1. Skip to content
  2. Skip to main menu
  3. Skip to more DW sites

Stock crash

August 5, 2011

Markets worldwide have slumped under a massive sell-off due to worries about debt in the eurozone and slow growth in the United States. But the global economy will keep growing, although more slowly, say experts.

Stocks economic crisis symbol
Stocks react with more volatility than real economic dataImage: Fotolia/flashpics

Just a few days after the United States narrowly avoided defaulting on its debt, stock prices worldwide took a sudden and brutal downturn. But experts say a dissatisfying economic outlook for sovereign debt in the eurozone also played a central role in the sell-off.

Despite this, economists believe the global economy is still growing, although at a slower pace than in the first half of the year. The downward spiral in stock markets doesn't necessarily mean a new recession is at hand, they say.

According to Tobias Knedlik, an economist at the Halle Institute for Economic Research (IWH), stock prices and real economic development are connected only by a "fairly weak" link. While stock prices are measured daily and are therefore volatile, real economic growth is measured in quarters or years, he pointed out.

The US Federal Reserve Bank
Although the US needs more stimulus programs, it must tread carefullyImage: picture-alliance/ dpa

"Stock prices are determined by the profit expectations for companies," he told Deutsche Welle. "The higher the expectation of profit, the higher the stock prices."

While stock prices are by their nature volatile, fluctuations currently being experienced are "uncommonly high," according to Knedlik. He added that the IWH expects "growth in industrialized nations will continue" at a weaker level than during the first half of the year.

Tight spot for the US

According to Ferdinand Fichtner, a macroeconomic expert at the German Institute for Economic Research (DIW), the economic setback Germany is likely to suffer during the second half of the year is "absolutely no cause for concern."

While Fichtner believes the US will be able to weather the coming months, he says German exports could be hurt if the US Federal Reserve Bank allows the dollar to inflate, making it weaker against the euro.

"I think that the high amount of debt the US has - both nationally and among private citizens - could lead to the Fed allowing a somewhat higher rate of inflation," he told Deutsche Welle. "That would be a way to reduce some of that debt, because it can be made worth less."

Spain protests
If Spain flounders, the European economic system may tooImage: picture-alliance/ dpa

But even as markets shrink away from the disappointing US economic outlook, Fichtner says there is little to be surprised about in real economic terms.

"The American economy simply hasn't reached a sustainable growth rate," he said. "Much of the growth we've seen in the past has been driven through very loose fiscal and monetary policy. And at least in terms of fiscal policies, the country now has to act carefully to avoid further increasing its debt. That means a significant economic driver is being removed."

Debt woes

With sovereign debt problems far from solved, stock market volatility is likely to be a fact of life for some time, Fichtner added.

Europe remains on edge in part because Germany and France agreed to talks with Spain on Friday in an effort to avoid the debt crisis from spreading to that country's central economy from peripheral Portugal, Greece and Ireland. Italy is also a concern.

Independent of the eurozone, Fichtner expects the US will be unable to deliver a genuine solution to its debt problems within the next two years. With Democrats and Republicans at each other's throats, unified fiscal policy is unlikely.

Frankfurt skyline
If the market turns its back on government bonds, the recession could be backImage: AP

"We're going to experience a tug-of-war over US fiscal politics at least until the next presidential election," he said. "It's going to continue, and that's not an environment in which one expects the US government will get a handle on its debt problem. The capital markets see that, and are right to be unsettled."

Breaking point

According to Joachim Scheide, head of the forecasting center at the Kiel Institute for the World Economy (IFW), the world economy is "certainly not yet in a recession." He placed blame for the current market instability at the feet of debt problems in Europe and the United States.

"The fact that the debt problem still hasn't been solved is the main problem," he told Deutsche Welle. "That's also what's driving the markets at the moment."

A loss of confidence in the United States' ability to reign in its debt would have "highly negative consequences" for the country, including higher interest rates, according to Scheide. But the real risk is that market could turn its back on government bonds.

"The fact that there is no solution here increases the risk that markets will become so mistrustful they'll cease buying government bonds," Scheide said. "If that should happen - it's not certain to, but it could - then we would most likely have a recession on our doorstep."

Author: Gerhard Schneibel
Editor: Ben Knight