World economy on a tightrope, warns Carney
The Governor of the Bank of England has ruled out a rise in interest rates amid fears of a global economic crisis. With memories of the 2008 recession fresh, should we be worried?
‘Private and public balance sheets remain stretched. The global environment is unforgiving. The world is weaker and UK growth has slowed.’
These were the words of the governor of the Bank of England, Mark Carney, yesterday. In a major speech, Carney explained why he would keep interest rates — which dictate the cost of borrowing and the income from savings — at a historic low.
Some economists had expected Carney to raise the rate and help savers. But yesterday, he said ‘progress has been insufficient’ to justify the risk to the economy and the increase to home-owners mortgage costs.
His words echoed those of UK Chancellor George Osborne, who warned earlier this month of ‘a creeping complacency’ and a ‘cocktail of threats’ to growth. Their tone reflected the gloomy economic news which has greeted the dawn of 2016.
One source of concern is the reduction in global demand for commodities, used as indicators of wider buying patterns. These include gas, iron ore and oil, now 70% cheaper than in June 2014. Yesterday the International Energy Agency (IEA) warned that oil prices would continue to be under ‘enormous strain’, particularly after sanctions against Iran were lifted.
Meanwhile, China’s government is trying to change an economy driven by exports and investment to one reliant on consumption and services. But its efforts have been accompanied by instability.
Trading on China’s stock market was suspended twice in the first week of 2016 alone. In 2015 the country’s economy saw its slowest growth in a quarter of a century, and the International Monetary Fund has predicted further slowdowns over the next two years. China has been vital in driving global growth in recent years, and Carney said yesterday: ‘China matters tremendously’.
These trends prompt concern that a global economic crash may be imminent. The global economy has recovered in recent years. But memories are clouded by the banking crisis of 2008, which began the deepest global recession since the 1930s.
We must prepare for the worst, say some. The major slowdown in exports is reminiscent of 2008. Meanwhile growth in the eurozone and Japan is minimal; Brazil and Russia — long tipped to emerge as significant economic powers — are in recession; and the problems in China are without modern precedent. Another crash is inevitable.
That’s a dangerous way to think, warn others. The think tank Global Trade Alert say the decline in demand is ‘very concentrated’, relevant only to a few particular products. Protectionism — governments fearfully shielding domestic industry from foreign competition by taxing imports — is the real problem. Planning for another crash is exactly what will cause it.
- Would you be badly affected if there were a global financial crash?
- Should governments now prepare for a crash?
- Watch the Crash Course Economics video in Become An Expert. Write a list of things we can learn from the 2008 financial crash.
- Write a list of potential problems facing the global economy, and produce a list of potential solutions to each. Write down how each of solution could make things better or worse. Then, as a class, discuss what you think global policy makers should now do.
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Q & A
- Doesn’t this just affect big business leaders?
- The global economy is very interdependent. If stocks fail in one country, it is likely to mean that businesses there cannot afford to invest their money elsewhere. This means people stop buying goods or services from abroad, which in turn threatens other countries. When people stop spending, others stop making money — and this is likely to lead to job losses. That can, in turn, start the same cycle all over again.
- But why would I care if someone loses their job? I’m still at school.
- The knock-on effect could have an impact on you in years to come. If people lose their jobs without being replaced, it creates more competition for jobs that remain. Workers in employment then have to work more, or accept lower pay, to justify their position.
- Low interest rates make it easier to borrow money, as they require less to be paid back. Mortgages — where a bank lends money secured on property to allow people to buy a house — are the most significant source of borrowing for many households.
- Money is placed in savings accounts to increase in value by generating interest. But low interest rates mean the increase is minimal.
- Historic low
- The UK’s interest base rate has been at the all-time low of 0.5% since March 2009, dramatically reduced after the 2008 financial crash.
- The IEA says supply is likely to remain 1.5 million barrels above demand throughout 2016.
- According to The Financial Times, Iran has 50 million barrels of oil in reserve, which are already being shipped to buyers in Europe, and is preparing to order the production of 500,000 more barrels of oil each day. The increase in supply is likely to drive the oil price down further.
- Slowest growth
- China’s government has an official growth target of 7%. It says the figure was 6.9% last year, but some outside observers believe this may be inflated.