A Glimpse Beyond the Global Recession

Economic Review

  1. Emerging economies have failed to prevent a global recession
  2. The United States is in a severe recession and this is preventing the recovery of the global economy
  3. The credit crunch is preventing faster economic recovery
  4. Fiscal stimulus have cushioned the global recession but is unsustainable in the long-run

The global economy is going through its worst recession since the Great Depression of the 1930s. Earlier talks on the emerging economies ‘decoupling’ from the advanced economies can now be seen to be wishful thinking as the emerging economies have failed to maintain global economic growth. The only exceptions are China and India that are still achieving decent economic growth. However, momentum has ceased as export led demand have dropped and domestic asset bubbles have burst.

One of the main reasons for this economic catastrophe is the United States which still accounts for over one-fifth of global economic output. The United States is now in a recession that matches the recession of the early 1980s and is now seeing its unemployment soar to some five million people. It is likely that unemployment on the United States will reach close to one in ten by the end of 2009.

Japan and Germany are also among those severely affected by the global economic downturn. Both countries are likely to see their Gross Domestic Product shrink by 6% and 4% respectively by the end of the year. Although the sub-prime mortgage crisis did not directly impact the two advance economies, industrial production and cross-border trade have slwed down dramatically since 2008.

The difference between this recession and the recessions in the mid 1970s, the late 1970s and the early 1990s is that this recession have badly damaged the international banking system. Banks have always played the role of the weakest link by pooling funds from individual savers and channeling them to borrowers in search for loans. The damage done to the banking system is now preventing this process from happening smoothly and presents a severe challenge to global economic recovery.

Hence, the popularity of the term ‘credit crunch’ in recent days as a term to describe the failure of the banking system to effectively allocate the flow of credit to household and businesses. While fiscal stimulus have indeed helped to lessen the effect of the credit crunch, it is unable to completely negate its effects. Furthermore, fiscal stimulus is unsustainable in the long-run as governments around the world cannot continously lower interest rate and print money to ‘spend’ themselves out of the global recession. The Bank of England for example, have already lowered the base lending rate to 0.5%. This is the lowest rate for the Bank of England in 300 years!

Economic Growth 2007 2008 2009e 2010f
GDP 3.0 0.7 -3.8 -0.3
Domestic demand 3.5 0.6 -3.9 -0.3
Output trends





Services 3.5 1.5 -2.2 -0.5
Manufacturing 0.2 -2.6 -14.3 1.5
Construction 2.8 0.3 -6.0 0.5
The Personal Sector





Disposal income 0.2 2.2 -0.5 0.0
Household expenditure 3.0 1.4 -3.5 -1.9
Retail sales 4.3 3.5 -2.0 -0.5
Unemployment rate (% of workforce) 5.4 5.7 8.5 10.0
House prices (Halifax survey, q4 on q4) 5.6 -16.5 -10.0 5.0
International Trade





Trade in goods balance £bn -89.3 -92.9 -85.0 -80.0
Current account balance £bn -40.3 -24.5 -20.0 -15.0
Inflation and base rate





Consumer Prices Index 2.3 3.6 1.6 1.1
Bank base rate (at year end) 5.50 2.00 0.50 1.00


1. HSBC forecasts are as at 2nd April 2009.

2. Data and forecasts are subject to revision.

Source: Meredydd Davies, HSBC Economic Review, Spring 2009 Issue 52

Challenges Ahead

All recessions end. The question is how deep and how long is the current global economic recession. A range of opinions diverge from having the economy being ‘V’ shaped, ‘U’ shaped, ‘W’ shaped and ‘L’ shaped. A recession by definition is two consecutive drops in economic output. Technically, the recession ends when GDP stops shrinking (even if GDP growth is 0.0%).

However, stopping the economy from shrinking is just part of the story for many countries. Even if the economy stops contracting, it is likely that unemployment would continue to rise, tax revenues continue to fall and budget deficits continue to grow. Besides that, the more pressing problem is the current account imbalance between China and the United States which continues to grow due to the undervalued Yuan and as some might put it, the still overvalued US dollar.

Other than the squables between China and the United States, another pressing problem lies in emerging Europe. Latvia, Lithuania and Estonia which have previously enjoyed several years of double digit growth are now finding themselves in a downward spiral into economic oblivion. All three Baltic states are likely to see their economies shrink by some 10%-20%  this year. Latvia has already been forced to seek the assistance of the IMF and the EU to obtain a package worth $7.5 billion (last December).

Emerging Europe may also herald economic disasters elsewhere. Swedish banks for example, dominate the financial services industry in Latvia as the country’s government, households and companies all hold borrowings in foreign denominated currencies. A drop in the currency of Latvia would increase the costs of servicing these debts and increase the chances of their defaults. The Bank for International Settlements (BIS) have estimated that Swedish Banks have foreign currency loans equivalent to $75 bullion outstanding in the Baltics.

Currently, two things should dominate the minds of citizens, governments and central bankers worldwide. First, the likelihood of political instability due to the worsening economic conditions. Unemployment would be the major issue here because an idle citizen is almost never a happy citizen. Second, the increasing risk of future inflation as a result of the fiscal stimulus needed to jump-start the economy. Both items on the list require time to stabilise, let alone recover. The global recession may have ended, but the uphill road to recovery is paved with thorns.

The Role of Governments

  • Improved communications
  • Better infrastructure links
  • Competitive tax rates
  • Less regulation
  • Freer labour markets
  • Availability of educated, trained and motivated staff

Source: Deloitte CFO Survey (July 14, 2009)

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