Equity markets suffered their largest fall in months last week. Concerns over the US ‘Fiscal Cliff’, a change of leadership in China, continued debt problems in Greece and violence in the middle-east all contributed to the sell-off, which saw the ASX200 drop 2.8% for the week. In total, the Australian equity market has now fallen over 5% since October. This week’s LJ News has a look at why markets around the world are falling, and where they are headed next.
The poor week on the Australian share market was matched by its global counterparts. The Dow Jones Industrial index in the United States fell circa 2% for the week, primarily off the back of the ‘fiscal cliff’ issue in the US which is still unresolved. The ‘fiscal cliff’ relates to the upcoming federal spending cuts and tax increases due to come into effect in the USA on January 1, 2013. If these measures come into effect as currently planned, growth in the US is going to take a substantial hit next year. In all likelihood, unless the ‘cliff’ is avoided, the US economy will slip back into recession next year, pushing share prices down.
In Europe, the economic situation continues to deteriorate, with recent research showing that euro-zone gross domestic product fell during the quarter, officially placing the area in recession (defined as two quarters of negative growth). Share prices in Europe headed lower as a result, and may continue to do so. Not only have the economic and social problems affecting Greece, Portugal, Italy and Spain not been resolved, but ‘stronger’ countries like France, Germany, Holland, Finland and Austria are now also either in recession, or very close to it. Unemployment in the entire euro region has reached circa 11.5%, whilst in Greece and Spain, the unemployment rate is closer to 25%. Young people are suffering even worse, with youth unemployment approaching or exceeding a staggering 50% in these countries. These are depression level statistics, and throw cold water on the argument that the world economy is improving, or that there is any ‘pain-free’ solution to sovereign debt crisis which has plagued Europe the past few years.
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