Is America about to enter a recession and take the world with it? Yesterday the pound was on track for its longest losing streak in a year as markets once again began to fear a US recession. The week started with what looked like the bursting of a tech bubble. Japan’s Nikkei dropped by 12 per cent in a day – its largest fall since Black Monday nearly four decades ago. But by Tuesday morning, stocks had recovered 10 per cent and markets looked to be steadying while the jittery hands of investors began to hold firm.
Are we out of the woods? Not quite. A leading Wall Street Bank – BNY Melon – this morning warned that global markets would be in turmoil for ‘months’. Earlier in the week, Japan’s share price falls were followed by some brutal sell offs in the US and Europe, with the microchip giant Nvidia seeing the worst of it: sales wiped out most of the gains on European markets from the past few months. As the week wore on, markets recovered some of those losses and things looked to be stabilising. But the week is ending with a renewed sense of fear.
Sterling fell nearly half a per cent this week and it looks like this will be the fourth declining week in the pound’s value in a row – the worst consecutive run since September last year. This hasn’t been helped by the Bank of England’s decision to cut interest rates last week (a move welcomed by many).
The FTSE 1000 dropped more than 1.2 per cent yesterday while major markets in the EU finished up about 1 per cent lower, too. Analysts at JPMorgan raised their predicted likelihood of an American recession from 25 per cent to 35 per cent and said there is a 45 per cent chance it will happen by the second half of next year.
But what caused the fears this week? US job creation data, which came in much lower than expected – with just 114,000 new jobs added to payrolls. This was then compounded by the unemployment rate spiking at 4.3 per cent which, as Kate Andrews wrote on Coffee House, is what seems to have caused fears that positive US growth forecasts for this year now look far too optimistic. However, there was better news from across the pond: US benefit figures yesterday showed claims for joblessness benefits falling at their fastest pace in nearly a year. This reassured investors that things were perhaps not as bad as they seem. The Dow Jones average of industrial stocks rose half a per cent at the open while the S&P 500 rose by 1 per cent. A mixed picture.
There’s one man who might have seen this coming: Warren Buffett. The Berkshire Hathaway boss has drawn attention in recent months for the mountain of cash (as opposed to stocks) held by his fund. The firm’s holdings of cash and treasury bills have grown from $189 billion (£150 billion) to $277 billion (£220 billion) while it halved its holding in Apple. Buffet’s cash pile is so enormous that he could buy McDonald’s and have $80 billion (£63 billion) to spare. Did the ‘Oracle of Omaha’ predict the future? Given he grew a similar (though smaller) pile in the mid 2000s, it doesn’t seem like good news for stock market investors.
If those of us who aren’t economic oracles have learned anything this week, it’s that the economic picture is mixed. Some economists are calling for calm – pointing out that the staggering gains in tech stocks over the past few years were probably overvalued – while others say the worst is yet to come. What’s clear is that another wave of economic uncertainty has hit, which will have consequences – especially for Rachel Reeves. The Chancellor’s plan for growth is heavily pinned on making Britain a hub for investment again, but that seems unlikely when the leaders in the field are fleeing investment for the security and – low rewards – of cash. And fears of an American recession will not help forecasts at home. Those wondering why Reeves has seemed unable to move on from her Tory-bashing campaign mode have their answer.