Stephen Gunnion
14 November 2008
Johannesburg — GLOBAL markets continued to tumble yesterday as world leaders prepared for a meeting in Washington tomorrow to consider additional measures to stave off a prolonged global downturn as more companies face bankruptcy.
Confirmation that Germany had entered its worst recession in 12 years, the Organisation for Economic Co-operation and Development (OECD) forecasting global slump and an about turn on the $700bn US bail-out package sent Asian markets into a tailspin. Emerging markets, including SA, followed suit.
In another day of volatility:
World stocks fell to a two-week low;
Trade on Russia's Micex index was suspended after plummeting 17%;
Trade in Kuwait was halted as share prices fell for a sixth day;
Oil prices hit a 22-month low, with Organisation of Petroleum Exporting Countries considering output cuts;
Copper fell to a three-year low, before recovering slightly;
Japan offered the International Monetary Fund (IMF) up to $100bn;
China's annual industrial output growth fell to 8,2%, its lowest in seven years;
The OECD slashed economic output forecasts;
Australia banned naked short-selling permanently;
Wall Street opened firmer on hopes of more rate cuts;
JSE share prices fell as much as 4,5% in early trade; and
The rand weakened to R10,64/$, before recovering to R10,48.
While Asia's main markets plunged 5%, falls were smaller in Europe, despite more bad economic and corporate news.
The German economy shrank 0,5% in the third quarter, sharper than the 0,2% economists expected, putting Europe's largest economy in recession. "We are going to have to face up to a very difficult and long-lasting economic crisis," Deputy Economy Minister Walther Otremba said.
The UK's largest telecoms company, BT Group, said it was cutting 10000 jobs, or 6% of its workforce, to improve profitability. Semiconductor stocks fell after Intel, the world's largest semiconductor maker, cut its fourth-quarter revenue estimates by about $1bn due to falling demand.
The OECD predicted the US, Japan and the euro zone would all fall into recession, and said it was time for more governments to boost their economies by increasing spending, cutting taxes or providing stimulus packages. It said that gross domestic product in its 30-member countries was likely to fall 0,3% next year.
The US economy would contract 0,9%, Japan's 0,1% and the euro zone's 0,5%.
These are issues the Group of 20 (G-20) leaders will consider when they meet this weekend. Japan is expected to formally offer foreign currency reserves of up to $100bn to the IMF if it needs extra funds to assist emerging economies.
Reform of the global financial system is also expected to be discussed, although this may meet resistance from US President George Bush, who would prefer to "fix the problems we have rather than dismantle a system that has improved the lives of hundreds of millions of people around the world", according to White House spokesman Carlton Carroll.
In his speech to the G-20 leaders, Bush is expected to urge them not to abandon free-market capitalism as they seek to escape the international financial crisis, calling it the "best system" for delivering growth.
Nilan Morar, head of the South African trading desk at Global Trader, said while markets would welcome any positive developments at the G-20 meeting it was questionable whether these would be sustainable.
Market sentiment was affected by US Treasury Secretary Henry Paulson abandoning plans to use a $700bn bail-out package to buy bad mortgage debt from financial institutions, choosing instead to buy stakes in banks and encourage them to increase lending.
"The fact that they have got to revise it is significant in itself. There is a lot of concern around the success rates of the bail-out plans and the effect this is going to have on the US taxpayer," he said.
President-elect Barack Obama is also advocating a second fiscal package and help for car makers.
Goldman Sachs said that General Motors, the largest US car maker, needed at least $22bn in federal aid.
On the JSE, share prices closed 2,9% lower at 19095. On Wall Street, stocks traded out of the red in the early evening as hopes of a further cut in US interest rates helped counter a larger than expected jump in unemployment claims last week. The Dow Jones index was 0,4% lower while London's FTSE 100 was down 1,2% and the Paris Cac-40 was 0,3% higher.
With Reuters
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A very well thought out analysis, though I disagree with “South Africa should support France and Germany in pursuing financial regulatory reform”. While reform is obviously needed, it must be remembered that neither of the mentioned economies would exist in present form, or be any where near as powerful, without having followed the American model; a model not completely right and in need of adjustment, to be sure, but a basis on which the modern world has been built. The words of commenter ‘Mohagany’ as to the electric power required are an absolute : without the power to drive the engines of commerce, any nation so lacking will forever be relegated to secondary, at best, status.
These are good observations. Africa, especially Sub-Saharan Africa should really think of a super electric grid, Europe and Northern Africa is building a Mediterrean Ring electric interconnection. Talk of economic development without an adequate energy infrastructure is a non-starter.
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