A downturn with echoes of the last great crash
ThE risks of a new global slump have increased considerably as share markets around the world collapsed in the latest trading. In Britain and Japan the stock markets are now in what the experts describe as ‘bear territory’, having dropped more than 20 per cent from recent peaks.
In the US, shares have gone into freefall and across Europe’s troubled southern tier there are fears of a banking crisis as severe as that of 2007-08.
At the core of the current global turmoil is the unexpected collapse in oil prices.
In America the price of US crude fell 5.2 per cent to its lowest level since 2003 in latest trading, and the price of Brent crude – on which UK petrol prices are based – plummeted 3.8 per cent to $27.67. Eighteen months ago they were above $100 a barrel.
Normally one would expect a fall in oil prices to hurt producer countries like Saudi Arabia and benefit advanced nations such as the US and Britain.
But this time it is different. Much of the current oil and gas surplus arises from shale oil and gas drilling in America by secondary drillers rather than the global companies such as BP and Shell. Most of these smaller producers are up to their necks in debt and as the oil price has fallen the risk of a cascade of bankruptcies has become very real.
The 2007-08 financial crisis had its origins in over-lending to homeowners who could never afford to pay back their mortgages. Among the sources of the current implosion are oil drillers, transporters, refiners and engineers who can no longer afford to pay off their bank loans.
Britain and its investors particularly are damaged by the fall in oil prices and other natural resources because of the domination of the FTSE 100 by the big natural resources and commodity giants that are suffering badly as a result of China’s sharp slowdown and plunging demand for raw materials for manufacturing and construction.
The impact on investors in Britain hoping to take their pensions this year or sell their ISAs or other investments is dramatic, with some £50billion wiped off values. Japan, which makes much of the hardware and high technology in Chinese electronic goods, is also being badly affected by events in the People’s Republic.
Markets do not always successfully predict recession. But the gloom has a habit of becoming selffulfilling prophesy. When share values fall, confidence evaporates and companies and consumers postpone investment and banks stop lending. Many of the big American banks have already revealed they are setting aside billions of dollars against potential losses arising from the oil markets.
In the eurozone, banks across the southern tier, notably in Italy, have seen large-scale share price losses, raising the possibility of government rescues and bailouts.
The speed at which global financial conditions have deteriorated has taken policy makers by surprise. The Governor of the Bank of England, Mark Carney, signalled all was not well earlier this week when he made it clear that a rise in British interest rates was off the table. PARADOXICALLY, the present convulsions in the City markets came as the Chancellor, George osborne, learnt that the jobless rate had fallen to its lowest level since the peak of the Blair-Brown boom in 2007. The same numbers, however, also show that earnings growth is stalling, and when that happens people have less money to spend and business and the economy do less well.
The toxic combination of events looks as if it could be deeply destabilising for us all. Far from partying on the ski slopes of davos, the Prime Minister and the Chancellor could well find themselves drawn into emergency talks on how best to restore confidence rather than enjoying plaudits for Britain’s economic recovery.