Central banks warn on share prices
Share prices are too high despite their heavy falls since spring last year, the world's central banks have warned.
While shares have tumbled well below all-time highs, they are still expensive when compared with corporate profits, which have fallen even faster, Urban Bäckström, president of the Bank for International Settlements, has warned.
"Since earnings have fallen sharply, equity markets still look high by historical standards," Mr Bäckström said, launching the bank's annual report.
The briefing also noted a three-year correlation between the tech-heavy Nasdaq index, one of the stock exchanges worst hit by the equity shake-out, and US consumer confidence.
"The prices of [Nasdaq] stocks may now be seen as a leading indicator of productivity in the economy," said the BIS, the organisation which brings together the heads of the world's central banks.
"Thus, they may potentially exert a disproportionate influence on consumers' spending decisions."
This link hints that a plunge of more than 50% in the Nasdaq since March 2000 has yet to feed through to US shopping malls, where spending has remained strong, and proved a major fillip in a time of economic gloom.
But Mr Bäckström, also head of Sweden's central bank, declined to make any predictions on share prices, merely noting the relatively high level as a "weak spot" in the global economic framework.
Rough ride?
Other risks to the recovery in the global economy include "imbalances" built up during a period of sustained expansion during the 1990s.
These imbalances "might not unwind as smoothly a might be expected", Mr Bäckström warned, singling out the widening trade deficit and falling corporate profits in the US, the world's powerhouse economy.
Tackling the US trade deficit, the gap between exports and imports, which in March widened at its largest rate for nine years, is likely to require a decline in the value of the dollar.
But such a devaluation would - through reducing the dollar's purchasing power - pose the threat of higher US inflation, Mr Bäckström said.
Meanwhile, the campaign to boost corporate profitability, "the key to further [US] expansion", could see firms implementing short-term austerity drives, including redundancy programmes.
"[These] could risk setting in motion forces that might depress consumer expenditure excessively," Mr Bäckström said.
'Grounds for optimism'
Overall, the road leading to sustainable growth in the global economy "is a narrow one", he added.
However, Mr Bäckström noted "remarkably subdued" inflationary pressures, which he credited largely to trade and labour market reforms.
"A number of factors could give grounds for optimism," he said.
Euro support
The BIS report also noted the resilience of the dollar which, according to a benchmark indicator, is "above its long-term equilibrium value" against the euro.
The dollar in October reached its highest rate against European currencies since 1985.
However, efforts to support the euro had, at least at the second wave, reaped rewards, Monday's report said.
While the first round of intervention, in September, had only a temporary effect, the second campaign, in November, proved "much more fruitful".
"Traders seemed to become much more concerned about the possibility of a much stronger, rather than a much weaker, euro," the report said.
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