While 2016 has only just begun, it’s already set to be a year for the history books – at least where financial markets are concerned. The year began with five straight days of losses. And then, by day ten, Wall Street had officially experienced the worst start to a year in history.
What’s been causing this perplexing tumble? Here’s what finance students have learned so far.
Unpacking the causes of this current slump takes a global perspective. As you’ll soon learn while you study economics in Italy, today’s markets are often affected by activities overseas – and what happens in one country can have global ramifications.
That certainly seems to be the case with the current market turmoil. In the United States, for example, unemployment rates are at 5% and the Feds had hiked up interest rates in December – all optimistic signs that the economy has truly recovered from the 2008 crash. Why then are many American stocks faltering? The answer – many economics students believe – lies overseas.
In China, higher wages for factory workers have cut into competitiveness as many manufacturers turn to South and Southeast Asia instead. That industrial slowdown isn’t unexpected or unwanted – the country has plans to transition from a manufacturing-based economy to one driven by services and consumption. But some experts are wondering if that transition may be rockier than expected.
Officially, China’s growth figures are said to be 6.8%. But, unofficially, the answer might be even lower. After China devalued its currency during the summer, many economists are spooked. They’re worried that the world’s 2nd largest economy might be experiencing a downturn more serious than previously thought and that the current stock market dip is pointing to serious underlying problems.
Turmoil in Chinese stock markets isn’t the only reason that investors are worried about the health of the global economy. Another driving factor behind the current downturn is the price of oil, which has been tumbling steadily too.
As you’ll learn once you study finance in Italy, sometimes a crisis can be a simple matter of supply and demand. Too much supply and too little demand can flood markets and drive down prices as companies try to stay competitive.
So far, an abundance of supply and shrinking demand seem to be behind the current tumble in oil prices.
The problem might have its roots in the US shale boom. The boom created a fresh new supply of natural gas and helped double US oil production, which in turn drove out imports that needed to find new markets.
Not long after, the Organization of the Petroleum Exporting Countries (OPEC) decided to ramp up production too – flooding markets with an even bigger supply of oil. Some economists say that this market flooding is designed to shove out competition, since countries like Saudi Arabia can extract oil at a cheaper rate and thus drive other oil producers out of business.
So far the oil glut has been good for consumers, but bad for oil-exporting countries like Russia, Venezuela, and Canada – which have experienced slumps in growth and even outright recessions as a result.
Finding solutions to these tangled problems is proving to be difficult. Many top economists are unsure of where markets will go next, and how to stop the current tumble from falling even further. Japan has recently opted for negative interest rates, China tried to employ circuit breakers to halt trading when stocks fell too low. Other solutions put forward include injecting economies with “helicopter money” or simply accepting a “cleansing depression” to help bring markets back up. So far, there doesn’t seem to be a consensus on how to best approach the downturn.
Do you want to major in economics and finance while you study abroad in Italy?
What solutions do you think could help stabilize current markets?