Monday, 8 August 2011


It's been an awful week for stock markets across the globe. Last Friday, the UK's main index, the FTSE 100 (Euronext: VFTSE.NX -news) , stood at 5,815. At the time of writing, it's trading at 5,340. That's a fall of 8%. As various screaming newspaper headlines will tell you, many billions of pounds have been lost, for the moment at least.
What's caused the rapid sell-off? Well, several different problems have come to a head. To be honest, most of these issues have been hanging around for a while, but investors have just chosen to ignore them up until now.
The recent political bickering over the US debt ceiling was a bit of a sideshow. The fact that US economic growth figures have been revised downwards probably spooked investors more. A key US employment indicator, called 'non-farm payrolls', provided some relief on Friday afternoon though. It showed that the US economy created 117,000 jobs in July, which was slightly more than expected.
Here in Europe (Chicago Options: ^REURTRUSD - news) , once the Greek debt situation was dealt with (temporarily at least), the bond market turned its attention to Spain and Italy. Both economies are in significantly better shape than Greece but are much, much larger. The theory is that these countries are too large for a bailout, so more radical action, including further spending cuts, is required. When you're relying on politicians to 'do the right thing', it's hardly surprising everyone's getting skittish!
It's not just the US and Europe though. Australia, which largely sailed through the credit crunch unharmed due to its abundance of natural resources, has lowered its growth forecast. And then there are worries that Chinese economic growth is slowing down as well.
As the West goes through its period of austerity, we're relying on Asia to provide the demand we need to grow again, thereby boosting our tax revenues and shrinking our deficits. In other words, any slowdown in the East will make our recovery much more difficult.
What does it mean for you?
Although the UK stock market has fallen in tandem with other markets, our own economic outlook hasn't really changed that much. GDP growth for the first and second quarter was pretty anaemic, but it's still heading in the right direction, albeit at a glacial pace.
Let's face it, this recovery was always going to take several years and be a bumpy ride. After all, we spent from 2000 to 2007 getting into this mess and it's not unreasonable to think getting out of it will take a similar period of time. Quick fixes might sound great, but the problems we face are too complex and deep rooted to be solved overnight.
If that all sounds too gloomy, then you'll pleased to hear there's some good news around. For example, investors have been buying gilts (UK government debt) in recent days, as they're perceived to be a safe haven. This will bring down the likely cost of any new government debt we have to issue in the near future, costing us taxpayers a little less in the long run.
This week's events have also knocked about $10 off the price of a barrel of oil. This should lead to lower petrol and energy prices in due course, and also ease inflation pressures across the board. What's more, it's probably a safe bet that UK interest rates will stay at rock-bottom levels for at least another twelve months, keeping mortgage costs low for many people. And the mighty pound has even managed to strengthen a bit against the euro this week -- there's always a silver lining if you look hard enough!
The big unknown is how far this particular crisis will go. To some extent, that depends on how quickly European politicians get their act together and stop pretending the large national debts across the euro zone will simply fix themselves. The message seems to be sinking in, but it's not clear yet what their next steps will be.
If the politicians continue to waver, the European economy will slow down even more and that's bound to have a knock on effect on the UK economy, and on our banks in particular. Europe is our largest export market after all.
So while this latest financial crisis is nowhere near as bad as the one we faced in 2007-08, it does have the potential to get a lot worse than it is at the moment.


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