Five years of gloom and more to come

Five years ago, the global credit crunch triggered a rash of bank bail-outs and ushered in the biggest slump since the Great Depression. So, what's changed since then?

Last Thursday marked the fifth anniversary of the start of the global credit crunch. In August 2007 the European Central Bank (ECB) was forced to inject an emergency €95bn into the money markets as European banks suddenly found they couldn't borrow short-term from other banks. This liquidity crisis was triggered by their exposure to the American subprime mortgage market, which was by then on the verge of collapse as borrowers defaulted.

In Britain, the run on Northern Rock bank in September 2007 soon followed as savers panicked about the safety of their deposits. As mortgage-related defaults rose sharply, a year later American investment bank Lehman Brothers went bankrupt. The following six months then "saw the biggest slump since the Great Depression", says Larry Elliott in The Guardian. Governments bailed out the banks, but "wrecked their own finances in the process". Indeed, by mid-2009, both consumers and governments "had too much debt". Little has changed since.

As far as investors are concerned, the past five years have been characterised by a "very healthy US Treasury market, a lacklustre US stockmarket and a generally poor performance by commodities", says John Higgins at Capital Economics. The average annual return from investing in seven to ten-year US Treasuries (government IOUs) has been more than 7%, compared with a return of 1% from the S&P 500 over the same period. Commodities are down 6% overall, although precious metals are up 15%.

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Five years into the "long slump" and it seems like "we are back to square one", says Ambrose Evans-Pritchard in The Daily Telegraph. China is "sufficiently alarmed" by the "flint hardness" of its "soft-landing" to talk of trillions in extra stimulus packages, while in Europe the ECB prepares to "print whatever it takes to save Spain and Italy". In addition, markets are already pricing in a third round of quantitative easing by the US Federal Reserve in September.

The attempt to fix a crisis caused by credit by using even more credit "has, predictably enough, proved a failure", notes Elliott. But some nations have fared better than others. Australia has been one of the few countries to avoid a recession. Its banks are well regulated and the supply of raw materials to China has supported a commodity boom. That lucky streak may now be ending as Chinese demand slows, but few can deny that Australia has weathered this crisis well.

Britain, on the other hand, was always more "lax" and encouraged an "anything goes" culture in the City. A consumer spending boom was largely underpinned by equity withdrawal from rising house prices. So it was always set to be hit much harder when the crunch came. As for the global economy, it may "get worse" before it gets better. There are signs of a general slowdown, with eurozone problems now affecting Asia and North America.

Bank of England Governor Mervyn King predicted that the British economy would experience "seven lean years", says Stephanie Flanders on, but that "biblical prophesy doesn't take account of the eurozone crisis" or the "hole in Britain's public accounts".

Moreover, while King's latest forecasts show the economy returning to its pre-recession peak in 2014, it will take much longer than this to "get back to where we hoped we would now be". Who would have thought, five years ago, that it would be "easier to get 29 gold medals in 2012 than a single bit of economic growth"?

Although some markets, such as Europe, now look increasingly cheap, there may be more gloom to come. Capital Economics expects the return on US Treasuries to be "much less healthy" over the next two years, albeit "slightly superior" to the return on US equities. It also expects commodity prices to "fall sharply". One exception here is gold, which should remain a draw for investors while the global economy remains in the doldrums.