Great Recession/Addendum
International recession and recovery by region
The World
2009 2010 2007 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 GDP (% change on previous period)[1] 3.9 1.7 -2.2
The financial crisis had an adverse effect upon most of the world's economies, but its greatest impact was on the high income countries (The United States, Canada Europe and Japan) with a collective GDP reduction in 2009 of 3.3 per cent. Next in severity were the downturns of the developing economies excluding China and India with a collective GDP reduction of 2.2 per cent[1], mainly as a result of the loss of capital inflows and of a collapse of world trade[2], and by the spring of 2009 most of the world's economies were facing severe damage. There were large variations in impact, however. It had little effect on the South Asian economies, the East Asian economies were less adversely affected by the crisis than other regions, and the impacts on the economies of China and India took the form only of significant growth rate reductions. The severest effects were upon the economies of the Baltic States, Iceland and Ireland.
America
The United States
| 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |
| GDP (% change at annual rate) [3] | 2.0 | 0.4 | -2.5 | 1.2 | 3.2 | 3.6 | 2.1 | -0.7 | 1.5 | -2.7 | -5.4 | -6.4 | -0.7 | 2.2 | 5.6 | ||||
| Unemployment (% of labour force)[4] | 4.6 | 5.8 | 9.3 | 4.5 | 4.4 | 4.6 | 4.7 | 5.0 | 5.4 | 6.1 | 6.9 | 8.2 | 9.3 | 9.7 | 10.0 | ||||
| Consumer prices (% increase on the same period of the previous year)[5] | 3.8 | -0.4 | 2.8 | 2.7 | 2.0 | 4.3 | 4.0 | 4.2 | 5.4 | 1.1 | 0.2 | -1.3 | -1.5 | 1.8 | |||||
The growth rate of American economy slowed sharply from around 3 per cent in 2006 to 2 per cent in 2007 and the economy continued to operate at below its trend rate of growth until the fourth quarter of 2009. Following the bursting of the house price bubble and the development of the subprime mortgage crisis in 2007, two and a half million families faced foreclosure in 2008, and the reductions in personal wealth resulting from the fall in house prices were causing further reductions in demand. The financial crash of 2008, and the resulting credit crunch, caused further declines in business activity, which added more pressure on the financial system and three and a half million Americans lost their jobs in the course of 2008[6]. Credit remained tight in 2009 with lenders imposing strict standards for all types of loans [7] and unemployment continued to rise throughout the year.
As the economy started to recover in late 2009, attention turned to the problem of reduction of restoring fiscal sustainability without endangering the recovery. The Federal budget deficit had risen sharply under the operation of the economy's automatic stabilisers, the Federal Government had introduced measures of fiscal stimulus amounting to 5.6 per cent of GDP spread over the three years 2008 to 2010[8], and by 2010 the national debt had risen from its 2007 level of 62 percent of GDP to over 90 per cent[9]
Canada
The Canadian mortgage market did not experience the surge in defaults that triggered the subprime mortgage crisis in the United States, and the subsequent financial crash of 2008 had little effect upon the Canadian financial system. Events in the United States nevertheless affected the rest of the Canadian economy. The economic growth rate faltered in the Autumn of 2007 as exports fell in response to falling demand from the United States, and the downturn developed into a sharp contraction, led by falling investment and household spending, in the last quarter of 2008. The government introduced fiscal stimulus measures amounting to 4 per cent of GDP spread over the three years 2008-10[8], and a modest recovery started in the second half of 2009.
Central and Southern America
Among the United States' southern neighbours, the Mexican economy suffered the deepest contraction, with quarterly GDP down 9.7 and 6.3 percent in the second and third quarters of 2009. In Brazil, GDP fell by 0.2 percent year-on-year in the first two quarters of the crisis period, but rebounded in the second and third quarter of 2009. In Argentina, GDP increased by 0.5 and 0.2 percent on an annualized basis in the second and third quarters of 2009.
Europe
The United Kingdom
The rapid growth of the British economy in the early years of the 21st century had been partly due to the success of its comparatively large financial sector and to the development of a comparatively vigorous housing boom, and those factors had a strong influence upon the impact of the recession that followed the collapse of the Lehman Brothers bank in the United States. Even before that collapse, some of its banks had been forced to make large writedowns because of their involvement in the subprime mortgages crisis and there had been a run on one of them [12], but the banking panic that followed the fall of Lehman Brothers, threatened the continued existence of the financial system. In October 2008 the British Government announced a £500 billion rescue scheme [13], including powers to take equity stakes in ailing banks and an undertaking to guarantee interbank loans. An impending collapse of the UK's financial system was averted, but the surviving banks adopted a policy of deleveraging that resulted in a severe credit crunch followed by a general economic downturn. In the second half of 2008 gdp fell by 2.2 per cent with falls in financial sector output and in housing and commercial investment. The effective exchange rate fell by about 20 per cent during 2008, but its effect was more than offset by falling overseas demand, and there was also a fall in exports. Early fiscal policy and monetary policy action was taken to tackle the growing recession . A fiscal stimulus amounting to 1.5 per cent of GDP[8] was introduced by the November Pre-Budget Report, including a temporary 2.5 percentage point reduction in value-added tax and a bringing forward of £3 billion of capital investment, and by March 2009 the Bank of England had reduced its discount rate rate from 5% to 0.5% and begun a programme of quantitative easing.
By 2010, the UK’s national debt had risen from under 50 percent of GDP to over 80 percent[9], due mainly to the operation of itsautomatic stabilisers, prompting expressions of concern by the credit rating agencies and plans for its reduction were being debated. had In its pre-budget report of 2008 and its budget of 2009 the Government planned a fiscal tightening that would increase gradually to 6.4% of national income over eight years. Their plans included a reduction in public expenditure of £35 billion which, together with tax increases, would reduce borrowing by 3.2% of GDP by 2014. The Institute of Fiscal Studies estimates that, under those plans, thenational debt would roughly double from pre-crisis levels, to a little under 80% of national income, before declining again to its pre-crisis levels by the early 2030s[14]. In September, the opposition Conservative party (the party that is expected to take over government in 2010) announced plans to make expenditure reductions of only £7 billion by 2014, but the right-wing Centre for Economic and Business Research assumes that a Conservative Chancellor would take earlier action than that planned by the Government, cutting public expenditure by £80 billion and raising taxes by £20 billion[15].
The Eurozone
Germany
The international banking panic had an immediate impact on Germany's fragmented banking system and in October 2008 the government set up a fund to guarantee the banks' debts and provide for recapitalisation and asset purchases. Although there had been falls in national output earlier in the year, the government did not at first consider further action to be necessary, but by the end of the year a fall in exports signalled the onset of major downturn, and in January of 2009 it launched a fiscal stimulus amounting to 3 per cent during 2009 and 2010[8], that included reductions in income, and payroll taxes(starting in July) as well as industrial subsidies and infrastructure investments. Those discretionary actions together with the action of the automatic stabilisers were expected to increase the budget deficit to 7% of GDP and raise the national debt from its 2007 level of 65 per cent of GDP to over 80 per cent by 2010[9].
France
The government introduced fiscal stimulus measures amounting to 0.6 per cent of GDP spread over the two years 2009-10[8], including infrastructure spending, measures to relieve cash-flow difficulties for small and medium-sized enterprises, tax holidays for low-income households, increased unemployment compensation, and loans to the car and aircraft industries. Together with the operation of automatic stabilisers, these measures are expected to raise the budget deficit to above 8% of GDP and the national debt to over 90 per cent of GDP by 2010[9].
Italy
Iceland
Before the Lehman Brothers collapse in September 2008, Iceland had a thriving economy, its government had a budgetary surplus, its banks had no toxic assets and its consumers had not indulged in any speculative bubbles. (Although Willem Buiter and Anne SIbert [16], believed that its banking model was not viable). A few months later its banking system had collapsed, its government was deeply in debt, its currency had suffered a 65 per cent depreciation, real earnings had fallen by 18 per cent, and its economy was facing a deep and prolonged recession. Those were the consequences of the impact of the international credit crunch on a banking system that had overseas debts amounting to almost ten times the country's GDP. Unable to roll over their debts, three of its largest banks had to be rescued by the government, and the consequent rise in national debt caused a flight from the national currency that made matters worse. The government introduced fiscal stimulus measures amounting to 9.4 per cent of GDP spread over the two years 2009-10[8]A loan was obtained from the International Monetary Fund and recovery is expected during 2011 [17]. In November 2009 the Moodys credit rating agency downgraded Iceland's government bonds to its lowest investment grade.
Ireland
A downturn in the output of the formerly booming Irish construction industry that started in 2007, intensified and developed into a full-blown economic recession in the course of 2008 and construction and property companies began to default on loans from the banks. News of their defaults made foreign banks and investors, that had been the banks' principal source of short-term finance, reluctant to risk further commitments, and a banking crisis developed. Consumer confidence fell and there was a very sharp increase in unemployment[18][19]. In an attempt to restore confidence, the Irish government undertook to guarantee loans to the banks. GDP growth rates averaging about 6 percent over the period 1995-2007 were followed by year-on-year falls of 8 percent in the 4th quarter of 2008 and 9 per cent in the first quarter of 2009, and the inflation rate fell to -3 per cent in September 2009. The government introduced fiscal stimulus measures amounting to 4.4 per cent of GDP spread over the three years 2008-10[8] which, combined with the effects of its automatic stabilisers is expected to raise the national debt to over 80 per cent of GDP from its 2007 level of 28 per cent[9]. Foreign investors became wary of the possibility a sovereign default, and the government's ability to finance the deficit was threatened by a general loss of confidence. In March 2009 the Standard and Poor credit rating agency downgraded its rating for Ireland from AAA to AA+[20], and April, the government decided that the only way to restore confidence was to take steps to reduce its deficit - and took the extraordinary step of increasing taxation in the midst of a recession [21]. Additional steps taken included direct purchase of stock in some banks and the establishment of the "National Asset Management Agency" - essentially a government-owned bank that will buy toxic debt from six financial institutions - both steps aimed at improving their balance sheets and freeing up capital.[22][23]
GDP growth rates averaging about 6 percent over the period 1995-2007 were followed by year-on-year falls of 8 percent in the 4th quarter of 2008 and 9 per cent in the first quarter of 2009, and the HCIP inflation rate fell to -3 per cent in September 2009. The government introduced fiscal stimulus measures amounting to 4.4 per cent of GDP spread over the three years 2008-10[8] which, combined with the effects of its automatic stabilisers is expected to raise the national debt to over 80 per cent of GDP from its 2007 level of 28 per cent[9].
Russia
The fall in the oil price combined with the collapse in world trade and a withrawal of international credit had a devastating effect upon the Russian economy, and its GDP fell by about 10 percent in the first half of 2009 [24], and its 2009 GDP is estimated to be 8.5 per cent below its 2008 level. These events prompted the central bank to inject large amounts of liquidity into the banking sector and to permit a gradual depreciation of the rouble by about 25 per cent against the dollar-euro basket. The Government launched a major fiscal stimulus in April 2009, consisting mainly of social transfer payments[7].
The Baltic States
The the fastest-growing economies in the European Union in 2006 became its three fastest-contracting economies in 2009. Years of boom were followed by falls in GDP averaging 1.8 per cent in 2008 and estimated to average 15.5 per cent in 2009 (Estonia 13 per cent, Latvia 16 per cent Lithuania 18 per cent)[25]. An International Monetary Fund report on Estonia noted that investment already started to slow in mid-2007, along with a bursting of the property bubble, when the two main banks tightened lending conditions. The collapse of global external financing and foreign trade in the Lehman Brothers bankruptcy aftermath exacerbated the downturn. Output fell by almost 16 per cent in the first nine months of 2009. Deflation and wage declines were projected to persist through 2010[26].
Greece
The country's national debt rose by about 25 per cent above its above-average pre-crisis level of 100 per cent of GDP[9].
Asia
Japan
Japan has suffered a much deeper recession than the other large industrialised economies mainly because of its greater reliance upon exports of cars and high-technology products. Output was also restricted by a credit crunch and by the need to reduce high inventory levels [29]. The government introduced fiscal stimulus measures amounting to 2 per cent of GDP [8]. Combined with the effect of the country's automatic stabilisers, its national debt (the majority of which was held by domestic investors) is expected to rise to over 200 per cent of GDP from its already massive pre-crisis level of 167 per cent[9].
China
2009 2010 2007 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 GDP (% change on previous period)[10] 9.6 8.7
In November 2008, the Chinese Government announced a fiscal stimulus amounting to 4.4 per cent of its GDP, in addition to which there was a massive increase in bank lending. The effect was partially to offset the effect of the collapse in world trade upon its export sales. Strong export growth resumed in the course of 2009 - rising to above pre-crisis levels in 2010. There were increasing signs in early 2010 of a developing boom in property prices[30].
India
2009 2010 2007 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 GDP (% change on previous period) 9.0 6.3 5.8e
A reversal of India's capital inflows started in January 2008 through a massive disinvestment by foreign institutional investors, with a net disinvestment of $13.3 billion from January 2008 to February 2009 following a net investment of $17.7 billion during 2007. That was followed by a massive slowdown in external commercial borrowing by India’s companies, trade credit and banking inflows from April 2008 [31]. There was a progressive reduction in manufacturing output in the course of 2009 following a fall in overseas demand for India's exports[32] .
Australia
The government introduced fiscal stimulus measures amounting to 4.6 per cent of GDP spread over the three years 2008-10[8]. In the course of 2009 there was a revival in exports to emerging markets, growth in consumer demand and a recovery in housing and mortgage markets, and in October the central bank raised its discount rate to 3.25%
.
Developing countries excluding China and India
2009 2010 2007 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 GDP (% change on previous period)[1] 6.2 4.3 -2.2
According to a World Bank report published in March 2009, 94 out of 116 developing countries had experienced a slowdown in economic growth in 2008. The most affected sectors were those that were that had been the most dynamic, typically urban-based exporters, construction, mining, and manufacturing[33]. Immediately following the intensification of the financial crisis in September 2008, sovereign spreads rose sharply to impose risk premiums of 7 to 10 per cent on the returns that had to offered on bond issues that subsided as confidence returned in the course of 2009 to around 3 per cent by the end of that year. There was also weak recovery of output from the precipitous decline that occurred in the first quarter of 2009, but there were still output gaps of around 3 per cent of GDP at the end of 2009, suggesting that high levels of unemployment might continue. perhaps for years [34]. Experience varied among the developing countries, however. Economists at the International Monetary Fund found that the worst affected of the developing countries had been those with highly leveraged domestic financial systems and rapid credit growth. Countries exporting more advanced manufacturing goods had suffered more than those exporting food, and countries with pegged exchange rates had fared less well than those with flexible exchange rates[35].
References
- ↑ 1.0 1.1 1.2 Global Economic Prospects, World Bank, January 2010
- ↑ Kristian Behrens, Gregory Corcos and Giordano Mion: Trade collapse or trade crisis?, Vox, 21 March 2010
- ↑ News Release, Bureau of Economic Affairs, March 2010
- ↑ seasonally adjusted Bureau of Labor Statistics data[1]
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 mid-quarter figures [2]
- ↑ Based on Treasury Secretary Tim Geithner's statement to the Senate Finance Committee March 4 2009
- ↑ Federal Reserve "Beige Book", March 2009
- ↑ 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 OECD Economic Outlook Interim Report Chapter 3, March 2009
- ↑ 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 The State of Public Finances Cross-Country Fiscal Monitor, International Monetary Fund staff report, November 2009
- ↑ 10.00 10.01 10.02 10.03 10.04 10.05 10.06 10.07 10.08 10.09 10.10 10.11 10.12 OECD StatExtracts at[3] & [4]
- ↑ 11.00 11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 11.10 11.11 seasonally adjusted [5]
- ↑ Rush on Northern Rock Continues, BBC News 17 September 2007
- ↑ Rescue Plan for UK Banks Unveiled, BBC News 8 October 2008
- ↑ Robert Chote et al: Britain's Fiscal Squeeze, the Choices Ahead, IFS Briefing Note BN87, September 2009
- ↑ Douglas McWilliams: The Economics of George Osborne, CEBR, 6 October 2009
- ↑ Willem Buiter and Anne SIbert: The Icelandic Banking Crisis and What To Do About It, Policy Insight No 26, Centre for Economic Policy Research, October 2008[6]
- ↑ Country Report No. 08/362, International Monetary Fund, November 2008
- ↑ The Tiger Tamed, The Economist, November 2008
- ↑ The Party is Definitely Over, The Economist March 19 2009
- ↑ Stacy-Marie Ishmael: S&P strips Ireland of its triple-A rating, FT-Alphaville, March 30 2009
- ↑ Budget Statement, Department of Finance, April 7, 2009
- ↑ Department of Finance, Ireland. Minister for Finance, Mr Brian Lenihan, TD, announces appointment of interim Managing Director of the National Asset Management Agency (html). Retrieved on 2009-05-12.
- ↑ Money Guide Ireland. NAMA - National Asset Management Agency. Retrieved on 2009-05-12.
- ↑ Economic Survey of Russia 2009, OECD July 2009
- ↑ [European Bank for Reconstruction and Development (EBRD) Forecasts, October 2009]
- ↑ Republic of Estonia: Staff Report for the 2009 Article IV Consultation, IMF Country Report No. 10/4, January 2010
- ↑ Maria Grazia Attinasi, Cristina Checherita, and Christiane Nickel: What explains the surge in euro-area sovereign spreads during the financial crisis of 2007-09?, European Central Bank, 11 January 2010
- ↑ Report on Greek Government Deficit and Debt Statistics, European Commission, January 2019
- ↑ Martin Sommer: Why Has Japan Been Hit So Hard by the Global Recession?, Staff Note SPN/09/05, International Monetary Fund, March 18, 2009
- ↑ China Quarterly Update, World Bank, March 2010
- ↑ [http://www.icrier.org/publication/Workingpaper241.pdf Working Paper No. 241 Mathew Joseph, Karan Singh, Pankaj Vashisht Dony Alex, Alamuru Soumya, Ritika Tewari, and Ritwik Banerjee: The State of the Indian Economy 2009-10, Indian Council for Research on International Relations, October 2009]
- ↑ Economic Survey 2008-09, Ministry of Finance, Government of India, January 2010
- ↑ Crisis Reveals Growing Finance Gaps for Developing Countries, World Bank, 8th March 2009
- ↑ Prospects for Developing Economies, Global Economic Prospects Chapter1, World Bank, 21 January 2010
- ↑ Pelin Berkmen, Gaston Gelos, Robert Rennhack, and James P. Walsh: The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact, IMF Working Paper no WP/09/280, December 2009