Bill Jamieson: Investors fear 'double dip' recession

Published on Tuesday 25 May 2010 22:55

INVESTORS are increasingly worried that the world economy is heading for a slowdown, with a 'double dip' recession a real prospect.

Concern over country debt in Europe is the main driver. Markets fear that the second shoe of the 2008 financial crisis is about to fall. Governments resorted to huge borrowing to avoid a financial collapse. Now the austerity programmes adopted to pay down this debt could so weaken debt-laden economies that they will be unable to repay the loans.

America – the biggest borrower of all – badly needs a strong recovery in Europe to boost its exports, but many eurozone countries are now unlikely to see any growth this year.

Yesterday, the Dow Jones industrial Average plunged below 10,000. It has now fallen more than 1,300 points, or 12 per cent, from its April high. The FTSE100 Index tumbled to 4,940.68, down 15 per cent from its April high.

The euro dropped close to a four-year low against the dollar and oil fell below $68 a barrel at one point. Gold shot above $1,200 an ounce as investors fled riskier assets.

Particularly worrying were signs of stress in credit markets as investors fled to save haven short-dated US government bonds. The big jumps in volatility are eerily reminiscent of the flight from risk in the wake of the Lehman Brothers collapse. Markets are sensing real trouble ahead.