Shenanigans on the international stock markets


Bulls and Bears. Tigers and Crunches. Listening to experts analyse the state of the global economy can sometimes be about as rewarding as trying to see through mud. Amidst all the talk of turbulence on stock markets around the world at least one thing is clear. Economic growth has slowed down considerably and will continue to be sluggish for some time.

Looking back, economists are able to chart a risk-strewn path from the more staid eighties to the increasingly neurotic nineties. The most prominent starting point is with the emerging markets in Asia, home to the so-called "Tiger" economies that in the end turned out to be embarrassingly toothless.

There was a time not so long ago when these markets, including Malaysia, Thailand and the Phillipines, recorded very strong economic growth rates. This capacity for growth was bolstered by a veritable stampede from overseas investors. With interest rates falling in the west at the time, it had become increasingly difficult to get a return on investments there and eastern markets proved an attractive option. The investments, which included pension and hedge funds, were highrisk, but, if they worked out, there would be high returns.

The big investors were to be disappointed. A lot of factors - increased public spending, property slumps, bad banking decisions and in some cases corruption - eventually led to huge currency devaluations in the middle of last year. From Thailand to Indonesia the currencies tumbled. Last November, the boss of one of the biggest brokerages in Japan, Yamaichi Securities, tearfully announced its collapse. Inevitably, the situation began to have an impact outside of Asia. According to Mr Dermot O'Brien, an economist with NCB Stockbrokers, "the international markets began to get jittery with money being taken out of Asian markets". At which point what he calls the "capital flight" began to spread.

Russia was one of the first casualties - as could be seen from the queues of traumatised customers outside Moscow banks recently - while Latin American countries, notably Brazil, have now fallen foul of what is known as the "contagian effect". The upshot of all of this has been a correction - that is a decrease - in global stockmarket prices. This has been welcomed by some who had expressed concern about the "irrational exuberance" in the markets up to then. However, the effects of this correction and the financial turbulence that began in Asia, has bigger global implications that were initially anticipated.

Economists talk about the "wealth effect" in the US where there is much wider spread of share ownership than in Ireland. (Although here certain pension fund owners and those availing of shares offered after the demutualisation of some building societies have been affected).

Meanwhile, just over half of all Americans boast either direct or indirect ownership of shares. "Anyone who holds stock has taken a hit in terms of their net worth," says Mr O'Brien of the US situation. This will result in a tightening of consumer belts and a slowdown in terms of national economic growth there. With globalisation, economies are so interlinked that a slowdown in the US will inevitably be mirrored in Europe.

Another consequence of the current economic situation will be an increase in competitive pressure on the global economy. It is an economy which is rapidly deteriorating with almost 40 per cent of countries currently experiencing difficulties.

As a country operating in a truly open economy, experts predict that Irish exporters will be undermined by the weaker external markets.

According to Mr Jim Power, economist with Bank of Ireland Treasury, Irish exporters have had it relatively easy over the past few years. "As the UK and European economies experience a slow down, selling into these important markets will become more difficult," he says.

The way out of the slump for a lot of the former "tigers" will be through increasing their exports. With currencies that have been devalued by up to 50 per cent, they are now able to compete more aggressively, selling cheaper goods on world markets.

In terms of investment plans, anyone undertaking such projects will think more carefully in the current climate. And "consumer confidence will be undermined to some extent by negative headlines of falling equity and the possibility of global recession", says Mr Power. Businesses could also be affected by a credit crunch, or what some describe less dramatically as a credit tightening. Some European banks have become exposed by the recent volatility and have had to make bigger provisions for bad debts.

This may lead to banks making it harder for borrowers to access funds, which in turn has negative implications for businesses, many of which rely on access to credit.

There are two schools of thought on the future economic outlook for Ireland. Most agree there will be a significant slowdown in line with global trends, what differs is what that will mean for the country.

Jim Power believes the slowdown is "desirable". "The current growth cannot be sustained," he says. "The economy would explode." Meanwhile, the doom and gloom brigade opine that we are headed for a collapse and, in what is a worst case scenario, a recession as the economy over heats. What is certain, however, is that fiscally things are set to slow down. Here's another certainty - experts will continue to fall out over what exactly this means for the Irish economy.

Lexicon of the Global Economy

Stock market correction - a fall in stock prices.

Credit crunch - an inability of the banking sector to supply credit which means borrowers cannot get access to funds.

Bull market - a market where share prices are going up on a consistently and are expected to continue to rise.

Bear market - where prices are falling on a consistent basis and the expectation is for a continued decrease. Emerging market - a market which has not a fully developed economic or financial system, for example Latin America, Eastern Europe, China.

There will be no Business 2000 next week because of the school mid-term break.