World stockmarkets have lost more than $US4.4 trillion ($A4.2 trillion) since July 26 as speculation mounts that the global economy is heading into a new recession.
MARKETS around the world have imploded. World stockmarkets have lost more than $US4.4 trillion ($A4.2 trillion) since July 26 as speculation mounts that the global economy is heading into a new recession. Is this GFC part two? Working out the real reason for the crash will be debated for some time. At this stage, everyone is guessing.
Experts say the big difference is that in 2008, the banking system was close to breakdown, but this time the banks are in better shape. Don't believe it. Banks overseas are in trouble because of their links to governments that made bad decisions three years ago.
There are several forces behind this meltdown, starting with jitters about a slowdown in China.
The biggest problem, though, is the basket case known as the euro zone. It's dangling on the edge with more debt than it can handle and sovereign risk worries. Bailouts for Greece, Portugal and Ireland are just Band-Aid solutions they are not fixing the problem. This week's turmoil threatens to engulf Spain and Italy and they're too big to bail out. According to one analysis this week, companies such as Budweiser, the world's biggest retailer Wal-Mart and technology giant Microsoft are now seen as more reliable at paying back their loans than Greece and Spain.
Add to that the US. On Friday, ratings agency Standard & Poor's cut its credit rating on US debt from AAA to AA for the first time in history. That's telling the world the US is no longer a rock-solid investment.
Analysts are still debating what impact it will have on the global economy, pointing out that there has been some discussion of this going on for weeks so markets would be prepared.
Still, there's one thing for sure: it won't be positive. The US debt burden has topped $US14.6 trillion and the US government continues to borrow 40? in every dollar it spends at a time when its economy is not growing.
Obama's debt ceiling deal has not fixed the fundamental problems. Unemployment is at 9.1 per cent, the housing market is dysfunctional, with many home owners owing more on their properties than they're worth.
Then there's the destruction of the middle class, which has driven demand - and US banks are not lending. At a time when the US needs stimulus and job creation, the politicians have gone for budget cuts. The big fear now is the US government has run out of resources to save the economy, which many now tip will slide into another recession.
So what impact will that have on Australia? It will hit markets, and superannuation will suffer.
But there is a plus side. Australian banks are vulnerable but are in much better shape than their overseas counterparts, corporate indebtedness is low, households are saving more than spending, our terms of trade are at historic highs and unemployment is low. As a result, Treasurer Wayne Swan on Friday reassured investors that the fundamentals of the economy were strong.
Still, there are worrying signs. Our traditional growth engines aren't ticking over properly. There is no more stimulus, retail and manufacturing are shrinking, the construction industry, always a driver of post-downturn growth, is just limping along and gains from our mining boom are being offset by the impact on manufacturing, retail and tourism.
Significantly, the bond markets and the Sydney Futures Market are now betting on interest rate cuts this year. That might be telling us that the economy could be in trouble.
With all these events in the global economy, it looks as if we're in for a wild ride.
Frequently Asked Questions about this Article…
What triggered the recent global market crash that wiped out more than US$4.4 trillion?
The article says global markets plunged amid growing speculation of a new recession. Key forces behind the sell-off include jitters about a slowdown in China, severe sovereign debt problems in the euro zone (with Greece, Portugal and Ireland seen as only temporarily helped by bailouts), and concerns about the United States after Standard & Poor's cut its US credit rating. Those combined worries have driven heavy losses since July 26.
Is this market collapse ‘GFC part two’ like the 2008 global financial crisis?
According to the article, experts are still debating that — everyone is guessing. A commonly noted difference is that the banking system was close to breakdown in 2008, whereas many say banks are in better shape now. The piece also warns not to be complacent, noting overseas banks linked to troubled governments are under strain, so the situation is uncertain rather than a clear repeat of 2008.
How did Standard & Poor’s downgrade of US debt affect investor confidence and markets?
The article highlights that S&P’s move to cut the US rating from AAA to AA+ for the first time ever signalled to markets that the US is no longer seen as completely rock-solid. Analysts are debating the full economic impact, but the article says one thing is certain: the downgrade is not a positive development and has added to global market stress.
Which companies were seen as safer than some sovereign borrowers during the turmoil?
The article cites an analysis saying large corporations such as Budweiser, Wal‑Mart (the world’s biggest retailer) and Microsoft were, in some cases, viewed as more reliable at repaying loans than indebted sovereigns like Greece and Spain during this period of market stress.
What does the global turmoil mean for Australian investors and superannuation funds?
The article warns the turmoil will hit Australian markets and superannuation. However, it also notes positives for Australia — banks are in better shape than many overseas peers, corporate indebtedness is relatively low, households are saving more, terms of trade are high and unemployment is low — so while super and markets may suffer, there are some domestic strengths.
Are Australian banks safer than overseas banks right now?
The article says Australian banks are vulnerable but are in much better shape than their overseas counterparts, largely because many foreign banks are exposed to governments that made poor decisions. That relative resilience is presented as a plus for Australia amid global stress.
Are markets expecting interest rate cuts in Australia because of this downturn?
Yes — the article notes that bond markets and the Sydney Futures Market were betting on interest rate cuts that year. The piece suggests that market pricing for cuts could be a sign the economy might be weakening.
What should everyday investors expect next — more volatility or a quick recovery?
The article’s overall tone is cautionary: with sovereign debt worries in the euro zone, concerns about China, the US downgrade and lingering domestic weaknesses (shrinking retail and manufacturing, limited stimulus), it says we’re likely in for a ‘wild ride.’ In short, expect continued volatility and uncertainty rather than a guaranteed quick recovery.
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