Hear come the Bears...
Economic risk cocktails are making market traders grumpy.
If you went down to the City at the start of the year, you’d have been in for a big surprise. Rather than having a picnic the stock market bears all had sore heads. The cocktail of risks referred to by our own Chancellor, George Osborne, clearly had an unwelcome effect. Uncertainty about the prospects for global growth, continuing falls in oil prices and beginnings of slowdown in China and other emerging markets, caused falls of more than 20 per cent across many global stock markets including the FTSE 100.
The hangover affected commodity prices too, as expectations of slower global growth affected likely future demand for resources from emerging countries like Brazil – which had been the engines of global growth. And then there is oil. Not only have fears of a slowing global economy (and hence a lower demand for the black stuff) affected prices, so too has the oversupply due to high levels of production. Brent crude dropped to $27.67 a barrel at one point in January, its lowest since 2003.
But what does that mean for us?
Falling stock prices affect our wealth – now and in the future. Pensions invest heavily in stock markets so when the indices fall, so too does the value of the pension fund. That can have implications, not just for pensioners’ incomes in future, but also the ability of pension funds to invest and for firms to raise funds to grow. Lower stock prices, mean firms have to issue more shares (and give away more of their future profits) to raise the same amount of money. That’s important because these investments and profits allow companies to expand and contribute to employment and economic growth in the UK. Lower oil prices should give us a boost. The rule of thumb is that a 10 per cent fall in oil prices boosts growth by 0.1-0.5 percentage points. We might not be feeling all the benefits just yet, but lower oil prices will affect transport, production and overall energy costs, helping to keep a lid on prices and so freeing up more income for us and companies to spend or invest. That should boost employment and economic growth and help the UK on its path to recovery.
But while the bears are still dealing with the most potent ingredient of that cocktail – global economic uncertainty – we will have to suffer with them.