Recession of 2009

Downturns in economic growth rates in the United States and the United Kingdom were apparent in the early Autumn of 2008, and the intensification of the financial crash of 2008 led to a general expectation of worse to come. The resulting loss of confidence by investors and consumers is forecast to contribute further to the severity of the expected reduction in world economic growth. In December 2008 the National Bureau of Economic Research determined that the United States economy had been in recession since December 2007.

(for an explanation of the term "recession" see the article on recession (economics); for forecast and actual growth rates, and a summary of recent economic developments see the Addendum subpage; and for a sequential list of statistical reports and announcements see the Timelines subpage)

Background

The world economy

There has been a downturn in world economic growth. In the nine months to the middle of 2008, the advanced economies have grown at an annual rate of only one per cent (compared with two and a half per cent in the previous nine months) and the growth rate of the developing economies has eased from eight per cent to seven and a half per cent. The downturn is generally attributed to a malfunctioning of the financial, housing, and commodity markets that had resulted in imbalances between supply and demand that are now in the course of correction.

The United States economy

According to the OECD the US economy was already facing substantial difficulties crisis. Households had borrowed at an unprecedented rate during the previous 15 years, and their saving rates had fallen nearly to zero as they increasingly relied on housing wealth to finance consumption. With the housing market suffering the severest correction for 50 years, household wealth was declining, and with credit conditions were getting tighter households had been forced to reduce their reliance on borrowing. Job losses and mortgage foreclosures were rising and further falls in house prices were expected.

Policy responses

In early November China took the lead in introducing expansionary fiscal measures with a $586 billion stimulus package.

A meeting of the world leaders (of the G20 group of countries), with the purpose of agreeing a coordinated response to the financial crisis, took place in Washington on 15th November . An ebook was published in advance, with the recommendations of an international group of twenty leading financial economists.They were unanimous on the need for Governments to take urgent action to recapitalise their banks, to guarantee cross-border bank claims, to restructure nonperforming assets, and to extend financial support for crisis countries. They were also agreed on the need for immediate, substantial, internationally coordinated fiscal stimulus, tailored to the circumstances of each country and taken with a view toward the impact on the rest of the world. There was also unanimity on the need to augment IMF resources immediately so that the institution has adequate firepower, and on the need to strengthen existing arrangements for global governance. Several of them also argued for new approaches to the regulation of large cross-border financial institutions.

Developments

The principal developments in the fourth quarter of 2008 were a reduction in the availability of credit, corresponding falls in business and consumer confidence, and a sharp reduction in oil prices. In the latter half of October, stock prices recovered partially from the precipitous falls of the previous month, but there was still widespread uncertainty about the effectiveness of government measures to tackle the financial crisis. News of output falls in the United States and the United Kingdom has been accompanied in October by reports of falling consumer confidence.

Forecasts

Fourth quarter 2008

In November 2008, the International Monetary Fund forecast that world growth would begin a slow recovery at the end of 2009, after falling from its 2007 growth rate of 5.0 per cent to 3.7 per cent in 2008 and 2.2 per cent in 2009 (the lowesr rate since 2002). . For the purpose of the forecast it was assumed that commodity and oil prices would stabilize, that U.S. housing prices and activity would hit bottom next year, and that there would be no further deterioration of conditions in the financial system. The "emerging and developing countries" were expected to be the main source of world growth, with a 2009 growth rate of 5.1 per cent, compared with -0.7 per cent for the United States and -0.5 per cent for Europe.