Are equities just going through a short-lived correction, or are we entering a bear market where falls will persist? The slumps in world markets over the past few days has unnerved investors who are wondering if this is just volatility in thin, holiday-time markets, or something more fundamental.

Behind the market concerns is one simple question – where is growth going to come from in the world economy? Signs of a slowdown in China and other emerging markets have hit sentiment, at a time when growth prospects for the big developed economies, while improving, remain uncertain.

The trigger to the latest uncertainty was the surprise decision last week of the Chinese authorities to allow their currency, the renminbi, to devalue on world markets. This was seen as being sparked, at least in part, by a desire to boost Chinese exports.

Fears that China’s big manufacturing sector was flagging was reinforced on Friday by a purchasing managers’ index, a signal of future orders for Chinese industry, which came in below expectations at 47.1. Any number below 50 indicates contraction.

Emerging market currencies

While the real state of the Chinese economy remains in question, the Chinese move has sparked falls in other emerging market currencies and forced some other governments – such as those in Vietnam and Kazakhstan – to abandon currency pegs. In turn, currencies from Malaysia to Turkey to Indonesia came under pressure. The problem is that if many currencies of countries trading together fall at the same time – known in the jargon as competitive devaluations – nobody gets much of a boost.

The nervousness has been intensified by a slump in the price of commodities such as oil, hitting big exporters like Russia and its neighbours in particular. Oil prices have hit a six-year low, with Brent crude falling to around $46 a barrel and most other commodities have also slid sharply, reflecting falling demand from big buyers such as China.

There is direct concern, of course, for companies selling into emerging markets such as China, particularly if the renminbi devaluation continues.

However the concern for equity investors is now a more broad one about the overall outlook for world growth. So far forecasts remain for world growth of around 3.5 per cent this year, but the concern is that the US, UK and Europe may not resume growth quickly enough to make up for the slowdown in emerging markets. As one international fund manager put it to Bloomberg: “The world is looking a little bit sad.”

The picture is complicated by the fact that international central banks have done pretty much all they can to boost growth during the crisis years, and the US and UK are now considering when to start raising interest rates.

Speculation

The latest upheavals have increased speculation that the US Federal Reserve Board might hold off increasing rates in September, as had been expected up to recently. But it can’t wait for ever, and the Bank of England is in the same predicament. A weaker euro-zone economy means euro base rates will not rise for a long time yet, though a euro zone purchasing managers’ index on Friday did at least show some signs of life, particularly for Germany.

The big equity markets peaked in April or May of this year and many have now lost all their 2015 gains, and in some cases a bit more. American markets had their worst week since 2012. The Iseq index of Irish shares has fared a bit better, though it fell some 1.7 per cent yesterday and is now more than 7 per cent of its 2015 high reached in early August. The falls play into the arguments of more bearish analysts, who have been warning for months that investors were not sufficiently taking into accounts the risks facing the international economy.

For the moment, it is a case of “risk off” in the markets, with money flowing in to lower-risk assets such as US and UK government bonds, the yen and money market funds.

The weeks ahead will now involve a forensic analysis of every piece of data as analysts try to work out whether global growth can hold in.