Recession of 2009/Addendum

International recession and recovery by region

World

The crash of 2008 had an adverse effect upon most of the world's economies, but in 2008 it was only the more vulnerable of the industrialised economies that seemed likely to suffer major downturns. By the spring of 2009, however, most of the world's economies were facing severely damage. The United States and United Kingdom economies had at first suffered more seriously than most because of collapsing housing and consumer credit booms but it soon became apparent that more serious downturns were threatening the economies of Japan and Germany. Neither had experienced such booms, but both had proved to be exceptionally vulnerable to reductions in foreign demand for their exports resulting from reductions in world trade (which is estimated to have fallen by 7 per cent in the 4th quarter of 2008) - and particularly trade in capital goods. Most of the other developed economies (except Spain and Ireland) were also relatively free of such problems, but they too were damaged by loss of exports. The economies of commodity-exporting countries in Eastern Europe, the Middle East and South America suffered mainly from falls in commodity prices, and some other emerging economies were also damaged by the withdrawal of capital inflows from the developed economies.

The United States

By early 2009, the United States economy was suffering from a severe lack of demand. Three and a half million jobs had been lost in just over a year and businesses were responding to falling demand by laying off workers or cutting back on their hours or wages, causing families to further reduce their demand and businesses to respond with yet more layoffs and cutbacks. The problem was being made worse by the inability of the financial system to provide the credit necessary for recovery, and the resulting "credit crunch" was causing more job losses and further declines in business activity, which, in turn, was adding more pressure on the financial system. Two and a half million families had faced foreclosure in the previous year, and the reductions in personal wealth resulting from the fall in house prices were causing further reductions in demand. Reports from the twelve Federal Reserve Districts in March suggested that national economic conditions deteriorated further during the reporting period of January through late February. Ten of the twelve reports indicated weaker conditions or declines in economic activity. The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions. Looking ahead, contacts from various districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010. The availability of credit generally remained tight. Lenders continued to impose strict standards for all types of loans, with scattered reports of further tightening and particular scrutiny focused on construction projects and commercial real estate transactions.

Europe

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 , 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 , 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 and monetary action was taken to tackle the growing recession . A fiscal stimulus amounting to 1.4 per cent of GDP 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 the bank rate from 5% to 0.5% and begun a programme of quantitative easing. The UK’s national debt had been comparatively low at the outset of the recession, but there has since been a large increase in the budget deficit, which is expected to rise to over 9 per cent of gdp by the end of 2009, mainly as result of the operation of automatic stabilisers. The government's policy was endorsed by the IMF, but was attacked by domestic critics and (at first ) by members of other European governments . The reduction of value-added tax appears to have resulted in an early boost to retail sales .

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 major fiscal stimulus (amounting eventually to 3.5 per cent of gdp) 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 by 2010. Forecasters expect the downturn of the German economy to be deeper than those of other major industrialised countries except Japan.

France

The government adopted a fiscal stimulus amounting to over 1% of GDP, 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 by 2010

Iceland

Before the Lehman Brothers collapse in September 2008, Iceland appeared to be in an enviable position among the developed countries. It 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 , believe 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. A loan was obtained from the International Monetary Fund and recovery is expected during 2011 .

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. In an attempt to restore confidence, the Irish government undertook to guarantee loans to the banks, as a result of which it experienced a large increase in its budgetary deficit. The sums of money involved were so large by comparison with the country's GDP that foreign investors became wary of a sovereign default, and the government's ability to finance the deficit was threatened by a general loss of confidence. In April 2009, 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 . As Paul Krugman has noted "the Irish government now predicts that this year [2009] GDP will fall more than 10 percent from its peak, crossing the line that is sometimes used to distinguish between a recession and a depression

Additional steps taken include 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.

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 .

Developing countries

According to a World Bank report published in March 2009, 94 out of 116 developing countries have experienced a slowdown in economic growth. Of these countries, 43 have high levels of poverty. To date, the most affected sectors are those that were the most dynamic, typically urban-based exporters, construction, mining, and manufacturing.

Recent economic developments

2009, 1st quarter

World

World trade falls - the value of trade by the G7 countries is 23% below that of Q1 2008.

Protection grows World Bank reports 47 trade restrictions by 17 G20 countries [4]

Developing countries lose exports [5].

IMF lending resources to increase - US proposes tripling them [6]

G20 Finance Ministers pledge further action [7]

The United States

Rising unemployment - 7.6% in January, 8.1% February.

Record budget deficit - $1.2 trillion 2009 deficit forecast by the Congressional Budget Office [8]. (Government spending expected to rise to 23% of GDP [9])

Major fiscal stimulus - proposed by President-elect Obama in his speech of 8 January [10][11]

Congress approves stimulus package - American Recovery and Reinvestment Act(H.R. 1) - a $839 billion stimulus package [12]

Financial Stability Plan - Government launches a plan intended to restore confidence in the financial system (including mandatory stress tests for major banks) and to provide financial assistance households and businesses[13]

Fears of Trade War – America First Steel Act, Homeland Security Comm. approves bill requiring federal agencies to use U.S. steel for public works projects, (HR 5935) [14] [15]

Money supply increase Federal Reserve to increase the size of its balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. [16]

Washington's digression Outrage over AIG bonuses threatens to derail Obama's rescue plans [17]

Housing market bottoms out?. House sales rise by about 5% in February.

Public Private Partnership Investment Program announced [18] to purchase $1 trillion worth of toxic assets from banks.

Europe excluding UK

Industrial production falls - Eurozone index drops by 3.5% in January.

ECB Discount rate cut from 2.4% to 2% [19]

French industrial production plunges at an annual rate of 13% in January.

German output projected to fall by 2.5 percent in 2009[20].

Eastern Europe's economic crisis [21]

IMF's Hungary programme[22]

United Kingdom

Industrial production falls - output decreased by 5.3 per cent in the first quarter of 2009 compared with the previous quarter and fell 12.1 per cent against the first quarter of 2008[23].

Fiscal stimulus announced- the main elements being a temporary reduction of the rate of value-added tax from 17.5% to 15%, a bringing forward of £3 billion of capital investment, and a range of minor tax reductions. The resulting discretionary fiscal easing (1.4% of GDP in 2009) together with the much larger effects of the automatic stabilisers was expected to raise the fiscal deficit to 9% of GDP in 2009 and even higher in 2010.[24]. Plans that were put forward for the halving of the deficit within 4 years included an increase to 45% of income tax rates for earners of over £150,000 a year

Quantitative easing [25] and Asset protection [26][27]

Discount rate cut - from 2% to 1.0% [28].

IMF endorses policy IMF Deputy Managing Director says "There is no unique weakness in the UK economy, and we believe the measures taken ...will strengthen the economy over the medium term "[29].

Asia

China's growth rate falls [30]

Japan's exports halved - exports in January 2009 were 56% less than in January 2008 [31].

Japan's industrial production falls - in January to 10.0% lower than in the previous month and 30.8% below that of January 2008 .

Japan's IMF loan - of $100bn[32].

2009, 2nd quarter

World

Signs of recovery- OECD leading indicators show moves toward long-term trend for the economies of nearly all industrialised countries[33], and G8 Finance Ministers say "there are signs of stabilization in our economies, including a recovery of stock markets, a decline in interest rate spreads, improved business and consumer confidence, but the situation remains uncertain and significant risks remain to economic and financial stability."[34]

Record public debt- the IMF expects the public debt of the 10 leading economies to rise from 78% of GDP on 2007 to 114% in 2010, or $50,000 per person.

United States

Output fall moderates? Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year

Banks fail stress tests - of the 19 banks tested, it was found that ten of them need to raise a total of $74.6bn. Any who fail to raise their quota will come under increased government control.

10 banks repay Treasury loans - received under the Troubled Asset Relief Program.

Credit crunch eases The LIBOR three-month lending rates for the dollar fell below 1 per cent for the first time. The previous all-time low was 1 per cent in June 2003.

Mark to market rule eased for inactive markets to what an asset could fetch in an "orderly" transaction (not including distressed transactions or fire-sales)[35]

Europe except UK

ECB discount rate cut to 1 percent - the interest rate on the main refinancing operations of the Eurosystem be decreased by 25 basis points to 1.00%, from 13/05/09[36].

ECB quantitative easing starts - with plans to buy €60bn worth of bonds. [37]

Ireland's supplementary budget - a number of tax increases and public expenditure cuts designed to reduce the deficit to 10.75 per cent of GDP for 2009 [38].

United Kingdom

"Recession is over!" - according to Martin Weale of the National Institute for Economic and Social Research[39]

Purchasing managers are optimistic PMI index reaches 50.9 - 51.7 for services (50 means stable)[40].

More quantitative easing: Bank of England increases its Asset Purchase Programme by £50 bn to £125 bn [41]

Budget - broadly in line with pre-budget proposals (but with top tax rate raised to 50%)

Treasury forecasts 2010 upturn and debt of 75% of GDP- puts gdp growth at -3½ to -3¾ per cent for 2009 (in line with independent forecasts) and 1 to 1½ per cent for 2010 (at the upper end of the range of independent forecasts) and forecasts an increase in national debt to about 75 percent of gdp.

S&P outlook revised to negative but 'AAA/A-1+' rating remains [42] - assuming national debt to reach 100% of GDP by 2013 and bank rescues to cost £145bn (note lower IFS estimates [43]).

House prices rise - twice in 3 months [44]

2009 3rd quarter

Europe, excluding the UK

Deflation? The annual HCIP index rate was negative - and below 1.0% in Portugal and Spain(-1.4), Luxemburg (-1.5), Belgium (-1.7), and Ireland (-2.6) [45]

United Kingdom

Quantitative easing extended[46] - by £50 billion to £175 billion.

Leading Indicators

Ratio to trend, amplitude adjusted, per cent
(long-term average = 100)
Growth cycle phases of the CLI are defined as follows: expansion (increase above 100), downturn (decrease above 100), slowdown (decrease below100), recovery (increase below 100).

	Japan	Italy	France	Germany	United States	United Kingdom	China	Russia
January 2009	91.2	96.2	96.3	90.7	91.3	96.3	91.7	88.2
February 2009	90.2	96.3	96.7	90.3	90.9	96.3	92.6	87.0
March 2009	89.4	97.3	97.8	90.2	90.7	96.7	93.4	86.2
April 2009	88.7	98.8	99.0	91.0	91.2	97.5	94.6	86.2
May 2009	89.5	101.1	100.3	93.8	92.7	98.3	96.3	88.2
June 2009	93.5	102	101.3	96.3	94.4	99.3	98	91.5
July 2009	94.0	104.8	102.7	98.5	96	100.6	99.4	92.8

Source: OECD Composite leading indicators [47]

Forecasts

Annual percentage growth in Gross Domestic Product

(forecasts are shown in italics)

Date	Source	Country	2007	2008	2009	2010	2011
30 March 2009	World Bank [48]	United States	2.0	1.1	-2.4	2.0
		Japan	2.1	-0.7	-5.3	1.3
		Euro area	2.6	0.7	-2.7	0.9
		China	12	9.0	6.5	7.3
		Developing	6.1	5.8	2.2	4.8
		World	3.7	3.1	-0.6	2.9
9 May 2009	Economist Poll [49]	United States			-2.9	1.4
		United Kingdom			-3.7	0.3
		France			-2.9	0.3
		Germany			-5.2	0.3
		Japan			-6.4	0.6
1 June 2009	OECD Economic Outlook [50]	United States		1.1	-2.8	0.9
		United Kingdom		0.7	-4.3	0.0
		France		0.7	-3.0	-0.2
		Germany		1.0	-6.1	0.2
		Japan		-0.6	-6.8	0.7
3 October 2009	International Monetary Fund [51]	United States	2.0	0.8	-2.7	1.5
		United Kingdom	3.0	0.7	-4.4	0.9
		France	2.1	0.3	-2.4	0.9
		Germany	2.5	1.3	-5.3	-0.3
		Japan	2.4	-0.7	-5.4	1.7'
		China	13	9	8.5	9.0
		World	3.8	3.1	-1.1	3.1