29 Jan 2016
LBS economist says the real trigger has yet to be pulled
The UK stock market has fallen into a bear market, but it doesn’t spell recession yet, a London Business School economist has said.
Speaking to the Guardian and Forbes, Linda Yueh, Adjunct Professor of Economics, London Business School, said: “The UK stock market has fallen into a bear market, meaning that the FTSE 100 is down 20% since last April’s high. Worse, it’s at the same level it was a decade ago, so it has lost all of the gains since global central banks unleashed cheap money that has propped up equities since the 2008 global crisis.
“But, that doesn’t mean that further declines in stock prices, which may well happen, will necessarily trigger a recession.”
The UK stock market has never reached the heights of the US indices, which have seen the S&P 500 and Dow Jones establish numerous records in the past few years.
“As that cheap cash comes to an end, it shouldn’t be surprising that the froth is coming off some equity markets, including Britain’s”, Yueh says. Indeed, the global stock market, as measured by the FTSE All World index, has also fallen into a bear market. “And”, says Yueh, “that’s unlikely to be the end.”
The normalisation of US monetary policy has been compounded by a slowdown in the Chinese economy, which has already seen its stock markets crash twice in six months. China’s global impact has led to widespread declines in commodity prices. Oil prices continue to crash this year, down some 20% in just three weeks.
Yueh says: “That’s why the UK stock market is falling. Compared with other major indices, the FTSE has a larger exposure to commodity firms and around half of its listings are international companies, which are more sensitive to the world economy.
“But, that doesn’t mean that further stock market falls will trigger a recession. The stock market is deflating, but it was never as frothy as the American or Chinese stock markets. And for the UK, the hit to the market is coming from largely global, not domestic, factors.”
While the market may make painful viewing for investors, Yueh believes the real trigger has not yet been pulled.