Shares are tumbling, forecasts are gloomy, jobs are lost. Make no mistake, bears are at the gate

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The Independent Online

So it is a bear market, in the United States at least. When share prices fall by more than 20 per cent - as they have since their peak last year - that qualifies as a bear market. If the fall is less marked other words, like "correction", "adjustment" or maybe "plateau" tend to be applied. While everyone knows that share prices fall as well as rise, it is hard to remember this during a period when the rise seems almost relentless - as it has for most of the past 13 years. Even the crash in October 1987, the last really serious fall, was quickly "corrected".

So it is a bear market, in the United States at least. When share prices fall by more than 20 per cent - as they have since their peak last year - that qualifies as a bear market. If the fall is less marked other words, like "correction", "adjustment" or maybe "plateau" tend to be applied. While everyone knows that share prices fall as well as rise, it is hard to remember this during a period when the rise seems almost relentless - as it has for most of the past 13 years. Even the crash in October 1987, the last really serious fall, was quickly "corrected".

In some corners of the stock market the falls of the past year have been devastating. Many internet stocks are worth less than 5 per cent of the level of the middle of last year, but now, even giant companies, making real products for which there is strong demand, are seeing their share prices devastated - because they happen to be in a high-technology business.

This rethinking of the prospects for these companies follows a string of disappointing company announcements. In most cases demand is still growing, but it is not growing as fast as the companies expected. And if you gear up for, say 30 per cent increases in output and find the rise is only 10 per cent, you disappoint the markets. This is happening daily and it is happening globally.

Yesterday, we had the German electronics group Siemens revising downwards its sales forecast for the first half of this year. Excluding microchips, output would be up 10 per cent, but that was lower than it had previously suggested. The US mobile phone company Motorola is scaling down its expected sales and announced 7,000 redundancies.

Nokia, the Finnish company that makes 31 per cent of the world's mobile phones, has yet to downgrade its forecast of making 25 to 35 per cent more phones in the first six months of this year, but is beset by stories that it will do so soon. Yesterday it announced that it would sell two of its US factories to a sub-contractor to cut costs.

In Britain, hi-tech firms have been similarly hit. Cable & Wireless, which owns the third biggest network for internet service providers and is financially strong, said demand was slowing and it would cut spending on its network. Result: its shares fell by more than 20 per cent. The company also said 4,000 jobs were going. Shares in Britain's largest biotech company, Celltech, were down more than 5 per cent. BT shares are only one-third of the level they were a year ago. By the end of trading yesterday the FTSE-100 had fallen 105.8 points to 5720.7 - its lowest level since December 1998.

So the big picture on the markets is one of the US high-technology sector dragging down share prices in the rest of the world. The question then becomes: why should this matter to the world economy?

Of course it matters to people who own shares either directly or through their pension funds. But you might reasonably say that after more than a decade of double-digit rises in share prices, no one should be too concerned. If you are investing for a pension, it is the performance of shares over 40 years that matters. On anything other than a one-year view investors have done very well.

The trouble is that bear markets sometimes presage recession. The links are loose and the timing uncertain, and markets sometimes get it wrong as they did in 1997 when they warned of a recession that never happened. This uncertainty is because markets both reflect what is already happening in companies (the present slowdown in demand for their products and services) and influence future demand by undermining confidence.

The link with confidence is complex. A few people, maybe, see that the value of their shares has fallen and decide to postpone the holiday they had planned. In the US, where a larger proportion of people own shares directly than here, there may be some effect. But generally the link is more likely to be through companies. A firm that sees its share price falling knows it may not be able to raise more money on the stock market, or at least the money will be very expensive. That is BT's problem at the moment: like the other European telecoms companies it has borrowed heavily to buy mobile phone licences. It has to pay back some of that debt, but how?

Giant companies are like people who have borrowed too much for their house: they have to cut back wherever they can. So any unnecessary investment is postponed, as Cable & Wireless is doing. Maybe some staff are shed, as Motorola announced. Perhaps plants are closed or sold, as Nokia said. And every time this happens ordinary people who are employed either directly or by suppliers are hurt. The decline in confidence starts with big companies, then moves down smaller ones, and then to the rest of us.

And if we then cut our spending that further hits the companies that supply us. The chain reaction seems already to have begun. The question is: how serious will it become?

It is guesswork, but it looks as though the US may already be moving into a recession, which is defined as six months when the economy actually shrinks. The single most disturbing aspect of the US is the fact that its households spend more than they earn, and all past experience suggests that sooner or later they will have to cut back. The trouble is, they may cut back at just the wrong time for the economy.

If the world's largest economy is moving into trouble, the second largest, Japan, is already in it, having hardly grown at all during the last decade. It seems to be heading back into recession again, for it has relied on exports to the US (and East Asian suppliers to the US) to keep moving at all.

Europe, for the time being seems to be growing reasonably well - the main cloud being the performance of its largest economy, Germany, which also depends on Americans buying its goods. This year looks like being the first for nearly a decade when Europe grows faster than the US.

In Britain, Europe's second largest economy (we passed France a year ago), there are a number of reasons to be hopeful that we will avoid recession, even if the US plunges into one. Our consumers are still saving; we don't have as large a hi-tech sector; confidence is high; public finances are in great shape, with £34bn of national debt being repaid; and government spending is scheduled to rise sharply this year. But in an increasingly global economy, no country - as John Donne almost wrote - "is an island entire of itself".

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