The Crisis Continues

Shares have fallen to a new low for 2008 as the economic outlook looks grim.

There's been a barrage of rotten news this morning.

• The UK's Gross Domestic Product (GDP) - which measures the output of the UK economy - shrank 0.5% in the third quarter. Economists had expected a fall of 0.2% according to a survey by Bloomberg.
• The pound slumped to below $1.53. That's a bigger fall than on Black Wednesday in 1992 when the UK was ejected from the Exchange Rate Mechanism.
• John Lewis said sales at its department stores have fallen for the fifth week running. Sales for the three months to October 12 were down 2.9% compared to a year earlier.

We still haven't had two consecutive quarters of economic contraction, so we don't have an 'official' recession just yet, but a 0.5% fall in GDP is a recession in my book.

The rotten economic news has sparked further falls in the stock market. As I write the FTSE 100 is down 9% at 3'782 points, its lowest level since April 2003. HSBC (LSE: HSBA) is one of biggest fallers, crashing 97p to 708p.

HSBC's fall is striking as the global bank's share price had held up reasonably well compared to many of its peers in recent weeks. That's because HSBC has a relatively strong balance sheet and looked very unlikely to go bust.

I still think that HSBC looks very safe, but it's now becoming clear that many emerging markets are going to suffer a lot from the global economic slowdown and a big chunk of HSBC's business is in emerging markets, especially in Asia. So profits will be hit. Another big player in emerging markets banking, Standard Chartered (LSE: STAN) saw its share price fall 112p to 788p today.

What does this mean?

I said ten days ago that I thought we were probably through the worst in the banking crisis. I think that's still true. I doubt we'll see any more major banks almost go to the wall in the US or UK. (That said, you can't rule it out completely.)

But it's clear that we are heading into a recession and that there are significant financial problems in Eastern Europe and other emerging markets. For example, Hungary's currency, the Forint, has fallen 14% this week against the dollar. That's in spite of a 3% rise in the country's benchmark interest rate to 11.5% this week. In a modern interconnected world, we won't be isolated from these problems.

What now?

If you're a brave long-term investor, today is probably a good time to put money in the stock market. An index tracker is a simple way to do that.

The lower risk option is to curb your spending and try and save as much as possible in a solid savings account. I've already booked an expensive foreign holiday in 2009. I'm now regretting that extravagance.

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