The US has recently experienced significant falls in the value of shares. After 12 months of solid growth in share prices. Suddenly US investors are realising the economy faces underlying weakness.
Part of the sell off came from even bigger falls in China. With the US economy increasingly dependent on Chinese capital flows a fall in the Shanghai index causes a knock effect on American investors. The problem is that America’s huge current account deficit is being financed by mainly Chinese investors buying up US Securites. At the moment China is willing to keep up the purchase of US assets at cheap rates. This enables US interest rates to remain low. However if the Chinese were to stop buying US debt there would need to be a significant devaluation in the dollar and / or higher US interest rates.
However weakness on the Chinese stock market is not the only reason for Worries in the US. THe US housing market is very weak at the moment. Home building has slumped and house prices are starting to fall. Furthermore there are worries about the lending of bad debt to people with poor credit histories. Because of the weakness of both the US housing Market and US stock market there is a growing fear that the US may be entering into a period of recession by the end of the year.
Alan Greenspan says the threat of recession is now a “possibility”
“By the end of the year, there is the possibility but not the probability of the US moving into recession.” He has argued this week that corporate profit margins appear to be narrowing, indicating that a recent economic expansion has reached a “mature phase”.
Events in US and the rest of the world could also feed through into the UK housing market and economy.