Saturday, June 13, 1998 Published at 12:13 GMT 13:13 UK
Business: The Economy
Catching the 'Asian flu'
Trade is now global
Why should the economic recession in Japan, or the fall in Far Eastern currencies, affect other parts of the world like Europe or the USA?
The reason is that world markets are now so inter-linked that a recession in one part of the world quickly affects trade in all regions. And because financial markets are even more closely tied together by global electronic trading, a crisis in confidence in one market will quickly be transmitted to others.
What has hurt the Asian economies?
The Asian economies were the fastest growing in the world until the crisis hit last year. But the growth of countries like Thailand, Indonesia and South Korea was fueled by imported capital borrowed mainly in dollars.
When it became clear that the fixed link between the dollar and their currencies was not sustainable, curriences like the Thai baht, the Korean won and the Indonesian rupiah fell dramatically. This made the debts of the companies that had borrowed dollars much more expensive - and put brought many of the companies to the brink of bankruptcy.
Eventually the International Monetary Fund had to provide loans of billions of dollars to help stablize their currencies.
With domestic demand weak, they hoped to boost their economies by selling more abroad, using their cheaper currency.
This would further weaken the domestic economies, hurting the prospects for imports from Europe and Japan and plunging these countries further into recession.
Effects on Financial Markets
The weakness in Asia can hit the real economy in other industrialised countries, especially the manufacturing sector, by making it harder to export and providing more intense competition from cheaper imported goods from the Far East.
But it also hit financial markets which have been enjoying boom conditions. First of all, corporate earnings for some British and European companies are down because of the loss of their export markets, which has affected their share price.
The gloom can also affect financial markets more generally. Stock markets across Asia have had dramatic falls in recent monoths. If investors believe this is the end of the stock market boom globally, they may decide to switch out of equities entirely, into safer forms of investment such as bonds.
This could hurt confidence in markets generally. And falling stock markets could mean that the people who have benefited from the increase in stock values will feel less wealthy. In the US an extra $12 trillion of notional gains has been sitting in the accounts of the 30% of the population who own stocks If the fall in notional wealth makes them spend less, this could weaken economic growth in the Western industral countries. And it could also make people demand higher wages, raisiing inflationary pressures.
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