That the US economy is doing badly has been well known for sometime now.However analysts had been suggesting that while US growth was weak, the rest of the world, particularly some of the emerging market economies like China and India, continued to enjoy high rates of growth, which would prevent the world economy from being dragged down by the US economy. In fact it was felt that these economies would prevent the US from sliding into recession,or at worst make it a brief and mild one, as their increasingly prosperous middle classes increased personal consumption and offset the loss of demand from the US consumer.Figures released last week by the Chinese government showed that their economy grew 11% in the last quarter, which suggested that the analysts may have got it right this time, and that the rest of the world was de-coupling from the US economy.
Comments by the Chinese Central Bank on Sunday that the Chinese economy was not de-coupled from the US economy shook the already fragile confidence of world stock markets and they collapsed when they opened for trading, Monday. Zhang Tao from the People's Bank of China warned that China's exports would be badly hit if US consumption weakens.He went on to add that increasing imports from the EU would not offset the loss of exports to the US because they would import less from China once their own exports to the US declined.
The markets were expected to react negatively to these comments and Asian stock-markets opened sharply lower,right across from Australia to India.Stocks fell for most of the day, making it the worst January for markets in a very long time. So far this year, Japan's Nikkei has lost 13%, Hong Kong's Hang Seng 14% and China's Shanghai exchange almost 7%. Europe fared little better when it opened for trade and looked set for the worst one day fall since 9/11.
The markets are clearly not enthused by President Bush's economic stimulus plan, and are nervous about a potential recession in the US spilling over to the rest of the world.The US remains the most important market for most of these export oriented economies. The most important factor behind the sell-off continues to be the crisis of confidence in the world financial sector. Despite reassurances about the extent of their exposure to the US subprime market, people are not willing to believe these global institutions, and expect further losses to be announced.
Many analysts however sound upbeat over the prospects of sharply lower interest rates by the end of the year. They cautioned that the markets looked oversold and could bounce back sharply if the US Fed. cut interest rates aggressively in its meeting at the end of the month, or even before then. Whether Bernanke rises to the occasion or not remains to be seen.