Q&A: Is this a temporary blip, or sign of even worse to come?
Published 25/08/2015 | 02:30
Global markets have taken a battering with little let up in sight; investors from Tokyo to Texas remain deeply concerned; the dollar is losing value and oil hit a six-and-a-half year low. Colm Kelpie analyses what's going wrong
Q: What's happening?
A: Global equities have suffered their sharpest falls since the economic crisis of 2008 as a sell-off in Asian markets is causing alarm and volatility across the world. The Dow Jones plunged at the opening by around 1,000 points, although recovered strongly in the following hours. Analysts didn't hold back in their language, with one trader describing it as "absolute carnage" and another saying it was "awe-inspiring".
Q: But what's causing it?
A: Essentially, China. Bloomberg estimates that since the world's second largest economy unexpectedly devalued the yuan on August 11, more than $5 trillion has been wiped from the value of global equities. Investors across the world are nervous at the prospect that the Chinese economy is slowing down. And they're concerned about the knock-on effect that this would have on a recovering global economy. It's thought that the immediate catalyst for yesterday's fall was that investors felt concerned by the fact that the Chinese authorities didn't do enough over the weekend to stem the sell-off, after falls in Shanghai and Hong Kong last week. The US dollar also fell as analysts became increasingly sceptical that the US Federal Reserve will raise interest rates next month, as some had anticipated.
Q: Why are financial markets so gloomy about the Chinese economy? I thought it was surging ahead.
A: China's economy expanded 7.4pc last year, which, by European standards is quite healthy. But that was the slowest pace since 1990. Repeated devaluations of the yuan against the dollar earlier this month made investors fear that the slowdown may be worse than Beijing is letting on, and that sparked uncertainty.
And markets hate uncertainty. A slowdown in China could hit demand for oil, which means prices would also be hit, which is actually good for the consumer. Oil prices have already been low because of a glut of supply.
Q: Should we be worrried?
A: Well, to put it mildly, it's not good. Whether it heralds the beginning of something much more serious remains to be seen. The experts have mixed views. The International Monetary Fund (IMF) believes that what's happening is not yet a crisis, but a necessary adjustment for China's economy.
In addition, the IMF points out that we can take some solace in the fact that while analysts are having doubts as to whether the US Federal Reserve will raise interest rates next month as has been speculated, the US economy itself is sound. A recovery - albeit fragile and tentative - is also taking place in the Eurozone. The IMF said the nervousness surrounding China is overshadowing this fact.
That said, a slowdown in China is unlikley to be good news in the long term.
It is a significant engine in the global economy, and a slowing down is likely to have an unpleasant ripple effect.