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Late 2000s recession
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Color scheme: Countries in recession as of December 2008 Severely affected countries
- This article is about economic issues beyond the financial market. For the financial market events, see Financial crisis of 2007-2008. For stock market crashes and bank bailouts, see Global financial crisis of 2008.
In 2008, an economic recession was suggested by several important indicators of economic downturn.[1] These included high oil prices, which led to drastic high food prices due to the extremely loose monetary policies and low interest rates of the U.S. Federal Reserve, as well as using food crop products (such as corn ethanol and biodiesel) as an alternative to petroleum and global inflation; a substantial credit crisis leading to the drastic bankruptcy of large and well established investment banks as well as commercial banks in various, diverse nations around the world; increased unemployment; and signs of contemporaneous economic downturns in major economies of the world, a global recession.
In December 2008, the NBER declared that the United States had been in recession since December 2007.[2]
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[edit] Global issues and trends
[edit] High prices
- Further information: 2000s energy crisis and 2007–2008 world food price crisis
- See also: 2008 Central Asia energy crisis and 2008 Bulgarian energy crisis
The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the prices of many commodities, notably oil and food, got so high to cause genuine economic damage, threatening stagflation and a reversal of globalization.[3]
In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year.[4] In July, oil peaked at $147.30 [5] a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. These high prices caused a dramatic drop in demand and prices fell below $35 a barrel at the end of 2008.[5]
The food and fuel crises were both discussed at the 34th G8 summit in July.[6]
Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 3.5-fold in less than 1 year whilst producers of sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price increases.[7][8]
In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.[9]
[edit] Trade
In middle -October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.[10]
[edit] Inflation
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations.[11] "Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation.[12]
In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term “unsterilized” referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country´s monetary policy target. However, inflation was also growing in countries classified by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and "Developing Asia", on account of the rise in oil and food prices.[13]
Inflation was also increasing in the developed countries,[14][15] but remained low compared to the developing world.
[edit] Unemployment
The International Labour Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in "construction, real estate, financial services, and the auto sector" - bringing world unemployment above 200 million for the first time.[16]
[edit] Return of volatility
For a time, major economies of the 21st century were believed to have begun a period of decreased volatility, which was sometimes dubbed The Great Moderation, because many economic variables appeared to have achieved relative stability. The return of commodity, stock market, and currency value volatility are regarded as indications that the concepts behind the Great Moderation were guided by false beliefs.[17]
[edit] Economic governance
- Further information: 34th G8 summit and 2008 G-20 Washington summit
In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a locus of economic and financial crisis management.
Economic stimulus plans were announced or under discussion in China, the United States, and the European Union.[18] Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India.[19]
[edit] North America
[edit] U.S.
- See also: Subprime mortgage crisis
The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value.[20] In February, 63,000 jobs were lost, a 5-year record.[21] In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008.[22]
| Federal reserve rates changes[23] | |||||
| Date | Discount rate | Discount rate | Discount rate | Fed funds | Fed funds rate |
|---|---|---|---|---|---|
| Primary | Secondary | ||||
| rate change | new interest rate | new interest rate | rate change | new interest rate | |
| Apr 30, 2008 | -.25% | 2.25% | 2.75% | -.25% | 2.00% |
| Mar 18, 2008 | -.75% | 2.50% | 3.00% | -.75% | 2.25% |
| Mar 16, 2008 | -.25% | 3.25% | 3.75% | ||
| Jan 30, 2008 | -.50% | 3.50% | 4.00% | -.50% | 3.00% |
| Jan 22, 2008 | -.75% | 4.00% | 4.50% | -.75% | 3.50% |
[edit] Early suggestions of recession
In the early months of 2008, many observers believed that a U.S. recession had begun.[24][25][26] As a direct result of the collapse of Bear Stearns, Global Insight increased the probability of a worse-than-expected recession to 40% (from 25% before the collapse). In addition, financial market turbulence signaled that the crisis will not be mild and brief.
Alan Greenspan, ex-Chairman of the Federal Reserve, stated in March 2008 that the 2008 financial crisis in the United States is likely to be judged as the harshest since the end of World War II.[27] A chief economist at Standard & Poor's, said in March 2008 he has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover in the summer 2008.[citation needed] Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period.[citation needed]
The former head of the National Bureau of Economic Research said in March 2008 he believed the country was then in a recession, and it could be a severe one.[citation needed] A number of private economists generally predicted a mild recession ending in the summer of 2008 when the economic stimulus checks going to 130 million households started being spent. A chief economist at Moody's predicted in March 2008 that policymakers would act in a concerted and aggressive way to stabilize the financial markets, and that then the economy would suffer but not enter a prolonged and severe recession.[citation needed] It takes many months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, makes its own ruling.[28]
According to numbers published by Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggest this indicates that the U.S. economy was not in a recession at the time.[29] However this estimate has been disputed by some analysts who argue that if inflation is taken into account, the GDP growth was negative for the past two quarters, making it a technical recession.[30] In a May 9, 2008, report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the recession started some time between September and January", on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.[31]
New York's budget director concluded the state of New York was officially in a recession. Governor David Paterson called an emergency economic session of the state legislature for August 19 to push a budget cut of $600 million on top of a hiring freeze and a 7 percent reduction in spending at state agencies already implemented by the Governor.[32] An August 1 report, issued by economists with Wachovia, said Florida was officially in a recession.[33]
White House budget director Jim Nussle said the U.S. avoided a recession following revised GDP numbers from the Commerce Department showing a 0.2 percent contraction in the fourth quarter of 2007 down from a 0.6 percent increase and a downward revision to 0.9 percent from 1 percent in the first quarter of 2008. The GDP for the second quarter was placed at 1.9 percent below an expected 2 percent.[34] Martin Feldstein, who headed the National Bureau of Economic Research until June and serves on the group's recession-dating panel, said he believed the U.S. was in a very long recession and that there was nothing the Federal Reserve could do to change it.[35]
In a CNBC interview at the end of July 2008 Alan Greenspan said he believed the U.S. was not yet in a recession, but that it could enter one due to a global economic slowdown.[36]
A study released by Moody's found two-thirds of the 381 largest metropolitan areas in the United States were in a recession. The study also said 28 states were in recession with 16 at risk. The findings were based on unemployment figures and industrial production data.[37]
In March 2008, Warren Buffett stated in a CNBC interview that by a "common sense definition", the U.S. economy is already in a recession. Warren Buffett has also stated that the definition of recession is flawed and that it should be 3 quarters of GDP growth that is less than population growth. However, the U.S. only experienced two consecutive quarters of GDP growth less than population growth. [38][39]
[edit] Recession declared by economists
On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in December 2007, citing employment and production figures as well as the third quarter decline in GDP.[40][41] The Dow Jones Industrial Average lost 679 points that same day.[42]
[edit] Rise in unemployment
On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years.[43][44] The news report cited the Department of Labor reports and interviewed Jared Bernstein, an economist:
| “ | The unemployment rate jumped to 6.1 percent in August, its highest level in five years, as the erosion of the job market accelerated over the summer. Employers cut 84,000 jobs last month, more than economists had expected, and the Labor Department said that more jobs were lost in June and July than previously thought. So far, 605,000 jobs have disappeared since January. The unemployment rate, which rose from 5.7 percent in July, is now at its highest level since September 2003. Jared Bernstein, economist at the Economics Policy Institute in Washington, said eight months of consecutive job losses had historically signaled that the economy was in a recession. "If anyone is still scratching their head over that one, they can stop," Mr. Bernstein said. Stocks fell after the release of the report, with the Dow Jones industrials down about 100 points after about 40 minutes of trading. | ” |
CNN also reported the news,[45] quoted another economist, and placed the news in context:
| “ | Job losses are still mild by recession standards, but the losses are relentless and they are accumulating. If job growth had paced with population growth during this year, it would have meant 1.3 million new jobs would have been created. Instead 605,000 were lost. That means about 2 million fewer people are working than if the economy were on a steady path. And that's a big number." But while economists generally study the payroll numbers most closely, it's the unemployment rate that registers with most Americans when they think about the labor market.[45] -- Bob Brusca of FAO Economics |
” |
[edit] Liquidity crisis
From late 2007 through September 2008, before the official October 3rd bailout, there was a series of smaller bank rescues that occurred which totalled almost $800 billion.
In the summer of 2007, Countrywide Financial drew down a $11 billion line of credit and then secured an additional $12 billion bailout in September. This may be considered the start of the crisis.
In mid-December 2007, Washington Mutual bank cut more than 3,000 jobs and closed its subprime mortgage business.
In mid-March 2008, Bear Stearns was bailed out by a gift of $29 billion non-recourse treasury bill debt assets.
In early July 2008, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac, a spinoff of Countrywide, was seized by federal regulators - and called for a $32 billion bailout. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship on September 7, 2008.
During the weekend of September 13–14, 2008, Lehman Brothers declared bankruptcy after failing to find a buyer, Bank of America agreed to purchase Merrill Lynch, the insurance company AIG sought a bridge loan from the Federal Reserve, and a consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure,[46] similar to the consortium put forth by J.P. Morgan during the stock market panic of 1907 and the crash of 1929.[citation needed] Stocks on "Wall Street" tumbled on September 15.[47]
On September 16 2008, news emerged that the Federal Reserve may give AIG an $85 billion rescue package; on September 17, 2008, this was confirmed. The terms of the rescue package were that the Federal Reserve would receive an 80% public stake in the firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual.[48]
The year 2008, as of September 17, has seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals.[49] The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank.[50]
The Wall Street Journal states that venture capital funding has slowed down which in the past led to unemployment and slowed new job creation. [51]
[edit] Bailout of U.S. financial system
On September 17, 2008, Federal Reserve chairman Ben Bernanke advised Secretary of the Treasury Hank Paulson that a large amount of public money would be needed to stabilize the financial system.[52] Short selling on 799 financial stocks was banned on September 19. Companies were also forced to disclose large short positions.[53] The Secretary of the Treasury also indicated that money market funds will create an insurance pool to cover themselves against losses and that the government will buy mortgage-backed securities from banks and investment houses.[53] Initial estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft legislation (as of September 19, 2008) were in the range of $700 billion[54] to $1 trillion U.S. dollars.[55] President George W. Bush asked Congress on September 20, 2008 for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis.[56][57] The crisis continued when the United States House of Representatives rejected the bill and the Dow Jones took a 777 point plunge.[58] A revised version of the bill was later passed by Congress, but the stock market continued to fall nevertheless.[59] [60]
As of mid-November 2008, it was estimated that the new loans, purchases, and liabilities of the Federal Reserve, the US Treasury, and FDIC, brought on by the financial crisis, totalled over $5 trillion: $1 trillion in loans by the Fed to broker-dealers through the emergency discount window, $1.8 trillion in loans by the Fed through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled Assets Relief Program, $200 billion insurance for the GSEs by the Treasury, and $1.5 trillion insurance for unsecured bank debt by FDIC.[61] (Some portion of the Fed's emergency loans would already have been repaid.)
[edit] Canada
In May 2008 Canada's GDP was reported to have decreased 0.1 percent due to decline in mining, oil and gas industry by 1.2 percent and fall in automobile production by 3.6 percent. Construction output in Canada declined 0.4 percent, utilities 1.3 percent, and farms produced 0.9 percent less.[62] In the first quarter of 2008 Canada's economy shrank by 0.3 percent and the Bank of Canada said second quarter growth would likely be less than 0.8 percent projected.[63] Canada later revised its first quarter GDP showing a contraction of 0.8% and gave second quarter GDP showing an increase of only 0.3%.[64] In early December 2008, the Bank of Canada, in announcing that it was lowering its central bank interest rate to the lowest level since 1958, also declared that Canada's economy was entering in recession.[65] Unfolding of this prospect will take until late Spring 2009, as Q3 GDP was announced as a 0.3% gain on December 1st by Statistics Canada.
[edit] Mexico
Mexico is well managed by the incumbent government with strict fiscal discipline. However, the effects of the financial crisis originating from the United States has already impacted on Mexico's export sector. Reduced demand and high unemployment in almost a decade and the depreciation of the Mexico peso has caused analysts to revise growth estimates officially from 1.8 percent to somewhere closer to 0. [66][67]
[edit] Europe
Denmark showed a contraction of 0.6 percent in the first quarter of 2008 following a contraction of 0.2 percent in the fourth quarter of 2007.[68] Estonia similarly saw an economic contraction of 0.9 percent in the second quarter, following a 0.5 percent contraction in the first quarter.[69] Latvia's gross domestic product fell 0.2 percent in the second quarter following a fall of 0.3 percent in the first quarter.[70] Sweden's economy showed zero growth in the second quarter of 2008.[71] The entire economy of the European Union declined by 0.1 percent in the second quarter.[72] A European Commission forecast predicted Germany, Spain and the UK would all enter a recession by the end of the year while France and Italy would have flat growth in the third quarter following second quarter contractions.[73]
Chairwoman of the Association of Estonian Food Industry, Sirje Potisepp, warned the Estonian food industry would probably face bankruptcies citing two major beverage companies in Estonia filing for bankruptcy.[74] Ratings agency Fitch warned Ukraine could be headed for a currency crisis as economic fundamentals deteriorate and the country enters another period of political uncertainty. Fitch said the current account deficit was likely to widen further as prices of gas imports rise and prices of its steel exports fall and said Ukraine was likely to need to borrow more at a time when global debt markets have ground to a virtual standstill. Ukraine's central bank chief, Petro Poroshenko, said he saw no need to intervene to protect the currency.[75] Only a few countries retained their high GDP predictions for the year 2008, and can be mentioned Romania and Slovakia. Despite high economic growth for this year (8.7%), Romania will be touched by the crisis, analysts forecasting only 4.7 growth for 2009.
[edit] Iceland
- Further information: 2008 Icelandic financial crisis
The Icelandic króna has declined 40% against the euro during 2008 and has experienced inflation of 14%.[76] Iceland's interest rates have been raised to 15.5% to deal with the high inflation and the króna's decline is reportedly only beaten by that of the Zimbabwean dollar.[77] This depreciation in currency value has put pressure on banks in Iceland, which are largely dependent on foreign debt. On September 29, 2008 Iceland's Glitnir was effectively nationalized after the Icelandic government acquired 75% of the bank's stock. According to the government the bank "would have ceased to exist" within a few weeks if there had not been intervention.[78]
Iceland's Prime Minister Geir Haarde in a television address on October 6, 2008 said credit lines to Icelandic banks had been cut off and that "the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy" and that the government was looking to other countries for sources of liquidity.[76] Iceland's parliament responded to the crisis by approving a bill giving the Government wideranging powers over the banks, including the ability to seize their assets, force them to merge or compel them to sell off their overseas subsidiaries.[79] The parliament went on to seize control and nationalize Iceland's second largest bank, Landsbanki, on October 8, 2008.[80] The Parliament also extended a £400m loan to the nation's largest bank, Kaupthing, in hopes that it would strengthen the institution's balance sheet.[81]
On 8th October UK Prime Minister Gordon Brown announced that the UK government would launch legal action against Iceland, whose government announced that they had no intention of compensating any of the estimated 300,000 UK savers after the nationalization of Landsbanki and its online brand, Icesave.[82] Chancellor of the Exchequer Alistair Darling announced that the UK government would foot the entire bill, estimated at £4bn,[83][84] and that he was taking steps to freeze the assets of Landsbanki.[85] The following day, Darling used the Anti-Terrorism, Crime and Security Act 2001 as the basis for seizing the assets of Landsbanki Islands hf, an Iceland-based bank.[86] Icelanders launched an on-line petition drive to protest this action, which as seen as comparing Icelandic banks with Al-Qaida.[87]
Iceland's GDP is expected by economists to shrink at least 10 percent as a result of the crisis, putting Iceland by some measure in an economic depression.[88]
[edit] United Kingdom
The economy of the United Kingdom has also been hit by rising oil prices and the credit crisis. Sir Win Bischoff, chairman of Citigroup, said he believes that house prices in Britain will keep falling for another two years. The Ernst & Young Item club predicted growth of only 1.5 percent in 2008, slowing to 1 percent in 2009. They also predicted consumer spending would slow to only 0.2 percent, and forecast a two-year drop in investment. The Institute of Directors’ quarterly business opinion survey showed business optimism at its lowest level since the survey began in 1996.[89] Deputy Governor of the Bank of England, John Gieve said inflation would accelerate "well over" 4 percent while economic growth is "slowing fast." Bank of England Governor Mervyn King said there may be "an odd quarter or two of negative growth," following the first quarter of 2009. Gieve said he couldn't rule out the U.K. economy heading into a recession, adding the economy was "quite a long way" from the end of the slowdown.[90]
Nationwide, the UK's biggest building society, warned the UK could head into a recession after house prices in July fell 8.1 percent from the previous year. Housing prices declined by 1.7 percent in July, double the decline recorded in June. Standard & Poor's said on July 30, 2008 that 70,000 homeowners were in negative equity and it could rise to 1.7 million or about one in six homeowners in the UK based on an expected 17 percent decline into 2009. The Bank of England reported that mortgage approvals fell by a record of nearly 70 percent.[91] In Northern Ireland, house sales saw a fall of some 50 per cent according to a survey by the University of Ulster/Bank of Ireland and housing prices fell on average by 4 percent.[92] British manufacturing activity declined by the most in almost a decade in July, the third consecutive month of declines. The number of companies that went into administration in May–July was 938, an increase of 60 percent compared with the same period in 2007. The number of company liquidations in the second quarter rose to 3,689, a 16 percent increase and the highest quarterly figure in five years. House builders expect the number of houses built in 2008 in England and Wales to be the lowest since 1924. The declines are seen as an indication the United Kingdom has high chance of entering a recession.[93] Factory production in the UK dropped 0.5 percent in June when twelve out of 13 categories of factory production fell. The economic output of the UK was reported to have increased by just 0.2 percent in the second quarter, the joint-slowest pace since 2001.[94] The Office for National Statistics later gave a revised number saying growth in the British economy was at zero, the worst since the second quarter of 1992.[95] The current slowdown has ended 16 years of continuous economic growth, the longest period of economic expansion in Britain since the 19th century.[96] A report from the National Institute for Economic and Social Research said the economy contracted by 0.1 percent in the period from May to July and 0.2 percent from June to August.[97]
A voter backlash due to the personal financial effects of the global credit crunch was widely attributed by politicians of the United Kingdom Labour Party, which had been in power since 1997, as the reason their political fortunes took a dramatic downturn through May 2008, with a succession of defeats in by-elections and the London Mayoral election, and the worst opinion poll result in their history.[citation needed] Political opponents countered this apparent excuse by pointing to the fact that the incumbent Prime Minister Gordon Brown, who had taken office in June 2007 just before the crisis broke, had been the country's 'Iron Chancellor', and had allegedly not ensured the country had sufficient monetary reserves to be able to lower taxes and ease the burden on voters, despite overseeing one of the longest sustained periods of economic growth in the country's history. In August 2008 the party also faced calls to impose a windfall tax on the utility companies, who were reaping record profits due to the fuel crisis, perceived as in bad taste given rising food and fuel prices.
On 17 September 2008, news emerged that the banking and insurance group HBOS (Halifax Bank of Scotland) was in merger talks with Lloyds TSB about creating a UK retail banking giant worth £30bn. The move received the backing of the British government which stated that it will over-rule any claims from the competition authorities.
According to the Office for National Statistics unemployment claims in August 2008 increased by 32,500 to reach 904,900. The wider Labour Force Survey measure found joblessness rose by 81,000 to 1.72 million between May and July, the largest increase since 1999.[98]
In September 2008, British bank Bradford & Bingley's £20billion savings business was acquired by Spanish bank Grupo Santander. While its retail deposit business along with its branch network will be sold to Santander. The mortgage book, personal loan book, headquarters, treasury assets and its wholesale liabilities will be taken into public ownership.
By November 2008, unemployment had risen to over 1.8 million and is projected to surpass 2 million by Christmas and perhaps even as high as 3 million by 2010.
From 1 December 2008, the UK Government made the decision to cut VAT from 17.5% to 15% for 13 months in an attempt to encourage a big spend from UK shoppers before Christmas.
On 4 December 2008, the Bank Of England cut interest rates from 3% to 2%, which amounts to the lowest level since 1951.[99]
[edit] Russia
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- Further information: 2008 Russian financial crisis
The 2008 crisis in the Russian financial markets stemmed from the US sub-prime mortgage crisis and has been compounded by the plummeting price of oil, which has lost more than two thirds of its value since its record peak of USD 147 on 11 July 2008.[100] While according to the World Bank Russia’s strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than otherwise. Prudent fiscal management and substantial financial reserves have protected Russia from deeper consequences of this external shock. The government’s policy response so far — swift, comprehensive, and coordinated — has helped limit the impact. [101]
On December 13, The Minister of Economic Development Andrei Klepach said that the country had entered into recession, as they have recorded a drop in production for two consecutive quarters. He recognized that the GDP growth rate would be lower than the expected 6.8% at the end of 2008. He clarified that the industrial production would be around 1.9% this year, well below the government forecast 4.7%.[102]
[edit] Sweden
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Sweden has not been severely affected, and no banks or financial institutions have had real trouble. However, some effects have been visible, mostly based on distrust and similar psychological mechanisms. The stockmarket has declined heavily, because of influence from New York and other markets. Some banks, especially Swedbank had invested heavily in US housing bonds.
The banks did not trust each other well and the difference between the interbank interest rate and the state interest rate has gone up at least 1%. The housing loan interest rates have gone up even further. The global sales especially of cars has gone down, forcing the Swedish car industry to lay off staff and contractors. The increased fear of enduring recession and the increased financing costs have lowered company investments and private consumption.
Sweden entered recession after a two consecutive quarter of economic contraction. The Swedish GDP contracted by 0,1% during both the second and third quarters of 2008.[103] Sweden's economy sank into recession in the third quarter of 2008. In October retail sales dropped 0.6 percent in the month, and household consumption fell 0.2 percent in the third quarter.[104] The Riksbank offered 60 billion kronor ($7.71 billion) in loans to financial firms at an auction, after having opened credit facilities to maintain the liquidity in the banking sector.[105] At the beginning of December, the government launched a financial stability package to rev up the economy,[106] while the central bank, urged by the OECD,[107] cut down its interest rates to 2%[108]
[edit] Ukraine
- Further information: Economy of Ukraine#Ukraine and the economic crisis of 2008
Ukraine was hit heavy by the economic crisis of 2008, analysts say the plights of Ukraine are slumping steel prices, local banking problems and the cutting of Russian gas supply in January 2009.[109][110] Key industries such as metallurgy and machine building are laying off workers, and real wages have started to fall for the first time in a decade. This makes it hard for Ukrainians to make payments on loans, many of which, especially mortgages, were issued in dollars. Since most people are paid in hryvnyas, they have to buy dollars with the weak hryvnya and are paying back much more on the loans than they had expected. The share of problem loans in bank portfolios grew to 10.3 percent by December 11 and is continuing to grow. Banks have all but stopped issuing loans, and clients have hurried to withdraw deposits. In October the National Bank of Ukraine introduced a moratorium on withdrawals ahead of schedule.[110]
Mid-December 2008 the International Monetary Fund (IMF) has lowered the forecast for Ukraine's GDP in 2009 from a 2.5% growth rate to a 5% decline,[111] the same day the Cabinet of Ministers worsened the GDP growth forecast to 0.4% from 6% for 2009.[112]
In November 2008, the IMF approved a stand-by loan program for Ukraine to the tune of $16.5 billion.[113]
[edit] Eurozone
In the eurozone as a whole, industrial production fell 1.9 percent in May, the sharpest one-month decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8 percent in May compared with a year earlier.[114] Retail sales fell by 0.6 percent in June from the May level and by 3.1 percent from June in the previous year. Germany was the only country out of the four biggest economies in the eurozone to register an increase of activity in July though the increase was sharply down. Economic analysts from RBS and capital Economics say the decline raises the risk of the eurozone entering a recession in 2008.[115] In the second quarter, the eurozone's economy was reported to have declined by 0.2 percent.[116] The economy declined again in the third quarter putting the eurozone in a technical recession.
[edit] Ireland
Ireland in the first quarter of 2008 reported a contraction in GDP of 1.5 percent, its first economic contraction since it began reporting by quarter and first recorded contraction since 1983.[117] However, Ireland's Central Statistics Office reported growth in GNP of about 0.8 percent, Ireland's government considers GNP a better measure of the economy. Analysts have predicted Ireland's economy will contract further in the rest of the year.[118] A report from NCB Stockbrokers predicts gross national product will fall by 1 percent in 2008 and by 0.4 percent in 2009 due to a decline in multinationals hit by the global economic slowdown. An economist from NCB said non-residential investment would fall by 5 percent in 2008 and by 12 percent in 2009.[119] Ireland's GDP saw a contraction in the second quarter by 0.5 percent making Ireland the first member of the eurozone to enter a recession.[120]
[edit] Spain
Spain's Martinsa-Fadesa, a construction company, has declared bankruptcy as it failed to refinance a debt of €5.1 billion. The two banks with most exposure to Martinsa-Fadesa are reportedly Caja Madrid, at €900m, and Banco Popular Español, at €400m. Spain's finance minister Pedro Solbes has said it would not bail out the company. In the second quarter in Spain house prices reportedly fell 20 percent.[121] In Castilla-La Mancha some 69 percent of all houses built over the past three years are still unsold. Deutsche Bank said it expects a 35 percent fall in real house prices by 2011. Spain's premier, Jose Luis Zapatero, blamed the European Central Bank for making matters worse by raising interest rates. More than 98 percent of home loans in Spain are priced off floating rates linked to Euribor, which has risen 145 basis points since August. Housing accounts for over 10 percent of Spain's economy. The Bank of Spain is concerned about the health of smaller regional lenders with heavy exposure to the mortgage market.
Although Spain has avoided recession in the first half of 2008, unemployment in the country has risen by 425,000 over the past year, reaching 9.9 percent. Car sales in Spain fell 31 percent in May.[114] Spain's factory output slumped 5.5 percent in May. The country's business lobby Circulo de Empresarios warned of a "high probability" that Spain's economy would fall into recession in the second half of 2008 due to the housing collapse.[122] Spain had a 7.9 percent decline in retail sales in June compared to the previous year, the largest drop since Spain began registering the results and the seventh consecutive monthly decline. This included a 17.9 percent drop in retail sales of household goods. June food sales in Spain fell by 6.8 percent.[123] Morgan Stanley issued a major alert on the health of Spanish banks and the Spanish economy in a report, saying, "A momentous economic slowdown is now under way. We believe the deterioration in Spain is just in the beginning stages. The bulk of the pain will be suffered in 2009." Morgan Stanley also warned there was 40 percent chance of a 0.5 percent contraction of the Spanish economy in 2009, with a risk of an even more extreme 1.4 percent contraction in 2009.[124] According to Spanish automobile manufacturers' association ANFAC new car sales fell 27.5 percent in July from the same time in 2007, the third consecutive monthly drop of over 20 percent. Spain's government forecast the unemployment rate would rise to 10.4 percent in 2008 and to 12.5 percent in 2009. Spain's second largest bank BBVA predicted the unemployment rate could reach 14 percent in 2009.[125] Spain's Purchasing Managers Index for the manufacturing sector in July fell to a new low suggesting a deep recession.[126] In the second quarter Spain's economy grew by 0.1 percent, the lowest gain in 15 years.[116]
[edit] Germany, Italy, Greece, Portugal
In Germany officials are warning the economy could contract by as much as 1.5 percent in the second quarter because of declining export orders. The economy of Germany contracted in both the second and third quarters putting Germany now in a technical recession. Although the idea was fought for a moment Angela Merkel and the German government approuved a €50 billion strong rescue plan to protect the German economy of the crisis, making of it Western Europe's biggest rescue plan for now in this crisis.[5] Industrial output in both Italy and Greece has slumped 6.6 percent over the past year. However, Greece's economy will continue to grow for both 2008 and 2009; Eurostat expects the Greek economy to grow 3.1% and 2.5% respectively. Portugal is off 6.2 percent.[114] The country, which was just recovering from a period of economic crisis during the past years, had several industries closing, one bank saved by the state, the remaining banks showing signs of significant unrest and unemployment figures rising to almost 11%. Germany's industrial output was down 2.4 percent in May, the fastest rate for a decade. Orders have now fallen for six months in a row, the worst run since the early 1990s.[citation needed] The German Chamber of Industry and Commerce warned of up to 200,000 job losses in coming months.[122] German retails sales fell 1.4 percent in June more than any expectations.[127] The German economy declined by 0.5 percent in the second quarter.[116] In Italy, Fiat announced plant closures and temporary layoffs at factories in Turin, Melfi, Imola and Sicily. Car sales in Italy have fallen by almost 20 percent over each of the past two months. Metalmeccanici, Italy's car workers' union said, "The situation is evidently more serious than had been understood."[122] On July 10, 2008 economic think tank ISAE lowered its growth forecast for Italy to 0.4 percent from 0.5 percent and cut the 2009 outlook to 0.7 percent from 1.2 percent.[128] Analysts have predicted Italy had entered a recession in the second quarter or would enter one by the end of the year with business confidence at its lowest levels since the 9-11 terrorist attacks.[129] Italy's economy contracted by 0.3 percent in the second quarter of 2008.[130]
[edit] France, Finland, Benelux
Other eurozone members saw a decline in their economy in the second quarter. France's economy declined by 0.3 percent, Finland's economy declined by 0.2 percent, and the Netherland's showed zero growth in the second quarter.[116]
According to INSEE, France's statistical agency, the French GDP was projected to decline by 0.1 percent in the third quarter of 2008 with another 0.1 percent decline in the fourth quarter and Eric Woerth, the French budget minister, said France was in a technical recession.[131] However the final estimations gave by the INSEE showed the French GDP actually increased by 0.14 percent thus avoiding a technical recession.[132] In order to fight the economic crisis a €26 billion strong rescue plan was announced by President Sarkozy. This saving plan however includes the scheduled budget for 2009, this makes €15.5 billion in addition to the normal budget for 2009. The French public deficit in 2009 is expected to raise to 4% with of this plan. It is similar in its conception to Obama's rescue plan in that it will be used, to a large extent, for public investments on infrastructures. More precisely railways, waterways, motorways will be improved; Hospitals, tribunals, the Gendarmerie and the Police will be modernised. In addition to these infrastructure the national defence will also benefit from this plan as well as public landmarks. Small business companies will get a tax rebate in 2009. Another part of the deficit will be used to pay for the national debt to French companies. Regulations over the public market, especialy construction and civil engineering, will be softened. Laws on urbanism will also be softened to favour construction and significantly lower delays between the moment a project is discussed and then built.[133]
On September 28, Dutch-Belgian bank Fortis was partially nationalized with a cash infusion from the Benelux countries amounting to €11.2 billion. Fortis' troubles started in the beginning of the year with an announcement that it faced around $1.5bn of losses in the American sub-prime catastrophe. In June, the company announced a selloff of assets to raise €5 bn to improve the liquidity of the organisation. This, however, proved insufficient.[134] On 6 October 2008, the French bank BNP Paribas took over 75 percent of Fortis' activities in Belgium, and 66 percent in Luxembourg, in exchange for the Belgian government becoming the new group's major shareholder.[135]
In May industrial output fell in the Netherlands by 6 percent.[136]
[edit] Middle East
[edit] Gulf Corporation Council
Decreasing oil prices will affect Persian gulf countries.
[edit] Lebanon
Lebanon is one of the only seven countries in the world to have scored profits in 2008.[137] Given the regular security turmoil it has faced in the past, its banks have adopted a conservative approach. The strict regulations imposed by the central bank were crafted to make the Lebanese economy immune to political crisis; and so far, this has applied to the global economic crisis as well. The Lebanese banks remain, under the current circumstances, high on liquidity and reputed for their security. [138]
Moody's has recently shifted Lebanon's sovereign rankings from stable to positive acknowledging its financial security.[139] Moreover, with a Beirut stock market increase of 51%, the index provider MSCI, ranked Lebanon as the world's best performer in 2008.[137] Analysts are, nonetheless, skeptic about the future indirect effects of the crisis, but so far, the direct consequences have proved to be positive.
[edit] Asia
[edit] China
In China, the IMF predicts GDP growth for 2008 will be 9.7% and drop to 8.5% in 2009.[140] A struggle was underway to see who would swallow the losses on US Agencies and Treasuries.[141] On November 9, 2008 China announced a package of capital spending plus income and consumption support measures. Four trillion yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.[142][143]
[edit] Hong Kong
The Hong Kong economy officially slid into recession in the final quarter of 2008. The economy is predicted to grow at 2 percent in 2009. Hong Kong is an advanced tertiary economy built on services, retail, tourism, transport and financial industries. Hong Kong's manufacturing industry is located in Guangdong province which employs over 11 million people.[144] The Hang Seng has lost over 60 percent of its value, property market lost over 40 percent in value and unemployment is at a record high of 4.8 percent. [145]
[edit] India
India's economy is expected to grow about 6.8% during FY2008 and as low as 5.5% in FY2009.[146][147] India's economy grew at an annual rate of 9% or more in the past three years, second only to China among the major economies, and the projections for FY2008 indicate that India's economic growth has been affected by the economic crisis.[148] The former Indian Finance Minister P. Chidambaram, however, said that he expected India's economy to "bounce back" to 9% during FY2009.[149] This prediction has been met with skepticism by observers.[147][150] The Asian Development Bank predicted India to recover from weakening momentum in 4-6 quarters.[151] At the G20 Summit, India called for coordinated global fiscal stimulus to mitigate the severity of the global credit crunch.[152] India said that it would inject US$4.5 billion into the financial system to help exporters.[153] Some analysts pointed that Indi