Stock market investors are bracing for panic selling in New York and London before what is expected to be the first rate rise by the US Federal Reserve since 2006.
Fed boss Janet Yellen is expected to announce the increase in borrowing costs despite a slowdown in global trade and a slump in oil and commodity prices that has pushed inflation down to almost zero in most developed countries. Shares plunged on Friday and oil prices tumbled as the date neared for the Fed decision and investors became increasingly nervous of the impact on highly indebted emerging market economies.
The level of borrowing by businesses and governments in China, Thailand, Indonesia and Brazil has soared in the past decade. Borrowing by emerging market economies has more than quadrupled from $4tn (£2.6tn) in 2004 to $18tn in 2014, much of it in dollars, making them vulnerable to higher US interest rates.
Phil Shaw, the chief UK economist at fund manager Investec, said it was almost certain that the Fed would raise rates, but the question for markets was whether or not Yellen would signal further rises over the coming months.
More than £73bn was wiped off the value of UK shares last week after fresh falls in the price of copper and other metals was matched by a precipitous fall in the price of oil to below $38. London’s FTSE 100 closed 135.27 points down at 5,952.78 – its lowest level since late September.
The index of Britain’s top 100 companies is now about 6.5% below its level at the start of the year, unlike the German Dax 30 and the Paris Cac 40, which are well above.
A forecast from the International Energy Agency (IEA) that a glut of crude will persist for another year triggered panic selling among investors, already concerned that an interest rate rise will potentially destabilise the global economy.
The Bank of England is expected to delay a rise in rates following a string of weak inflation figures. Official figures on Tuesday are expected to show that falling oil prices and intense competition among food retailers kept inflation near zero in November, adding to a year of flat average prices.
Several Threadneedle Street policymakers have warned that the UK needs to begin raising rates to choke off cheap personal credit and rampant house price rises.
Unemployment data on Wednesday is expected to show a further strengthening of the employment rate, which is already at a record high, though skills shortages in some areas of the economy are likely to limit the extent of new hiring, according to some analysts.
A business barometer by Lloyds Bank showed that November saw growth in activity across all regions in England and a solid expansion in Wales. The Lloyds Bank regional purchasing managers’ index (PMI) found that employment rose across most regions, although the pace of job creation eased.
The fastest overall growth was in the east of England and in London, where a flood of new business fuelled robust rates of expansion. The survey found that the north-east returned to growth after a fall in October. “However, like the north-west, it underperformed compared to the national average,” it said.
But surveys of high street retailers have found that shoppers remain nervous of spending the higher wages they received this year, preferring to hunt for bargains. The British Retail Consortium (BRC) and Springboard measure of footfall in November was 2.1% lower than a year ago, with high streets and shopping centres suffering declines of 3.4% and 2.8% respectively.
The BRC said only retail parks succeeded in attracting customers, while high streets were hurt by the online buying frenzy on Black Friday. Only two regions reported positive footfall growth in November: the east Midlands and Greater London.
Recent declines in manufacturing and construction output have also indicated that keys parts of the economy are struggling, leaving only the services sector to maintain GDP growth.
Shaw said it was likely that the UK’s first rate rise since the financial crash would take place next summer, but several analysts have argued that low inflation and tepid growth will prevent the Bank of England from following the Fed until late next year.
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