Consequences of fear of recession
Tuesday, 28 October 2008
Syed Jamaluddin
GROWING warnings of global recession and the expectation of more interest cuts triggered turmoil on the currency markets and sharp falls on stock exchanges. The British pound fell to a five year low against the dollar as Prime Minister Gordon Brown indicated that Britain was likely to enter a recession. The euro and other high-yield currencies saw sharp falls.
On the stock markets, Japan's Nikkei share index closed down 6.79 per cent after Wall Street's Dow Jones sunk 2.5 per cent last Tuesday(21-10-08) while Europe's major markets were all down. Brown appeared before lawmakers and said the downturn need to be confronted with the same vigour with which govts have moved to safeguard ailing banks.
Britain's central bank governor said that the financial crisis had squeezed the amount of money banks would lend to consumers and companies, at a time when high energy and food prices were also reducing disposable incomes.
The prospect of a sharp economic slowdown raises the chance that the British central bank will again cut interest rates making sterling a less attractive investment than the euro or the dollar.
There were more signs of trouble in the emerging markets, with South Africa's rand coming to a six-year low against the dollar. The Reserve Bank of India cut its lending rate for the first time since 2004. The Prime Minister of India conceded that the nation will face temporary slowdown from the ripple effects of the crisis.
The turbulence on the stock and the currency markets came despite new attempts by the US Federal Reserve to restore confidence to the fragile financial system. In a bid to help troubled money market mutual funds, the Fed said it would make available up to 540 billion dollars to restore confidence in the financial system. The market for these assets, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks as the global financial crisis worsened.
The IMF forecast predicts sharp contraction in credit next year as the full consequences of the global crisis unfold. There will be a steep slowdown in credit growth in Europe next year. The growth of gross domestic product (GDP) will slump to 0.2 per cent in 2008 down from 1.3 per cent. The forecast for 27-nation European Union (EU) is that the growth in 2009 will be 0.6 per cent, down from 1.7 per cent.
Dubai would rely on domestic sources to solve the crisis. The impact of the crisis has been mild and manageable. Russia, Iran and Qatar would work on joint projects. The Organisation of Petroleum Exporting Countries (OPEC) slashed production. Algeria and Libya were the prime movers behind this strategy. Iran and Venezuela have thrown their full weight behind this move. Saudi Arabia was not in favour of cut in production. Airbus and Boeing, giant aircraft makers of Europe and US have chalked out plans to support their buyers to keep their schedule. The airlines are confronting mounting problems in obtaining funds from banks and lessors.
According to the Asian Development Fund (ADB), Asian economies may remain on course for robust growth next year in spite of the financial crisis and looming recession in Europe and US. The ADB, however cut its 2009 growth forecast for the region from 7.8 per cent to 7.2 percent. South Korea has announced an emergency plan of $130 billion to bolster its banking sector.
China has also announced steps to boost its property market and help exporters. The ADB Chief praised the authorities in the most open financial markets -- South Korea, Hong Kong, Singapore and Malaysia for confidence-boosting pledges, including guarantees for bank deposits.
Emerging market stocks, bonds and currencies suffered steep falls as the global credit crisis deepened amid growing risk aversion and increasing fears over the severity of a worldwide economic slowdown. Ukraine, Hungary, Serbia, Turkey, Iceland, Argentina, South Africa and South Korea were all hit hard. These countries are considered extremely risky because of the large amounts of debt their economies are carrying.
The stronger emerging economies of China and Brazil, which have built up large foreign exchange reserves and are considered more stable, were also hit. Alarm is also rising over the health of banking systems in some emerging markets as investors shift their focus from the developed world where central banks have taken action to address the financial problems.
Many nations were running large current account deficits and living off large foreign inflows. Now this is reversing and causing these economies' big problems. Argentina was one of the biggest casualties as its stocks tumbled 13 per cent. Brazil's stocks tumbled 6.0 per cent while Hungary and Turkey closed 4.0 per cent lower and China was 3.0 per cent down. We have discussed above the prevailing situation during the last week.
Thereafter, the situation has further deteriorated. World stock markets tumbled again on October 24. Futures indicated a sharp drop on Wall Street. It was down 550 points. German DAX index was down 10.76 per cent. French CAC was down by 10 per cent. Britain's FTSE was 8.67 per cent lower. Stocks in Asia fell for a third day Japan's Nikkei was down 9,6 per cent. South Korea's stock market also fell sharply. The Kopsi dropped 10.6 per cent. In Hong Kong, the Hang Seng fell 7.8 per cent. Funds are pouring out of emerging markets.
The sudden gloom over growth expectations is having the added impact of putting small economies and currencies under pressure. Investors are pulling money out of countries in Eastern Europe. Latin America will not only be hit hard but they may also default on debt. Even at 1.5 million barrel a day production cut by OPEC failed to stop oil prices falling amid fears of deep global recession. The best word to describe what is going on right now is panic.
East Asian leaders on October 24 agreed to create an 80 billion dollar fund to fight the global economic crisis. This agreement between South Korea, China, Japan and ten members of ASEAN(Association of South East Asian Nations) is the first major coordinated regional action This will be effective next June
Asian and European leaders meeting on October 25 in Beijing promised wide-ranging and effective reforms while the UN Secretary General called for quick and meaningful change. The 40-member Asia Europe Meeting (ASEM) pledged to undertake comprehensive reform of the international monetary and financial system. The European Commission (EC) President said that it would be possible to reach concrete and important decisions at the Washington summit on November 15.
As Bangladesh would not be immune to the global financial meltdown and its negative spillover, experts have suggested to set up a competent task force to assess the effects of the financial crisis and to design an adjustment package with both short- and medium-term policies and institutional measures. It was also suggested that as Bangladesh will get a political government in a couple of months.involvement of the politicians would be necessary. The prevailing situation needs urgent action.
The writer is an economist and columnist
GROWING warnings of global recession and the expectation of more interest cuts triggered turmoil on the currency markets and sharp falls on stock exchanges. The British pound fell to a five year low against the dollar as Prime Minister Gordon Brown indicated that Britain was likely to enter a recession. The euro and other high-yield currencies saw sharp falls.
On the stock markets, Japan's Nikkei share index closed down 6.79 per cent after Wall Street's Dow Jones sunk 2.5 per cent last Tuesday(21-10-08) while Europe's major markets were all down. Brown appeared before lawmakers and said the downturn need to be confronted with the same vigour with which govts have moved to safeguard ailing banks.
Britain's central bank governor said that the financial crisis had squeezed the amount of money banks would lend to consumers and companies, at a time when high energy and food prices were also reducing disposable incomes.
The prospect of a sharp economic slowdown raises the chance that the British central bank will again cut interest rates making sterling a less attractive investment than the euro or the dollar.
There were more signs of trouble in the emerging markets, with South Africa's rand coming to a six-year low against the dollar. The Reserve Bank of India cut its lending rate for the first time since 2004. The Prime Minister of India conceded that the nation will face temporary slowdown from the ripple effects of the crisis.
The turbulence on the stock and the currency markets came despite new attempts by the US Federal Reserve to restore confidence to the fragile financial system. In a bid to help troubled money market mutual funds, the Fed said it would make available up to 540 billion dollars to restore confidence in the financial system. The market for these assets, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks as the global financial crisis worsened.
The IMF forecast predicts sharp contraction in credit next year as the full consequences of the global crisis unfold. There will be a steep slowdown in credit growth in Europe next year. The growth of gross domestic product (GDP) will slump to 0.2 per cent in 2008 down from 1.3 per cent. The forecast for 27-nation European Union (EU) is that the growth in 2009 will be 0.6 per cent, down from 1.7 per cent.
Dubai would rely on domestic sources to solve the crisis. The impact of the crisis has been mild and manageable. Russia, Iran and Qatar would work on joint projects. The Organisation of Petroleum Exporting Countries (OPEC) slashed production. Algeria and Libya were the prime movers behind this strategy. Iran and Venezuela have thrown their full weight behind this move. Saudi Arabia was not in favour of cut in production. Airbus and Boeing, giant aircraft makers of Europe and US have chalked out plans to support their buyers to keep their schedule. The airlines are confronting mounting problems in obtaining funds from banks and lessors.
According to the Asian Development Fund (ADB), Asian economies may remain on course for robust growth next year in spite of the financial crisis and looming recession in Europe and US. The ADB, however cut its 2009 growth forecast for the region from 7.8 per cent to 7.2 percent. South Korea has announced an emergency plan of $130 billion to bolster its banking sector.
China has also announced steps to boost its property market and help exporters. The ADB Chief praised the authorities in the most open financial markets -- South Korea, Hong Kong, Singapore and Malaysia for confidence-boosting pledges, including guarantees for bank deposits.
Emerging market stocks, bonds and currencies suffered steep falls as the global credit crisis deepened amid growing risk aversion and increasing fears over the severity of a worldwide economic slowdown. Ukraine, Hungary, Serbia, Turkey, Iceland, Argentina, South Africa and South Korea were all hit hard. These countries are considered extremely risky because of the large amounts of debt their economies are carrying.
The stronger emerging economies of China and Brazil, which have built up large foreign exchange reserves and are considered more stable, were also hit. Alarm is also rising over the health of banking systems in some emerging markets as investors shift their focus from the developed world where central banks have taken action to address the financial problems.
Many nations were running large current account deficits and living off large foreign inflows. Now this is reversing and causing these economies' big problems. Argentina was one of the biggest casualties as its stocks tumbled 13 per cent. Brazil's stocks tumbled 6.0 per cent while Hungary and Turkey closed 4.0 per cent lower and China was 3.0 per cent down. We have discussed above the prevailing situation during the last week.
Thereafter, the situation has further deteriorated. World stock markets tumbled again on October 24. Futures indicated a sharp drop on Wall Street. It was down 550 points. German DAX index was down 10.76 per cent. French CAC was down by 10 per cent. Britain's FTSE was 8.67 per cent lower. Stocks in Asia fell for a third day Japan's Nikkei was down 9,6 per cent. South Korea's stock market also fell sharply. The Kopsi dropped 10.6 per cent. In Hong Kong, the Hang Seng fell 7.8 per cent. Funds are pouring out of emerging markets.
The sudden gloom over growth expectations is having the added impact of putting small economies and currencies under pressure. Investors are pulling money out of countries in Eastern Europe. Latin America will not only be hit hard but they may also default on debt. Even at 1.5 million barrel a day production cut by OPEC failed to stop oil prices falling amid fears of deep global recession. The best word to describe what is going on right now is panic.
East Asian leaders on October 24 agreed to create an 80 billion dollar fund to fight the global economic crisis. This agreement between South Korea, China, Japan and ten members of ASEAN(Association of South East Asian Nations) is the first major coordinated regional action This will be effective next June
Asian and European leaders meeting on October 25 in Beijing promised wide-ranging and effective reforms while the UN Secretary General called for quick and meaningful change. The 40-member Asia Europe Meeting (ASEM) pledged to undertake comprehensive reform of the international monetary and financial system. The European Commission (EC) President said that it would be possible to reach concrete and important decisions at the Washington summit on November 15.
As Bangladesh would not be immune to the global financial meltdown and its negative spillover, experts have suggested to set up a competent task force to assess the effects of the financial crisis and to design an adjustment package with both short- and medium-term policies and institutional measures. It was also suggested that as Bangladesh will get a political government in a couple of months.involvement of the politicians would be necessary. The prevailing situation needs urgent action.
The writer is an economist and columnist