The last few days have seen significant volatility in global stock markets. Here in Australia, the stock market had its worst two days since the onset of the pandemic.
It all came after the U.S. posted higher-than-expected unemployment numbers, raising concerns that the world’s biggest economy is slowing.
So what’s going on? Here’s what you need to know.
U.S.
To understand why global stock markets have dipped, we first need to understand what’s happened in the U.S. economy.
Last Friday, the U.S. Bureau of Labor Statistics revealed the unemployment rate had risen to 4.3% in July – its highest level since October 2021 – which was higher than expected.
There is an economic theory that unemployment figures can be a key indicator of an impending recession (a sustained economic downturn). This triggered a panic among some investors.
On Monday, the S&P 500 (the 500 biggest companies on the stock exchange in the U.S.) fell 3%, which was its sharpest daily drop since September 2022.
While this obviously matters to the U.S, it also impacts other markets around the world. This is because the U.S. is the world’s largest economy — there’s a saying that “when America sneezes, the world catches a cold”.
Since then, stock markets around the world have experienced similar drops. On Monday, Japan suffered its biggest daily drop in the market since 1987. It declined by more than 12% on Monday, although has since started recovering.
Australia
That drop was also reflected here in Australia. On Friday and Monday, the country’s stock exchange saw its biggest drop since the onset of the COVID-19 pandemic.
The 4% drop was the equivalent of $100 billion being wiped off the Australian stock market.
However, on Tuesday, the rapid sell-off seemed to have eased. In fact, the ASX 200 (which tracks the share price of the 200 largest companies listed on the exchange) was up slightly.
Recession?
The big question from the market downturn is whether a recession is coming in the U.S. and elsewhere.
A recession is generally defined as six months of negative growth in real GDP, the value of all goods and services produced in a country.
The Australia Institute’s Chief Economist Greg Jericho told TDA: “I wouldn’t be predicting we’re going to go into a recession, but certainly the risks are pretty high.”
RBA
Against this backdrop of economic uncertainty, all eyes have been on the RBA, Australia’s central bank, who sets the cash rate. This rate influences the cost of borrowing across the economy, so changes to the cash rate are often called changes to ‘interest rates’.
Today, the RBA announced that it would keep the cash rate on hold at 4.35%. It was 0.10% at the start of 2022.
RBA Governor Michele Bullock said today that the recent market volatility “didn’t factor into the board’s decision on what to do with interest rates”.
