Recession of 2009

Downturns in economic growth rates were apparent early in 2008, and the subsequent intensification of the financial crash of 2008 led to a general expectation of worse to come. The resulting loss of confidence by investors and consumers contributed further to the severity of the reduction in world economic growth and it was apparent by the end of 2008 that the economies of the United States and Several European countries had for some time been in recession.

(for an explanation of the term "recession" see the article on recession (economics); for forecast and actual growth rates, and a summary of recent economic developments see the Addendum subpage; and for a sequential list of statistical reports and announcements see the Timelines subpage)

The policy debate

In the words of the Chief Economist of the OECD:

Against the backdrop of a deep economic downturn, additional macroeconomic stimulus is needed. In normal times, monetary rather than fiscal policy would be the instrument of choice for macroeconomic stabilisation. But these are not normal times. Current conditions of extreme financial stress have weakened the monetary transmission mechanism. Moreover, in some countries the scope for further reductions in policy rates is limited. In this unusual situation, fiscal policy stimulus over and above the support provided through automatic stabilisers has an important role to play. Fiscal stimulus packages, however, need to be evaluated on a case-by-case basis in those countries where room for budgetary manoeuvre exists. It is vital that any discretionary action be timely and temporary and designed to ensure maximum effectiveness. .

Fiscal policy can quickly boost spending power, whereas monetary policy acts with long and uncertain lags. Discretionary fiscal policy has often been used to regulate developed economies but, because of legislative delays it has sometimes had a destabilising effect because the stimulus arrived when activity was recovering .

Background to the recression

World events

There has been a downturn in world economic growth. In the nine months to the middle of 2008, the advanced economies have grown at an annual rate of only one per cent (compared with two and a half per cent in the previous nine months) and the growth rate of the developing economies has eased from eight per cent to seven and a half per cent. The downturn is generally attributed to a malfunctioning of the financial, housing, and commodity markets that had resulted in imbalances between supply and demand that are now in the course of correction.

A meeting of the world leaders (of the G20 group of countries), with the purpose of agreeing a coordinated response to the financial crisis, took place in Washington on 15th November . An ebook was published in advance, with the recommendations of an international group of twenty leading financial economists.They were unanimous on the need for Governments to take urgent action to recapitalise their banks, to guarantee cross-border bank claims, to restructure nonperforming assets, and to extend financial support for crisis countries. They were also agreed on the need for immediate, substantial, internationally coordinated fiscal stimulus, tailored to the circumstances of each country and taken with a view toward the impact on the rest of the world. There was also unanimity on the need to augment IMF resources immediately so that the institution has adequate firepower, and on the need to strengthen existing arrangements for global governance. Several of them also argued for new approaches to the regulation of large cross-border financial institutions.

The United States economy

According to the OECD the US economy was already facing substantial difficulties by the middle of 2008. Households had borrowed at an unprecedented rate during the previous 15 years, and their saving rates had fallen nearly to zero as they increasingly relied on housing wealth to finance consumption. With the housing market suffering the severest correction for 50 years, household wealth was declining, and with credit conditions were getting tighter, households had been forced to reduce their reliance on borrowing. Job losses and mortgage foreclosures were rising.

Developments in the 4th quarter of 2008

General

The principal developments in the fourth quarter of 2008 were a reduction in the availability of credit, corresponding falls in business and consumer confidence, and a sharp reduction in oil prices. In the latter half of October, stock prices recovered partially from the precipitous falls of the previous month, but there was still widespread uncertainty about the effectiveness of government measures to tackle the financial crisis. News of output falls in the United States and the United Kingdom has been accompanied in October by reports of falling consumer confidence.

In November 2008, the International Monetary Fund forecast that world growth would begin a slow recovery at the end of 2009, after falling from its 2007 growth rate of 5.0 per cent to 3.7 per cent in 2008 and 2.2 per cent in 2009 (the lowesr rate since 2002). . For the purpose of the forecast it was assumed that commodity and oil prices would stabilize, that U.S. housing prices and activity would hit bottom next year, and that there would be no further deterioration of conditions in the financial system. The "emerging and developing countries" were expected to be the main source of world growth, with a 2009 growth rate of 5.1 per cent, compared with -0.7 per cent for the United States and -0.5 per cent for Europe.