There is sometimes a feeling that “the markets” are a kind of all-knowing beast, with trading based on forensic analysis of the latest economic and business signals. This week has shown, however, that investors are as confused as the rest of us. That is the only way to explain the extraordinary ups and downs, with reporters on the trading floor in New York saying they had experienced some of the strangest days they had seen in decades. A market “crash” can be explained, and so can a surge in prices, but volatility on this scale is very unusual.
The calculation the markets are trying to make is how serious the slowdown in Chinese growth is for the world economy. China is, after all, now the world's second-largest economy, and, although direct trade links to it from many economies remain limited enough, a hard landing in China would shake the world. For the moment this looks unlikely, with the Chinese economy more likely to slow to a growth rate of about 5 per cent this year than suffer some kind of collapse. In the accompanying piece Clifford Coonan assesses the outlook for China itself. Of course everyone will be watching the market there, with fears that further falls will follow if the authorities step away from supporting it.
Here is what to watch for in the weeks ahead, to judge whether the China syndrome can create more trouble for the world economy.
The US rate debate: The big central banks have injected wads of cash into their economies to try to revive growth since the crisis broke, in 2008. The expectation had been that they would start to unwind this stimulus as growth started to pick up. The US central bank, the Federal Reserve, had been expected to lead the way by increasing its key interest rate from effectively zero to 0.25 per cent in September. Now there is a question about whether it will proceed, a dilemma made all the more acute by this week's figures showing that the US economy grew by 3.7 per cent in the second half of the year. Without the market wobble, that would have been the green light for a rate rise. Now there is uncertainty. This " will they, won't they" debate will be a big factor in the next few weeks.
Emerging market hit: The fallout from China's slowdown has hit other so-called emerging markets – developing economies generally in Latin America, Asia and Africa – in a number of ways. Most obviously the falling demand from China for commodities such as iron and other minerals has hit the big exporters of these products – everywhere from Brazil and Mexico to Malaysia and even Australia. Russia and its neighbours have been suffering for some time because of falling oil prices. The devaluation of the Chinese currency has meant that many other emerging countries have had to let their currencies fall to remain competitive. The final complication is the risk that rising US interest rates pull investment out of these countries and back to the US, where the return will slowly increase. This has led to fears of an emerging-markets crisis – and emerging markets are now big players.
Ireland's outlook: There are pluses and minuses for Ireland from specific things happening. We gain from lower oil prices. The longer low interest rates continue for us the better. On the downside, low milk prices, due in part to lacklustre Chinese demand, are hitting our farmers and dairy sector. But the big issue for us is whether this all has any big implications for world economic growth and trade. Our economic forecasts are based on growth being maintained in the US and UK and picking up slowly in Europe. Any major hit to global growth would affect confidence here. This week we had a string of generally positive Irish economic figures. The economy created more than 50,000 jobs over the past year, unemployment is falling and retail sales, while bumpy, are well ahead of last year. We have some leeway if there is an international wobble. What we don't need to see is another international crisis that hurts trade and investment. Here's hoping.