Market Review: London January 2009 Commentary

At the centre of this co-ordinated collapse in global activity lies the slump that occurred in the middle part of last year in international capital flows. During the boom years of the mid 2000s, surging international capital flows had allowed many countries – and certainly the vast majority of the OECD – to grow rapidly on the back of easy credit conditions, falling savings rates and rising asset prices.

Countries as diverse as Denmark, Spain, New Zealand, the UK and of course the US each borrowed heavily from abroad in order to augment their low savings rates and so finance huge increases in consumption, property investment and in some cases even productive investment.

Unfortunately, now that these capital flows have abated or even reversed, this spend-thrift behaviour has been obliged to come to an end, most notably in those countries (and this covers three-quarters of the OECD) that possess significant current account deficits in their trade accounts, since without an easy supply of international capital, it is no longer possible to fund these deficits.

Unfortunately, with so many large rich countries trying to, in effect, save more, spend less and close their trade gaps, global trade activity has naturally been weak and export growth has been hard to come by, whatever the level of one’s currency.