FTSE suffers worst quarterly fall since 2002 as fears rise of “Great Stagnation”

The FTSE fell 13.7 per cent since the start of July – the worst quarterly fall since Q3 2002 and the fourth worst in its history.

Markets across Europe fell, Frankfurt’s DAX and Paris’s CAC 40 both losing more than a quarter of their value over the past three months, the result of poor growth everwhere, the spread of the eurozone debt crisis, and a lack of global leadership. There were also warnings today the global economy faces a “great stagnation”.

On the quarterly slump, the Telegraph’s Angela Monaghan explains:

The last time the index fell more sharply was the third quarter of 2002, when the UK’s blue-chips were down 20pc in the midst of the dotcom crash. On Friday The FTSE 100 closed down 68.36 at 5128.48.

The poor three-month performance was echoed across key European markets, with the CAC 40 in Paris down 25.1pc over the third quarter and the DAX in Germany 25.4pc lower. In the US, the Dow Jones was on course to post a third quarter fall of 11pc.

Adding of the eurozone crisis:

The latest data from the eurozone showed annual inflation jumped unexpectedly to 3pc in September from 2.5pc in August, despite a worsening growth outlook. Economists had forecast no change.

Separately, economists at JP Morgan said they now believed the eurozone would slide into a recession in the fourth quarter of this year, which would last through next summer. “At first blush, the recession that we look to be sliding into now looks more like the 2008/09 experience,” said David Mackie at JP Morgan.

“Instead of a monetary policy shock, the region is experiencing a confidence shock – confidence in sovereign solvency – which is being amplified by a still vulnerable financial system.”

While on the global picture, the BBC’s Jamie Robertson points out:

Following all the violent swings in equity markets since the sharp falls at the beginning of August, the main markets have not really moved outside fairly narrow ranges: the FTSE between 5,000 and 5,400 and the Dow between 10,800 and 11,600.

The Nikkei, the Dax and the Cac 40 have been gradually trending downwards by about 6-10% over the past two months. This is almost entirely due to uncertainty over the debt crisis and the fate of the eurozone. However, even if there is no further bad news on that front, things are likely to get very active for individual companies.

Many of them, particularly ones that move in tandem with the economic cycle such as those in mining, retail, the auto sector and manufacturing, are trading on values that imply double digit growth.

And in tomorrow’s FT, Jamie Chisholm reports (£):

Global risk assets are set to end a miserable quarter in lacklustre fashion as recent rare pieces of good news on the US economy and eurozone debt crisis are submerged by the strong undercurrent of investor nervousness.

The FTSE All-World equity index is down 1.8 per cent, and commodities are lower, with Brent crude off 0.9 per cent to $103.04 a barrel. “Core” sovereign debt is in favour, softening yields. The Asia-Pacific region has had a weak day, dipping 0.8 per cent; the FTSE Eurofirst 300 is suffering a loss of 1.1 per cent; and Wall Street’s S&P 500 is off 1.3 per cent.

Traders can be excused a moment of reflection given the torrid time they have endured over the past three months. Worries about a slowing global economy and headlines relating to festering eurozone fiscal woes have regularly caused sharp lurches in sentiment.

Worryingly, however, the news may be about to get worse. Much worse.

Goldman Sachs warned today that the global economy is heading into a “Great Stagnation”, during which we would experience long periods of sluggish growth of about 0.5%, low inflation, rising and sticky unemployment, stagnant house prices, and lower returns on shares. Their economists calculate there is a 40% chance of this happening.

Having examined 150 years of macroeconomic history, Goldman found the probability of stagnation much higher after financial crises, explaining:

“Trends in Europe and the US are so far still following growth paths that would be typical of stagnations…

“Given those risks, whether these countries manage to avoid a ‘Great Stagnation’ by a pick-up in the recovery is likely to depend on policy being able to restore confidence and putting in place reforms that can decisively jolt growth.”

Further proof of the pressing need for the government to put aside dogma, follow the evidence and change their minds on Plan B before it’s too late.

See also:

• Look Left – “Six weeks to save the euro” warns Osborne – Shamik Das, September 23rd 2011

• The West’s lost decade has begun – Cormac Hollingsworth, August 18th 2011

• Rich List 2011: Charity down and inequality up – Duncan Exley, May 9th 2011

• Expansionary fiscal contraction and the emperor’s clothes – George Irvin, November 13th 2010

• Business confidence down most among SMEs – Shamik Das, August 23rd 2010