23 - 29 August 2001
Issue No.548
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Al-Ahram Weekly Online 23 - 29 August 2001 Issue No.548 |
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The market yawns
With global markets reeling from reverberations of a US economic slump, the rich are bracing for the worst-case scenario, writes Faiza Rady
Among analysts the consensus is almost unanimous: the bad times have indeed descended upon us. And when economic times are bad, profit loss predictions reverberate loud and clear; stock markets tumble, banks sink under the leaden burden of bad loans, businesses crash and unemployment soars. An unabated string of global stock market crashes heralded the current downturn, and since no plausible signs of a significant turnaround have surfaced, the market is unlikely to bounce back any time soon.
As economists gloomily forecast a global depression reminiscent in magnitude to the dark days of the Great Depression, deep market pessimism has taken root. In a concerted effort to mobilise against the potential damage, the US Federal Reserve met on Tuesday to announce the seventh interest rate reduction of the year. Although the markets picked up slightly in response, Wall Street on the whole barely flinched. "Trading conviction remains tepid," reported CNN. "Fed to cut again", announced CBS MarketWatch, quipping: "Markets yawn. Wake me when its over."
The most recent spat of crashes hit Wall Street late last week when the Dow Jones industrial average slipped 151.175 points to close at 10,240.78 on Friday. The drop follows grim profit fall predictions by veteran "old economy" transnationals like manufacturing heavyweight Ford Motor, retail luminary the Gap, and veteran computer manufacturer Dell, announced CBS MarketWatch.
Trailing the Dow Jones, the NASDAQ hi-tech composite index dropped 63.31 points, hitting 1,867.01. The NASDAQ thus entered the dangerous waters of the so-called bear territory -- which defines a "slump" for the hi-tech index -- by plunging below the 2000 edge.
A vicious cycle of all-too-familiar ills presage a market slump: profit falls, falling investments, lay-offs, reduced growth. Last year, the American economy grew by only 1.3 per cent, the World Bank reported, and that figure has fallen to a dismal 0.7 in the last quarter. As a result, earnings for the second quarter are expected to be the worst in a decade. Compared with last year, corporate profits in the US dropped by 17.3 per cent between April and June, the British weekly The Economist reported.
This will inevitably translate into a further retrenchment of corporate investments and yet more redundancies. In the US alone, the human costs are devastating. The American Labour Department reported that more than 900,000 workers have lost their jobs since last year -- casualties the likes of which have not been witnessed since the 1950s.
The bleak outlook doesn't end with Wall Street, as numerous other markets bear the brunt of US recession. Considered the dynamo of the global economy and branching out right, left and centre, the US has exported its plague. The list of ailing economies netted by US economic woes is growing. Over 40 per cent of American capital equipment is imported, and shrinking US demand has already dampened growth worldwide.
Tokyo's Nikkei index lost 69.48 points, closing at 11,438.87 -- its lowest point since December 1984. European markets followed suit, slithering along a downward trend. Germany -- renowned as the motor of the EU economies -- stumbled and fell with the US. Although Germany's exports to the US account for only 3 per cent of its gross domestic product (GDP), the slowdown of the American economy has drastically reduced demand in Germany.
Germany also exports a host of intermediate goods to countries that, in turn, export to America, explains The Economist. As a result of shrinking demand, German exports of intermediate goods have fallen by 12 per cent since last year. In the wake of reduced demand, the pernicious cycle of panic and stalled investments takes its predictable and inexorable course. Growth slipped from 3 per cent last year to an estimated 1.5 per cent in 2001. Industrial retrenchment also felled the German workforce: the German Ministry of Labour reported that unemployment levels hit 9.2 per cent in July, affecting 3.8 million workers.
It goes without saying that the buck does not stop in Germany. Poland, the Czech Republic and Austria all ship over one-third of their exports to Germany, reported The Economist. The extent of the damage is hard to assess, but it is evident that frailer economies will be more exposed to the market's turbulence.
If European market news is bad, the scene in South and Central America approaches the nightmarish. Heavily dependent on the United States' market and closely trailing its downturn, stocks south of the Rio Grande have plummeted. Already plagued by recession, but also groaning under their collective debt burden -- an estimated $706 billion in 1999, according to the World Bank, up from $42 billion in 1972 -- a number of Latin American countries are in danger of defaulting on their loans. A case in point is Mexico, the US's main trading partner on the continent. Mired in recession since last year, Mexico sank deeper into bear land this week -- with Argentina and Brazil closely following suit.
More so than other economies on the continent, the Brazilian economy is hurting. In the wake of the global stock market slump, the South American giant is tottering on feet of clay -- and the debt is adding fuel to the fire. With the Brazilian real pegged to the dollar, the country's debt has soared following a devaluation of the currency in 1999, and is expected to reach 53 per cent of GDP come December. Servicing the debt alone exceeds combined public spending on health and education. Add to such volatile conditions, extreme levels of income disparity -- with the richest 20 per cent controlling 67 per cent of the national income and the poorest a tiny 2 per cent and you have a recipe for disaster. Describing poor people's lives in Brazil as a "litany of horrors", author-activist Noam Chomsky writes that "cities compete for world championships in child slavery and murder of street children by security forces."
Bursting at the seams, Brazil is bracing itself for a social blow-up. No wonder then that the rich duck into bullet-proof cars and hide behind gated fortresses, buttressed by a private battalion of well-trained security patrols. For them, recession is a matter of hide and seek.
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