Investors fear severe slowdown or recession
A warning note was sounded by influential UK fund managers on 21 January as share prices fell and stock markets tumbled around the world. The falls were fuelled by investors' fears of a severe slowdown or a recession, despite an attempt by President Bush late last week to prop up the US economy with a $140 billion (£72 billion) package of tax cuts and other measures (The Times, 22 January 2008).
David Cummings, the head of UK Equities at Standard Life, said: 'There's been persistent bad news. The question is now not whether there will be a recession in the US, but how bad it will be. There''s been a breakdown in the interest-rate mechanism as banks either won't or can't lend to each other, so central banks need to cut rates more aggressively to get the system working again'. (The Times Online, 22 January 2008)
In London, the FTSE 100 index lost 323.5 points to close at 5,578.2. This was its largest one-day loss since the 9/11 terrorist attacks in the USA in 2001. More than £77 billion has been wiped from the value of the blue-chip index, which has lost more than 13% of its value since the start of the year. (The Times Online, 22 January 2008)
Many firms have already reported lower profits and a worsening business environment. There is concern that the move by the US Federal Reserve to bolster markets with its biggest rate cut for 25 years may have come too late. The European Central Bank hinted it would not follow the US Federal Reserve by slashing interest rates and analysts said the Bank of England was unlikely to accelerate interest rate cuts. (BBC News Online, 23 January 2008)
Currently, changes in the business cycle particularly affect financial institutions. Few industries have experienced as many changes in their external environment in recent years as financial services. See the Times 100 case study on AEGON, which has had to address and overcome industry-wide problems and external changes to remain competitive.
The Times, 22 January 2007, print edition
Potential Study Questions:
- Who sets interest rates in the UK?
- Define the term 'recession' and explain what happens in the business cycle when a recession occurs.
- What actions can governments take during a recession to increase confidence?
- How can a business try to anticipate changes in its business environment?