World markets suffer biggest annual falls since crisis of the early 1970s

The London stock market ended 2001 with a large loss for the second year in a row, the first time this has happened since the global crisis of the 1970s.

The London stock market ended 2001 with a large loss for the second year in a row, the first time this has happened since the global crisis of the 1970s.

The FTSE 100 closed a truncated trading session down 25 points, or 0.5 per cent, at 5,217.4. The performance capped a bad year for the index, which ended down 1,005 points on the year, or 16.2 per cent – the index's worst annual performance since its inception in 1984. Hilary Cook, a director of investment strategy at Barclays Stockbrokers, said: "It's been a year that we'll all be heartily glad to forget. Every time the market has looked like it might rally, something has come along to dampen it."

But British investors were not alone. In New York, Wall Street delivered the worst year for the broad market since 1974. The Standard & Poor's 500 was on track to close down about 12 per cent. In 1974, the S&P 500 fell nearly 30 per cent. European markets also slumped. The Dow Jones Stoxx 600 fell 17 per cent, its biggest decline since calculations began nine years ago. In Japan, the Nikkei share average ended the year at 10,542.62, a 24 per cent fall over the year despite a 0.8 per cent rise on the last day of trading. Very few markets boasted a gain on the year. Turkey topped the table with a 92 per cent gain, followed by Taiwan, which surged 51 per cent over the year. South Korea gained 38 per cent on the year, while Australia closed the year 7 per cent ahead.

Last year was not short of possible causes for one of the worst bear markets in history. At its epicentre was the end of the longest unbroken run of economic growth in the United States. The surprise cut in interest rates by the US Fed on 3 January – the first of 11 – woke many investors up to the realisation that the economic cycle had not, as some had claimed, been abolished. In fact by March the world's largest economy had gone into recession. The impact on the stock market was heightened by the fact that the corporate sector was bearing the brunt of the slowdown.

At its heart was the bursting of the New Economy bubble that had seen an explosion in investment in hi-tech stocks and equipment. As this unwound, firms cancelled orders with their suppliers and ran down their stocks instead. World markets had already fallen substantially by 11 September when two airplanes destroyed the twin towers of the World Trade Centre, although the horrific event had a devastating short-term impact on consumer confidence.

Meanwhile, stock markets in other countries, especially Europe, which had seen themselves immune from the end of the US economic miracle, fell when it rapidly become clear that they too faced recession. But Britain has been one western country that can honestly boast of having, so far, escaped the worst of the side-effects of the US slowdown. The economy looks on track to have achieved growth of 2.4 per cent last year and there were no signs of the hyper-inflation or oil crises that helped caused the market to crash in the 1970s. But the UK was hit by a sharp fall in profitability, worries about the impact of global recession on future growth and a refusal by investors to underwrite the huge earnings ratios that had built up towards the end of the 1990s.