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The Bank of England fears it may not spot the next crisis. Here’s where to look

Gertjan Vlieghe giving evidence to MPs.
Gertjan Vlieghe giving evidence to MPs. Photograph: PA

It was like a private confession broadcast to the nation. When Gertjan Vlieghe cast his eyes down at the desk in front of him and said “we are probably not going to forecast the next financial crisis”, it was a moment of sorrow and self-reproach rarely seen from a Bank of England policymaker.

Vlieghe is a member of the Bank’s monetary policy committee, alongside governor Mark Carney and seven others who set the UK’s base interest rate.

Behind closed doors, most of them would probably confess to lacking the tools to spot a financial meltdown akin to the disastrous collapse of 2008, but it’s not usually something they would admit to in public. So where, then, is the next crisis going to come from? Here are five likely candidates.

The stock market

The FTSE 100 has rocketed in the last year and is currently just 1.7% off its record intra-day high. But the market is characterised by many in the City as healthy, vigorous and a “good buy”.

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If this attitude strikes you as complacent, you might be right. Many of the firms enjoying the biggest lift in their value have benefited from the falling value of the pound, because the dollars they earn are more valuable. Others have benefited from the rise in the oil price. All these factors could reverse, triggering a slump.

Beyond British shores, the US stock market is at record highs and much of the rise follows a mania for tech stocks. The technology sector is the best-performing sector in the S&P 500 this year, rising nearly 9%, with firms such as Apple, Facebook and Amazon emerging as the biggest winners.

But like in 1999, investors are getting carried away with the tech story – which describes a digital future where humans relax while apps manage armies of robots – rather than focusing on revenues and profits. Too many companies are valued in excess of 40 times earnings, which means they will struggle to make a satisfying return for investors. All it takes is for those assumptions to be challenged by a collective panic and in a short space of time those values could be turned on their heads – with an ensuing impact on the confidence of British and global markets.

Car loans and credit card debt

Last month, the Bank of England warned that consumer credit, including car loans, was nudging levels not seen since the 2008 crash. Credit agency Experian, which monitors personal indebtedness, said the number of personal contract plans (PCPs), which allow buyers to pay a small deposit and then commit to making a monthly payment for three years with the option to buy or hand back the car at the end, has increased by 394% in five years.

The central bank, which regulates lending, says it will take calming action before this lending bubble bursts. So at least Vlieghe and his colleagues are keeping a close eye on this one.

However, there is the US to look out for as well. The New York Federal Reserve warned in November that sub-prime car loan “delinquencies” were a “significant concern”. It said such loans were being taken out at a faster rate than any time in its history.

If the US market pops, the same lenders operate in the UK and could find themselves overstretched and in need of cash, just as they did in 2008. If they call in loans or stop issuing new ones, the car market would be in big trouble. Likewise credit-card lending, which is vulnerable to a rise in unemployment – or, more likely, a squeeze on pay from rising inflation that will prevent people servicing their loans.

House prices

A mix of higher taxes on second homes and Brexit uncertainty is taking the heat out of the housing market. But there are still concerns that buyers are stretching too far to purchase homes, leaving them vulnerable to the slightest hiccup in their financial calculations.

The latest study of home affordability by Lloyds, which measures the ratio between average house prices by city and average gross local earnings, is at its worst level since 2008.

Over the past five years, the average UK city house price has risen by 32% from £169,966 in 2012 to its highest ever level of £224,926 in 2017. Average annual earnings for city dwellers over the same period have risen by only 7% to £32,796. As a result, average affordability in the nation’s cities has worsened, with house prices rising as a multiple of average annual earnings from 5.5 in 2012 to 6.9 in 2017. In 2008 the ratio was 7.2.

Like any pyramid selling scheme, all is fine until the next wave of buyers refuses to participate. Then the whole edifice comes crashing down.

Chinese slowdown

Starting in 2014, Beijing experimented with rebalancing its economy away from debt-fuelled expansion. The result was a collapse in GDP growth and mass redundancies, especially in industries that relied on cheap loans.

It was this slowdown that precipitated the fall in oil prices and a dramatic decline in global trade during 2015. Last year China found that its efforts had not only increased unemployment, but also pushed inflation higher, cutting consumer incomes.

As Diana Choyleva, a renowned China economics expert, says: “This is the demand-deflationary spiral that unproductive investment and excess debt lead to.”

China wants to devalue the yuan to get out of this fix, but with Donald Trump poised to brand the country a currency manipulator, that avenue may be cut off. Without the safety valve of a lower currency, China could slow again and the world’s second-largest economy could take everyone else with it.

Federal Reserve

Trump is running his White House much like he controlled the two teams on The Apprentice. The radical team and the sober-suited team are sent away to determine how to overhaul corporate taxes one week, impose tariffs on Mexico the next and in the third week resolve how to increase infrastructure investment. Which side will win is anyone’s guess (as is who will get fired). If Steve Bannon, Trump’s chief adviser, is allowed free rein, there could be a war with China, which he believes is inevitable and should be got out of the way sooner rather than later.

Some analysts expect the Federal Reserve to raise interest rates up to three times this year. If it does, the knock-on effects could be catastrophic for a beleaguered Mexico and other countries, such as Turkey, that have borrowed heavily in dollars. This could spark a collapse in trade that would wash up on the UK’s shores.