Effects of the Great Recession

This information is related to the effects of the late-2000s recession that is happening worldwide.

Overview

The late-2000s recession is shaping up to be the worst post-World War II contraction on record:

• Real gross domestic product (GDP) began contracting in the third quarter of 2008, and by early 2009 was falling at an annualized pace not seen since the 1950s.
• Capital investment, which was in decline year-on-year since the final quarter of 2006, matched the 1957–58 post war record in the first quarter of 2009. The pace of collapse in residential investment picked up speed in the first quarter of 2009, dropping 23.2% year-on-year, nearly four percentage points faster than in the previous quarter.
• Domestic demand, in decline for five straight quarters, is still three months shy of the 1974–75 record, but the pace – down 2.6% per quarter vs. 1.9% in the earlier period – is a record-breaker already.
• The Economic recession has been part of the causes of the Resurgence of racism in Europe 2008-2011.

Trade and industrial production

International trade, 2000-2010. 2000=100. A plunge in the volumes of exchanges can be seen as of the second half of 2008.

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.

In February 2009, The Economist claimed that the financial crisis had produced a "manufacturing crisis", with the strongest declines in industrial production occurring in export-based economies.

In March 2009, Britain's Daily Telegraph reported the following declines in industrial output, from January 2008 to January 2009: Japan −31%, Korea −26%, Russia −16%, Brazil −15%, Italy −14%, Germany −12%.. Some analysts ventured that the world was going through a period of deglobalization and protectionism after years of increasing economic integration.

Sovereign funds and private buyers from the Middle East and Asia, including China, are increasingly buying in on stakes of European and U.S. businesses, including industrial enterprises. Due to the global recession they are available at a low price. The Chinese government has concentrated on natural-resource deals across the world, securing supplies of oil and minerals.

Retail

Mall museums are a new global development resulting from the 2007-2010 global recession, where museums take over large spaces within shopping malls, making beneficial use of empty space, drawing shoppers, and leveraging the foot traffic of the malls to bring more people into museums, exhibits and other educational venues.

Pollution

According to the International Energy Agency man-made greenhouse gas emissions will decrease by 3% in 2009, mainly as a result of the financial crisis. Previously emissions had been rising by around 3% per year. The drop in emissions is only the 4th to occur in 50 years.

Unemployment

The International Labour Organization (ILO) 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. The number of unemployed people worldwide could increase by more than 50 million in 2009 as the global recession intensifies, the ILO has forecast.

In December 2007, the U.S. unemployment rate was 4.9%. By October 2009, the unemployment rate had risen to 10.1%. A broader measure of unemployment (taking into account marginally attached workers, those employed part time for economic reasons, and some (but not all) discouraged workers) was 16.3%. In July 2009, fewer jobs were lost than expected, dipping the unemployment rate from 9.5% to 9.4%. Even fewer jobs were lost in August, 216,000, recorded as the lowest number of jobs since September 2008, but the unemployment rate rose to 9.7%. In October 2009, news reports announced that some employers who cut jobs due to the recession are beginning to hire them back. More recently, economists announced in January 2010 that economic growth in the U.S. resumed in the fourth quarter of 2009, and some have predicted that limited job growth will begin in the spring of 2010.

The average numbers for European Union nations are similar to the US ones. Some European countries have been hit by recession very hard, for instance Spain's unemployment rate reached 18.7% (37% for youths) in May 2009 — the highest in the eurozone.

The rise of advanced economies in Brazil, India, and China increased the total global labor pool dramatically. Recent improvements in communication and education in these countries has allowed workers in these countries to compete more closely with workers in traditionally strong economies, such as the United States. This huge surge in labor supply has provided downward pressure on wages and contributed to unemployment.

Financial markets

Main article: Financial crisis of 2007–2010

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.

January 2008 was an especially volatile month in world stock markets, with a surge in implied volatility measurements of the US-based S&P 500 index, and a sharp decrease in non-U.S. stock market prices on Monday, January 21, 2008 (continuing to a lesser extent in some markets on January 22). Some headline writers and a general news columnist called January 21 "Black Monday" and referred to a "global shares crash," though the effects were quite different in different markets.

The effects of these events were also felt on the Shanghai Composite Index in China which lost 5.14 percent, most of this on financial stocks such as Ping An Insurance and China Life which lost 10 and 8.76 percent respectively. Investors worried about the effect of a recession in the US economy would have on the Chinese economy. Citigroup estimates due to the number of exports from China to America a one percent drop in US economic growth would lead to a 1.3 percent drop in China's growth rate.

There were several large Monday declines in stock markets world wide during 2008, including one in January, one in August, one in September, and another in early October. As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year. The Dow Jones Industrial Average had fallen about 37% since January 2008.

The simultaneous multiple crises affecting the US financial system in mid-September 2008 caused large falls in markets both in the US and elsewhere. Numerous indicators of risk and of investor fear (the TED spread, Treasury yields, the dollar value of gold) set records.

Russian markets, already falling due to declining oil prices and political tensions with the West, fell over 10% in one day, leading to a suspension of trading, while other emerging markets also exhibited losses.

On September 18, UK regulators announced a temporary ban on short-selling of financial stocks. On September 19 the U.S. Securities and Exchange Commission (SEC) followed by placing a temporary ban of short-selling stocks of 799 specific financial institutions. In addition, the SEC made it easier for institutions to buy back shares of their institutions. The action is based on the view that short selling in a crisis market undermines confidence in financial institutions and erodes their stability.

On September 22, the Australian Securities Exchange (ASX) delayed opening by an hour after a decision was made by the Australian Securities and Investments Commission (ASIC) to ban all short selling on the ASX. This was revised slightly a few days later.

As is often the case in times of financial turmoil and loss of confidence, investors turned to assets which they perceived as tangible or sustainable. The price of gold rose by 30% from middle of 2007 to end of 2008. A further shift in investors' preference towards assets like precious metals or land is discussed in the media.

In March 2009, Blackstone Group CEO Stephen Schwarzman said that up to 45% of global wealth had been destroyed in little less than a year and a half.

Travel

According to Zagat's 2009 U.S. Hotels, Resorts & Spas survey, business travel has decreased in the past year as a result of the recession. 30% of travelers surveyed stated they travel less for business today while only 21% of travelers stated that they travel more. Reasons for the decline in business travel include company travel policy changes, personal economics, economic uncertainty and high airline prices. Hotels are responding to the downturn by dropping rates, ramping up promotions and negotiating deals for both business travelers and tourists.

According to the World Tourism Organization, international travel suffered a strong slowdown beginning in June 2008, and this declining trend intensified during 2009 resulting in a reduction from 922 million international tourist arrivals in 2008 to 880 million visitors in 2009, representing a worldwide decline of 4%, and an estimated 6% decline in international tourism receipts. The decline caused by the recession was further exacerbated in some countries due to the outbreak of the AH1N1 virus.

Insurance

A February 2009 study on the main British insurers showed that most of them do not plan to raise their insurance premiums for the year 2009, in spite of the prediction of a 20% raise made by The Daily Telegraph and The Daily Mirror. However, it is expected that the capital liquidity will become an issue and determine increases, having their capital tied up in investments yielding smaller dividends, corroborated with the £644 million underwriting losses suffered in 2007.

Small-business lending

New York Times reported that the U.S. Treasury Department found a sizeable decrease in small-business lending by the 22 largest bank recipients of federal bailout money. The banks reduced their small-business lending by US$12.5 billion, a decline of 4.6 percent during a seven-month period ended in November 2009. During that time, the two biggest small-business lenders, Wells Fargo and Bank of America reduced their lending to small-business by 4.4 percent and 6.2 percent, respectively. Bank of America explained that about half of the decline was attributable to decrease demand, and a decline in sales and creditworthiness among small businesses furthered the drop.

Countries most affected

The crisis affected all countries in some ways, but certain countries were vastly affected more than others. By measuring currency devaluation, equity market decline, and the rise in sovereign bond spreads, a picture of financial devastation emerges. Since these three indicators show financial weakness, taken together, they capture the impact of the crisis. The Carnegie Endowment for International Peace reports in its International Economics Bulletin that Ukraine, as well as Argentina and Jamaica, are the countries most deeply affected by the crisis. Other severely affected countries are Ireland, Russia, Mexico, Hungary, the Baltic states, United States and United Kingdom. By contrast, China, Japan, India, Iran, Peru and Australia are "among the least affected."

Political instability related to the economic crisis

In December 2008, Greece experienced extensive civil unrest that continued into January and then again in late February many Greeks took part in a massive general strike because of the economic situation and shut down schools, airports, and many other services in Greece. In January 2009, the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police due to the government's handling of the economy. Hundreds of thousands protested in France against President Sarkozy's economic policies, but it is important to remember that such protests, although rare in countries such as the USA, are quite a common phenomenon in Europe, even in periods of growth (major strikes in France in 1968, and many others occurring almost every five to ten years). Prompted by the financial crisis in Latvia, the opposition and trade unions there organized a rally against the cabinet of premier Ivars Godmanis on January 13, 2009. The rally gathered some 10–20 thousand people. In the evening, the rally turned into a riot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. Police and protesters also clashed in Lithuania. In addition to various levels of unrest in Europe, Asian countries have also seen various degrees of protest. Communists and others rallied in Moscow to protest the Russian government's economic plans. Protests have also occurred in China as demands from the West for exports were dramatically reduced and unemployment increased.

Beginning February 26, 2009, an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflected the assessment of United States intelligence agencies that the global financial crisis presented a serious threat to international stability. In March 2009, British think tank Economist Intelligence Unit published a special report titled 'Manning the barricades' in which it estimated "who's at risk as deepening economic distress foments social unrest". The Report envisioned the next two years filled with great social upheavals, disrupted economies and toppled governments around the globe.

Business Week in March 2009 stated that global political instability is rising fast due to the global financial crisis and is creating new challenges that need managing. The Associated Press reported in March 2009 that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations." Even some developed countries are seeing political instability. NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off."

"The recent wave of popular unrest was not confined to Eastern Europe. Ireland, Iceland, France, the U.K. and Greece also experienced street protests, but many Eastern European governments seem more vulnerable as they have limited policy options to address the crisis and little or no room for fiscal stimulus due to budgetary or financing constrains. Deeply unpopular austerity measures, including slashed public wages, tax hikes and curbs on social spending will keep fanning public discontent in the Baltic states, Hungary and Romania. Dissatisfaction linked to the economic woes will be amplified in the countries where governments have been weakened by high-profile corruption and fraud scandals (Latvia, Lithuania, Hungary, Romania, the UK and Bulgaria)."