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Source: ONE News -
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After a few weeks of relative calm, fears of a double dip global recession returned to haunt global markets this week.
This time the concerns seem to be coming from all corners of the globe.
Over the course of the week there has been data suggesting a slow down in the Chinese economy, signs of a faltering US jobs market and worries over the health of European banks.
Markets have shed around 5% over the week with the NZX hitting a one year low.
While the scope of the negative data this week has no doubt been a factor in this latest bout of nerves, there may also be other bigger picture concerns that are nagging away in the back of people's minds, as they consider just how robust the world economy is and how correctly stocks are priced.
Central to this is the ongoing debate amongst top economists and politicians about the merits of government's cutting back on spending and introducing tough austerity measures.
For governments in Germany, the UK, Spain and the rest of Europe, cutting spending is now seen as a top priority in order to maintain the confidence of money markets - which they need to keep tapping to fund their budget deficits.
In many of these countries the private sector will now be left with the burden of driving economic growth.
Proponents of the austerity measure seem to be arguing that firms will be more confident if government deficits are under control.
But some economists, in particular the United States-based Paul Krugman thinks this move towards austerity right now is fatal.
While Krugman agrees that big budget deficits eventually need to be cut, he feels the economic recovery is still far too fragile to risk pulling government support right now...and cites the Great Depression as proof of how spending cuts at the wrong time can make matters far worse.
It seems this kind of thinking has influenced policy makers in the US. President Obama raised concerns about pulling spending too fast at the G20 meeting last weekend, while some suggest the US Fed is preparing to significantly bolstering its balance sheet in order to further support the economy.
One of Krugman's biggest arguments at the moment is that money markets are doing anything but punishing the US government for racking up huge amounts of debt.
Over the last week investors - driven by these renewed fears of a double dip recession - have rushed back into the safety of US Treasury bonds.
Yields on US 10-year bonds have fallen well under 3%.
This is important because 10-year US bonds are often seen as a benchmark price for interest rates globally - including in New Zealand.
And this flight back to the safety of US bonds may well be what is driving changes in our interest rate markets this week.
A number of banks in New Zealand cut their key two-year fixed rate mortgages this week from around 7.3% to just under or around 7%.
The move, which comes only a few weeks after the Reserve Bank hiked its bench mark interest rate, will be welcome for some.
However it is also a sign that investor confidence in the world's economic recovery is still very weak and fickle and there are more bumps to come in the road ahead.
