturn in Europe is sufficiently robust to maintain its momentum. Historically, there has been a close correlation between developments in the US and Europe. Slow growth in the US economy will also now have an effect on demand for European goods, but the effects via financial markets are likely to be more important. A turnaround in the US could feed through to European stock markets and may also trigger financial unrest.
On 15 January, the Swiss Franc moved by more than 30 standard deviations. For rough scale, an 8 standard deviation move should happen once every three billion years or so for normally distributed data. You may at this point recall the saying popularised by Mark Twain, about “lies, damned lies and statistics”. I think I can be reasonably confident in saying that the fact of these events happening does not mean that we should expect low volatility in financial markets for at least the next three billion years. I am not going to spend time discussing the causes of these events; suffice to say that there was news of an unexpected sort, and the size of the resulting moves points to greater sensitivity in the response of markets. The ability of markets to trade without triggering major price moves was limited. That said, by the end of both days, volatility had reduced, prices had retraced a portion of their peak intra-day moves and liquidity returned. This quick stabilisation helped to limit contagion to other markets, and thus wider effects on the stability of the financial system. Should we therefore be concerned? My answer to that is we should certainly be keenly interested. I agree with the conclusion of the Federal Reserve Bank of New York that understanding the manner in which the evolving market structure is affecting market liquidity, efficiency and pricing is highly important (Potter (2015)).