How the financial climate affects Mr World

(CH) The panic gathering on the global stock markets coupled with real fears of seeing the world economy falling into recession again are not without consequences for the average citizen.

Not only are we affected morally at the influx of bad news - a psychological consequence – but those who have shares will also experience financial losses.

The current economic and stock market climate affects "Mr World”, according Degroof Bank chief economist Etienne de Callataÿ, who detected two major consequences for the average citizen: one financial and one psychological, but both linked to insecurity.

Virtual gains and losses

Clearly, someone who holds a stock portfolio, who has an investment fund wholly or partly invested in equities or who has taken out a life insurance policy backed by equity investments, sees their assets badly affected by the stock market crisis.

The market decline exceeded 20% between late July and mid August.

The losses may only be virtual but so are the gains when the stock markets go up but the investor does not profit (that is to say, he does not sell).

“As long as the investor does not sell, he hopes his assets will claim back the value” they had before the market crisis, explains Degroof chief economist.

A reasoning that has clear limits

But “this reasoning has its limits” he said, explaining that many investors want or need to sell part of their portfolio in order to honour significant expenditures such as property repair, children's education etc.

Others, such as retired US men, regularly sell a portion of their portfolio to ensure an additional monthly income.

These people are forced to sell at a loss, insists Etienne de Callataÿ.

Only savers who planned a distribution in the long run can expect to make a benefit sooner or later.

Playing squirrel

The current financial situation induces a psychological shock that affects both those who own a portfolio of stocks and those – more numerous – that prefer to keep away from the stock exchange.

Indeed, everyone is affected and enters a crisis of confidence, realising that financial and economic prospects are unfavourable and that there are also tensions on the employment front.

Faced with a fearful future, Mr World plays a squirrel and prepares for the difficult days ahead.

Second Round

From now on, all these people consume less and try to increase their savings in order to cope with future shocks – as does the investor who tries to restore his devalued actions.

Eurostat statistics make it clear: during the last financial crisis in 2008, the rate of household savings in the euro zone exploded in the third quarter of 2008 and peaked in the second quarter in 2009 before gradually declining again.

The vicious circle

Etienne de Callataÿ describes this effect as a “vicious circle”. But the second round of the vicious cycle is worse.

It occurs when companies, noting that reduced consumption has a negative influence on the course of business, sell their stock, slow down their production and reduce costs to keep their level of achievement up.

Lowering costs effectively means axeing jobs. And because of the growing number of unemployed, due to the growing climate of insecurity, the loss of purchasing power becomes net and citizens reduce their spending and consumption once again, sliding slowly but surely into a next infernal round.