Introduction
No any other time in the history of human beings has the world experienced a large economic development and a creation of wealth as the period between the 1990s and the year 2005. Every sector of the economy was experiencing huge economic development, and each country was experiencing the creation of thousands of jobs. The stock market a rose, financial assets were performing well and everything looked well. Most institutions such as Superannuation invested in the stock market and various financial assets which were generating profits. This is because they expected the member’s funds to have a positive return and increase the value of the fund. However, things started becoming unpredictable and erratic because of the financial crisis that hit the world. The stock market and other financial institutions started reporting a downfall in returns something that affected most operations.
The events of financial and capital markets transformed various economies of the world. They affected almost every sector by lowering the rate of economic as well as financial activity worldwide. It has also affected the level of consumer wealth on a huge margin, also leads to complete failure of some major business mainly in developed nation. America put large emphasis on credit, but this should be used wisely. Credit mainly used to start or expand a business, which helps to create much job in the economy and leads to welfare. But in the last decade most of the credit was unproductive, unchecked and go beyond control.
Various loan incentives influenced borrowers to pursue difficult mortgages with the expectation that they will refinance it very quickly. Expectation hardly matches with reality. Rise in interest rates and continuous decline in housing price makes refinancing a more difficult task. During the crisis initially the prices of certain commodities and especially the price of crude has gone up. Price of Crude has touched height of $147. Then it has come down to $ 28 at one point. High volatility has caused fear in the mind of the investors. Even if everything is proper there should positive sentiments to keep the economy in the growth tract. Sentiments alone can keep the prices high due to speculation. Now it is agreed that the boom of 2004-2007 was not completely of an economic boom rather the speculative element has contributed to it. When the sentiments were down and greed was given way for fear and ended up in crashes of financial markets.
Reasons for Decline of Superannuation Assets Value
Global financial crisis
Current financial crisis which leads to a complete breakdown in the global landscape of the economy, affected almost every sector of financial system hampered the growth of most countries. Banks were mainly lending to those firms that did not have the capacity to pay back their loan which is the main reason behind the crisis. As a measure against it the Federal Reserve decreased their interest rates. At that period of time export reduces, consumer spending also falls at a huge margin which implies decline in the level of inflation.
The financial crisis has hit the Australia in seven areas which include dollar exchange, bank operation, real estate development, tourism, oil production and private and public income. But this effect will gradually disappear if the other side of the recession is considered i.e. the falling trend in inflation. It is very much important to reduce the level of inflation in Australia to bring stability in the economy. The reduced price of construction material leads to lower price of the real estate. Again recession will cause reduction in price of almost all products. As dollar will recover, it will lead to increase in the value of Australian currency. It will definitely improve the standard of living of the Australians. Mainly fluctuation in the dollar is the main reason behind the increase in inflation rates in Australia. Most superannuation funds also invested in foreign asset with the expectation of increase profits. But with the financial crisis many banks withdraw their money, caused a severe crisis. The oil sector was also very much affected, where price was USD 148 per barrel in July 2008 but reduced to USD 40-50 per barrel. As markets are closely attached it leads to decrease in the total and the personal level of income rates, which in turn reduces spending rates including both consumption as well as investment.
This global recession has made the growth rate stagnant for the entire economy. The credibility of financial sector declined at a huge margin. Investors loose their confidence in the economy as the real sector is subject to a high level of risk. According to the IMF reports the world economy should grow at 3.7% in 2008 and 2.2% in 2009, 2% less than its July forecast for 2009. However, the economy achieved a growth rate of 5% in the year 2007. (Topcu. June 17-19, 2009)
Capital flow
In case of emerging market economies the private capital flow shows a downturn path. In 2007 capital flow was $890 billion, in 2008 it reduces to $ 390 billion and in 2009 it again reduces to 140 billion. But according to Institute for International Finance it will increases to $375 billion by the end of 2010. (Cline. June 23, 2009)
Global Trade and Investment
Global trade and invest level is very much affected due to the financial crisis, it reduced in a wide margin. According to the IMF report in 2008 the global trade volume were expected to grow by 2% but in 2009 it reduces by -2.8%.( Topcu. June 17-19, 2009) it has hugely affected mainly the export based companies, where the level of foreign investment reduces and companies mainly depending on domestic factors for their survival.
Consumer Confidence Affecting US Economy
The stock market in the Australia impacted consumer confidence wherein most consumers have fears in spending and this event is critical in keeping the world’s biggest economy in gear. The investors are reported being rattled when consumer spending stokes the Australia economic output. The status of consumer spending becomes worse than expected as it plunged to a record low stressing that consumers are becoming more pessimistic. The events alarmed the Australia industries and most of the players are expecting a more modest decline. It impacts the financial crisis elevating difficulties in consumer spending. Business condition and labor market are becoming less favorable to consumers and their outlook on earning and inflation soured. Australia consumer spending can be observed in housing industry as the prices of houses sank to new lows. The government already had series of actions to stabilize the economy due to recession but still their actions are still not enough. The consumer spending continues to plunge and business condition is worsening the job market as well.
The decline in consumer spending was driven by worsening business conditions and deteriorating job market while the economic condition continually weakens. Economists believed that confidence in consumer spending shattered and most actions introduced by the government in stabilizing the financial markets are failing and don’t give any reassurance to consumers. The crisis in consumer spending deepens the recession and people are spending less.
Consumer confidence is essential in the economy of Australia because it drives seventy percent of economic growth. The consumers are uncertain with the economy and they buy less and economy slow further. The Index is a lagging indicator and it follows the trends of economy. Unemployment is a lagging indicator and the consumer confidence index is being monitored by stock market analysts and investors. They used the index to get an idea about the behavior of consumer spending. In the current index, the trending is downward and this means those stocks will probably go lower as well. If in case, the confidence is too high, then the demand could trigger inflation that could elevate the interest rates of Federal Reserve. High interest rate elevates the value of Australia dollar that could reduce the exports and make the imports more affordable. With the recent consumer confidence index, it has downward trending and probably it will continue to trend downwards in the near future following the employment economic indicators and GDP. Among the elements in consumer spending is the price of energy wherein as it continues to climb, it takes bigger effect to consumers’ budgets. Sustained slow down in consumer spending could certainly push the Australia into recession. In the event, consumers are likely to postpone large spending and most of their earning goes for gasoline and home costs. For the coming months, analysts see rise in non cyclical or defensive stocks (Consumer Confidence Drops, 2009).
Consumers’ budgets are affected by increasing energy costs and stock investors noted that it has long term damage to economy. Consumer confidence dropped indicating that current business conditions and the labor market is getting worse and consumers have negative outlook with the economy. Banks increased their interest rates according to inflation expectations which directly hit the interest rates in mortgage, loans, and savings which elevate the expected supply of money. In order to maintain the real return, nominal rates in the Australia must also rise. The interest rate is highly correlated with the Federal policy and their target is to lower the interest rates to drive down the long terms interest installed in mortgage, loans, and savings. Stock market and consumer sentiments are related and expected changes in consumer confidence can directly affect stock prices. Consumers interpret the changes in stock indexes as indicators of future income changes.
Stock Market in the Australia
The economic data and job numbers were actually worst than what the analysts forecasted and didn’t motivate the investors in taking their chances on stocks. Unemployment rate continually rising and even banks are struggling in the industry including their concerns with superannuation funds that intensifying the market’s uneasiness. Uncertainties in stock market affect the financial system and keep the investors out of the market where even small advances have been difficult to maintain. Analysts believe that among the influential factors affecting the stock market is the banking system because most banks are experiencing loan losses due to recession (Stock Market Needs Certainty, 2009). Financial stocks slumped as the government still lacks clear solutions to easing the housing crisis and unlocking credit (Cary, M. K. 2009).
Most investors suffered in the market as a result of their unwarranted expectations and these expectations had fuelled speculative highs that market had reached. Their expectations greatly damaged the economy and to some extent new government themselves trigger the collapse of market. The Australia must have policies that will control speculative capital flows and stall speculative attacks on currency and stock market
Unemployment
Unemployment could be burdensome to the economy because it incurs potential losses in outputs. But the monetary loss is not the only consequence of unemployment. Nonmonetary consequence of unemployment could be more costly. Some people may endure unemployment because they have enough savings but there are people who become frustrated and dwell in despair. This primarily brought about by issues of self-worth in which an unemployed person may think of himself less valuable in the society for being unable to support a family. According to research, unemployment is related to suicides, crime, mental illness and other problems while severe unemployment results to despair, breakups in families as well as political unrest (Tucker 165).
The workers can be considered fuel of the economy since they help in the production of goods and services. But there are situations wherein workers may lose their jobs and become unemployed. Various factors can result to unemployment. Seasonal demands for goods and services for example mean seasonal demand for workers. Although, there are cases wherein it may be the individual’s decision not to look for a job, there are also those who cannot find one despite persistence in looking. It shows however that the highly skilled and educated individuals are more marketable and thus they are more readily hired. It is therefore important to place importance on education as well as training so that unemployment and its consequences would be avoided.
Inflation
Inflation has almost doubled due to the financial crisis. At that time another bubble was created following the housing bubble and it was the commodity price bubble. Many countries mainly small developing countries are about to face another crisis. Mainly the price of oil and the price of food item increased rapidly. The price of oil increases from $50 to $140 from 2007 to 2008, which implies larger share of spending in gasoline, which reduces the growth rate in oil importing countries. (Global financial Crisis: implication for South Asia. October 21, 2008) In India the inflation occurs due to the increase in oil prices. On the other hand wealth flows in the oil producing countries. In countries like Afghanistan, Sri Lanka, Pakistan, Nepal the increase in food price had a greater impact rather than the fuel price increase. Various South Asian countries witnessed the increase in the price of staple food, 12% in India and 83% in Sri Lanka. (Global financial Crisis: implication for South Asia. October 21, 2008). But at 2008 the production of staple food increases which implies the falling of staple food price worldwide. At that period oil price also decreases to $70. The combining effort of lowered food and oil price leads to reduce the inflationary pressure almost in every South Asian country except Pakistan. Another reason for price inflation is falling is that the demand for goods, services is slow. This situation encourages the consumers to hold back their spending as prices are expected to fall further. It my cause a deflation in the economy which further discourage spending.
Conclusion
Financial market was fully shattered and this accelerated devaluation assets in superannuation. People loose their confidence from the economy thus selling of their financial assets. Number of job cuts increases day by day. It is very tough to recover world economy easily. Many other effective actions should be taken to bring back consumer confidence in the economy, support demand and reduces the level of unemployment.
References
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