World Markets
Expecting Further Falls
By Nick Beams
19 April 2005
World
Socialist Web
World
stock markets are bracing themselves for further turbulence following
the sharp decline on Wall Street last week which saw the Dow Jones index
close at its lowest level for the year. The sell-off began on Wednesday
and accelerated as the market fell 191.24 points on Friday, the biggest
one-day decline for almost two years. For the week, the Dow fell 373.83
points, bringing the total decline for the year to more than 6 percent.
Summing up market
sentiment, the Washington Post noted that the bullish mood,
which had been seen at the end of last year, had now disappeared. Instead,
there was a sentiment of intense anxiety in which all news is
viewed negatively and not even strong earnings reports... can overcome
fears of a slackening economy, a bulging trade deficit, and a worn-out
consumer struggling to keep up with higher energy costs.
The sell-off was
sparked by adverse reports from some of Americas biggest companies,
coupled with fears that the US economy could be sliding into a recession.
General Motors has
stated that its year-end profits could fall to below $1 billiona
drop of $3 billion from its estimates as recently as January. Its operations
in North America could record a loss of more than $1 billion in 2005.
Shares in the company touched a 12-year low last Thursday amid rumours
that it could possibly file for bankruptcy. GM is desperate to cut former
employees health and other benefits, which are regarded by financial
markets as the chief obstacle to the restoration of profitability. Credit
rating agencies are on the verge of reducing GMs debt to junk
bond status.
But GM was not the
only problem. After reporting a net income of $1.4 billion5 percent
below the level expected by the marketIBM saw its shares plunge
by 8.3 percent on Friday. The fall extended across the range of technology
companies, which are most dependent on an expanding economy. The technology-dominated
Nasdaq composite index fell by almost 2 percent, bringing its losses
for the year to more than 12 percent.
Reports on the general
state of the US economy also contributed to the downturn. On Tuesday
it was announced that the US trade deficit had expanded by a further
$2.5 billion in February to reach an all-time high of $61 billion for
the month. No serious commentators any longer believe that even a sharp
fall in the dollar and a corresponding rise in East Asian currenciesespecially
the Chinese yuanwill lead to a significant narrowing of the trade
gap. This is because the main factor inhibiting the increase in US exports
is the lack of growth in major world economies. Large areas of the eurozone
are stagnantGerman unemployment has reached 12 percent, close
to its highest levels in the post-war periodand the latest surveys
from Japan show that business confidence was weaker than expected for
the first quarter.
Falling consumer
confidence in the face of rising oil prices and fears about the general
state of the US economy also contributed to the market downturn. The
influential University of Michigans consumer sentiment index dropped
to 87.7 in mid-April from 92.6 in March, compared with expectations
of a drop to about 91.3.
Other figures showed
that factory output fell by 0.1 percent last month, the first decline
since last September. Production of cars and home electronics fell in
March, indicating that consumers are putting off spending plans. Bank
of Tokyo-Mitsubishi economist Christopher Rupkey described it as worrisome
situation because once confidence takes a hit, consumers
go on a buying strike. There has been a sea change in expectations for
the economy and the culprit is rising energy prices at the pump.
The slide on Wall
Street formed the backdrop to meetings of the International Monetary
Fund (IMF) and the G7 meeting of finance ministers and central bankers
held in Washington over the weekend.
A statement issued
by the IMFs International Monetary and Finance Committee (IMFC)
forecast that global growth would remain robust in 2005
but warned that widening imbalances across regions and the continued
rise in oil prices and oil market volatility have increased risks.
There was a potential for sharper-than-expected increases in interest
rates and increased exchange rate volatility. The chief imbalance in
the world economy was the balance of payments deficit of the United
States, now requiring an inflow of $2 billion per day to sustain it,
and absorbing up to 80 percent of the available surplus capital from
the rest of the world.
Speaking in his
capacity as IMFC chairman, British Chancellor of the Exchequer Gordon
Brown outlined the measures needed to ensure orderly adjustment
of global imbalances. The committee had agreed to call for
concrete actions in all continents, fiscal consolidation to increase
national savings in the United States, greater exchange rate flexibility
as appropriate supported by continuing financial sector reform in Asia,
continued structural reforms to boost growth and domestic demand in
Europe, and further structural reforms including fiscal consolidation
in Japan.
But in the absence
of any concrete plans, the IMF prescriptions were virtually meaningless.
That did not stop
them being repeated in the G7 communiqué. The only difference
was that the G7 added the call for vigorous action to meet
the desired goals without, however, spelling out what it should comprise.
Speaking to a press
conference following the IMFC meeting, the funds managing director
Rodrigo de Rato said the risks to the world economy posed by financial
imbalances were increasing. He claimed that the central scenario
of the world economy was extremely positive. De Rato emphasised,
however, that the IMF was not only advising countries but calling
on countries to take action on those issues of global imbalances, insisting
that if policies do not adapt, do not change to react to those imbalances,
we run the risk of an abrupt correction by the markets at a moment in
which confidence, for different reasons, could evaporate or could be
reduced.
The clear signs
of desperation in the IMF chiefs remarks are a reflection of the
growing contradiction in the present situation. While the central
scenario of the world economy is extremely positive,
it will nevertheless lead to a major crisis if it continues to be played
out in the same direction.
De Rato concluded
his remarks by insisting that that the decision to take action was the
responsibility of governments and that right now there
are important economies in the world that face a special responsibility
regarding world imbalances.
But there is no
sign that any of the major governments have any real idea of what to
do, let alone the capacity to decide on a joint plan of action.