Q&A: why are markets falling?

Here’s a Q&A on the market turmoil we’ve seen over the past few weeks, which you can also find on the Sky News website.

1. Why are markets plunging?

Good question: as ever with global markets there’s no straightforward answer, but here are three likely factors: first, the economy in the Eurozone is doing worse than many had expected; so you’d expect share prices, which have raced away in recent months, to come down. Second, with the Eurozone facing a possible recession, threatening to drag the rest of the world into a slump, and with China and other emerging economies weaker, it’s not clear who will play the role of global economic powerhouse in the coming year. Third, there are some who fear that the share price gains of the past few years are simply a temporary sugar high fuelled by central banks pumping cash into the system.

2. But the UK is outperforming the G20, isn’t it? So are we immune?

Fraid not. As a small, open, highly-financialised economy, Britain is highly sensitive to changes in the international economy – and nowhere more so than the euro area. Just over 50% of UK goods exports go to the EU, compared with just over 13% to the US and just over 4% to China. Indeed, economists think if there is a recession in the euro area that could cause annual UK GDP growth, currently more than 3% a year, to drop into negative territory.

3. To what extent has the Ebola outbreak contributed to growth and investor concerns?

It has certainly added to the sense of unease, alongside the rise of Islamic State, the growth of extremist political parties in the EU and the prospect of a UK referendum on EU membership. Though it is difficult to pinpoint precisely how much influence each factor has on confidence.

4. A core concern worldwide is low inflation. Surely weaker price increases is a good thing for me?

Well strictly speaking higher inflation tends to be good for debtors and bad for savers. But the worry here is less about investors and more about what low inflation is telling us about the growth prospects of the Eurozone. 12 of the 28 EU member states have zero inflation or deflation (falling prices). And falling prices (and wages) are usually a sign of an economy which is facing a pay cut, and struggling to generate growth.

5. The Eurozone looks to be heading towards recession again. Who is to blame? (Was thinking euro model, ECB, Governments, ECB)

For the time being, this is a different crisis to the existential crisis we saw a couple of years ago (where it looked like the single currency was about to break apart). But now the eurozone’s long-standing weaknesses (poor demographics, high public spending, unreformed labour markets) are coming back to haunt it. Those kinds of problems – as rife in France and Italy as other smaller, Mediterranean economies – will take years to resolve, and there is little sign politicians are getting any closer to doing so (certainly in France).

6. Germany is Europe’s biggest economy. Why is it now suddenly facing a downturn?

Partly because its neighbours aren’t doing all that well. Partly because it has been more affected than most by sanctions on Russia. Partly it has been affected by the relative strength of the euro in the past few years. But there are also complaints that its government hasn’t done enough to get growth going. The International Monetary Fund, among others, believes it should be spending more on infrastructure to help kick-start economic activity. See its recently-published World Economic Outlook for more.

7. Greece was the first euro nation to get a bailout during the debt crisis. Why is it still struggling when other nations such as Ireland have recovered?

Actually in some senses it is doing a lot better than expected. Next year, according to the IMF Greece will grow faster than any other Eurozone economy apart from Ireland. However, for one thing, unemployment remains eye-wateringly high. Second, and most worrying as far as markets are concerned, the coalition government looks weak, and could conceivably collapse in the coming months. That brings its capacity to exit its bailout programme into question. And is why Greek bond yields have risen sharply in recent weeks.

Though in reality, even at their current elevated levels they are still far short of where they were in the depths of the crisis.

All the same, there is little hope of Greece continuing to finance itself (eg going to the market to borrow, as it did earlier this year) on a permanent basis at interest rates of circa 9%.

8. What three measures/actions would you suggest to get the world economy moving forward?

As a mere journalist I would tend to leave such judgements to actual policymakers and economists. However a few ideas that have been suggested include: quantitative easing (eg money creation) from the European Central Bank – though that is fraught with difficulties, notably the refusal of the Bundesbank to co-operate. Clearly some euro members desperately need to reform their public sectors. But unfortunately there are no easy answers for the current malaise. Which is why markets remain so concerned.