The world stockmarkets have had a torrid time over the past couple of weeks and more uncertainty lies ahead. The catalyst has been concerns over emerging markets and particularly about a slowdown in the Chinese economy, one of the engines of world growth. For the developed economies, it underlines again the difficulty of emerging from the economic crisis and the very thin line which policymakers must now walk.
While the latest market upheavals were set off by the decision of the Chinese authorities to allow their currency to devalue, trouble has been brewing for a while. Lower demand in markets such as China have been a key factor in falling commodity prices, notably affecting emerging markets which export oil, in particular. Russia is deep in recession and its currency, the rouble, has lost not far off 50 per cent of its value over the past year.
This emerging market nerves are adding to unease about the overall picture for global growth. The US and UK economies have staged something of a recovery – but plans to start increasing interest rates from rock bottom levels are fraught with danger. The euro zone economy has yet to return to any kind of decent growth rate, though there are some positive signs from the German economy. Ireland’s 5 per cent growth rate is very much against this trend, though a prolonged global slowdown would hold dangers for us, too.
The key message is that the fight to restore the global economy to some kind of normality is far from over. The US Federal Reserve Board now faces a dilemma in deciding whether to start the long march of interest rates from their current lows back towards normality. It had been expected to commence this in September, but a delay is possible. One concern is that after a period of extraordinary monetary expansion, central banks do not have many bullets left to fire to try to push economies forward.
The episode again confronts governments with the problems of boosting growth and living standards in the wake of the economic collapse. In the big economies, the normal pattern of rising growth, prices and wages has yet to take hold. The worst of the economic crisis may be past, but some big questions remain.