Nextwave Finance

Global Recession - Is it Possible?

November 1st, 2008 | by admin |

“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” claims the International Monetary Fund (imf.org).

It appears that the IMF, the European Union, and World Bank have been quite busy bailing out one country or another. The latest $25 billion financing package for Hungary comes on the heels of two other financing packages distributed as emergency loans to Iceland and the Ukraine. These countries are dealing with their own problems of oversees borrowing and rapid credit growth.

The IMF has a $200 billion loanable fund and other resources from which to draw to stem the fallout from the global financial turmoil. The IMF works by parachuting in when a member country faces extenuating circumstances that threaten its financial stability. A rapid response is needed to contain the damage to the country or the international monetary system. Judging by all the money loaned out so far, there’s indication that some countries are either in a recession or tipping into one. In early October, the world’s central banks administered emergency measures, including a round of coordinated interest rate cuts.

If that weren’t enough, the financial turmoil is already beginning to slow growth in some emerging markets, such as China. When emerging and developing economies are feeling the impact of the global financial crisis, it is an indicator of a major slowdown in the global economy. This, coupled with global growth slowing down sharply, all point to a global recession. The following are some of the factors that can cause crises in emerging countries:

collapse of export prices
drastic increase in import prices
anemic foreign investments and capital flows
large depreciation or devaluation of the currency of a close trading partner. In this case, the U.S.
sharp increase in interest rates in world markets.

Despite China’s emerging role as the main cog in the world economy (it accounted for one-third of global GDP growth in the first half of this year), its economy is struggling. It is being hit by events in overseas markets to which it sells - namely the U.S.

The IMF said the U.S. crisis is likely to lead to “severe and protracted economic downturns around the world”. According to its report, World Economic Outlook, it now expects world growth to slow to three percent in 2009.

We don’t want to waste our energy at finger-pointing, but it is without a doubt that the global financial crisis emanates from the U.S. The economic consequences resulting from the collapse of the U.S. subprime mortgage market have spread beyond our American shores. This collapse has triggered a series of bankruptcies, forced mergers, and public interventions in the United States and Western Europe. As a result, the interbank markets have locked up, as trustworthiness in their counterparts have evaporated into thin air.

The world’s seven largest industrial market economies (G7) - the United States, Canada, Britain, Japan, Germany, France, and Italy- are either in a recession or slowly tipping into one. Some European countries have had their own housing and credit booms that have gone into reverse. The housing correction is beginning in the U.S., with the liklihood that it might be prolonged, but Europe’s correction began later and so will have a long way to go. Japan’s economy initially showed more resilience but has recently been affected by slowing exports while its consumer demand has weakened.

As the currency falls for countries such as Spain and Ireland, the burden of their foreign debt increases and so does the risk of defaults. All of this is dampened by high oil prices, tightening credit conditions, and the appreciating euro.

Several economies depend on exports to the United States and Europe. These countries, which may also have current-account surpluses, are suffering from the G7 recession. They include China, most of Asia, and other emerging countries, such as Brazil and Russia. Countries that are part of Eastern Europe, which have large current-account deficits, are also suffering from the global credit crunch.

These global problems require global solutions, and that is why the round of simultaneous interest rate cuts from central banks including the Bank of England, the US Federal Reserve, and the European Central Bank were necessary. It’s batton down the hatches for everyone.