WASHINGTON — Here's a look at why global stock markets are falling and what it might mean for American workers and investors.
What is causing the global stock market meltdown?
The stock market plunge was triggered by China's move two weeks ago to devalue its currency. Although Beijing said the action was taken in line with a policy change to make its exchange rate more market-driven, many investors and analysts took the announcement as an indication that the Chinese economy is slowing more sharply than previously thought.
Since then those fears have been intensified by economic reports from China showing a worse-than-expected decline in exports and industrial production, as well as a plunge in China's stock market, which has exacerbated worries about the Chinese government's management of its financial market and economy.
Investors have good reason to be concerned about a sharp slowing in China's growth. The Asian country is the world's second-largest economy, behind the United States, and has been a major engine of global growth over the last decade. China is the biggest trading partner for most countries in Asia, the fastest-growing region, and it is the world's biggest consumer of copper and many other commodities that are important to countries around the globe.
Some analysts also say the Federal Reserve is partly to blame for the accelerated fall in stocks since Wednesday. That's when minutes of the Fed's last meeting were released, and they showed the central bank remains deeply divided about whether to begin raising interest rates in September, as many had been expecting. That has added to the uncertainty and anxiousness in financial markets around the world.
What does the market plunge say about the global economy?
There is no question that global economic growth has been disappointing in the last couple of years. Major economies around the world, developed and developing, have generally been performing under expectations.
The European economy has struggled under the weight of debt problems in Greece and other imbalances on the continent. Japan remains mired in a two-decade slump amid weak spending and heavy debt. China's growth has slowed, helping further weaken other emerging economies such as Brazil and Indonesia. The United States has been a major driver of the global economy but has fallen short of the robust pickup that many had predicted last year.
What does this mean for the U.S. economy?
At this point, few experts are predicting that the market sell-off will derail America's six-year-long economic expansion. Analysts point out that fewer Americans today own stocks than during the 2008 financial crisis, and corporate America has a lot of cash in hand, as many companies had a string of record profits during the recovery.
Still, the pullback in financial markets is certain to weigh on business and consumer confidence, and that could translate into weaker investment, hiring and spending. And if China's economy continues to show it is facing a deep slowdown, that will fan fears, crimp global trade and further hamper many other economies, which in turn will hurt American exports and manufacturing.
How will the Chinese and the United States respond?
Chinese leaders are expected to take steps to quell the panic, most likely by injecting new liquidity into its financial system to boost lending and lift confidence in its shaky markets. Specifically, Beijing is planning to reduce reserve requirements for banks, making more funds available for loans, according to the Wall Street Journal.
The latest market turmoil also could push the Federal Reserve to hold off on its plans to raise its benchmark interest rate, and some analysts think the central bank could telegraph that before its next meeting in mid September as a way of helping calm markets.
How much risk is there of a global recession or an Asian currency crisis like the one in 1997?
Although currencies in Asia have been under pressure — and many are down significantly against the dollar — most analysts don't see a crisis like the one in 1997 when the currencies of Thailand and South Korea plunged and helped trigger a deep slump in the Asian region. For one thing, Asian currencies haven't come under speculative attacks, and many of these Asian economies today have considerable foreign-exchange reserves and stronger banking systems in place.
Nor are experts worried that China's market problems will trigger a full-blown global financial crisis like the Lehman Bros. shock. China's financial markets are fairly contained and not linked closely to banks and other financial institutions in the United States and Europe. Beyond that, many analysts believe that China's economic growth, while slowing, won't tumble into a hard landing as it transitions away from an export-dependent economy to one that is relying more on services.