Analysis of the Trade Impacts of the Global Recession of 2008 International Economics

Oliul Islam (352949) Table of content 1. Introduction 2. The Recession 3. The Recession * Poor risk management * Over reliance on the Bull market * Trade Imbalance and debt bubbles * Lack of Transparency * Misguided information from the rating agencies

4. Effects on global trade * Trade and Industrial production * Unemployment * Financial market * Travel * Insurance * Small business lending * Pollution

5. Global responses 6. Policy recommendations 7. Risks 8. References

Introduction
In 2008, the world experienced a major financial crisis which was rooted from the US housing market; moreover, many economists considered it as one of the great recession since the Great Depression in 1930s. After posing a huge affect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. In this paper, I will analyze the impact of the recession on the global trade, the results of it and the risk and opportunities that came along with it.

The Recession
In April 2009, the world economy appeared to be in a free fall. Global trade between the countries had decreased 15.8 percent over the last two quarters of 2008 and the first quarters of 2009. This global trade collapse had been the biggest three quarter decline in the past 40 years. The initial phase of this global crisis began with a financial liquidity crisis which started on august 2007, in the lending market between the banks and eventually the central bank stepped in with liquidity lending to the banking market1. The bursting of the housing bubble caused the median price for real state home sales in U.S decline, damaging financial organizations globally and creating interbank credit crisis. This disastrous recession brought the governments down ruined economies and crumbled financial institutions along with individual lives.

Main causes of the global crisis
The economists have enlisted various causes that lead towards the global financial crisis. 1. Poor risk management:
The risk management of the banks and interbank movement strategies were improper. The banks were relying too much on the ongoing market and different agencies. The over exposure of the banks’ funds and instruments of the CDO’s showed lack of governance. The rating of AAA and AAA- made the banks believe that the funds are safe. They started to take it for granted and all measures on the part of the banking intuitions were lacking. Over investment in these securities resulted to the failure of banks.2

2. Over reliance on the Bull market
This poor risk management made the economies believe that the market will never crush and it will continuously grow. Even they received signals of felling the market, they didn’t react and continue to approach in the same manner, which shows the negligence of the corporate governance and relied too much on the bull market.

3. Trade Imbalance and debt bubbles
The Economist wrote in July 2012 that the inflow of investment dollars required to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade deficit, less than 1% of GDP in the early 1990s, and hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result.’’3

4. Lack of Transparency
The lack of transparency and not adhering to the corporate governance made them unable to mould the profit and this resulted huge losses, which leads to the crisis. And also there was no instrument or mechanism to gain a linkage between compensation and performances lead the institution bear the brunt as it over compensated the employees, which ended up to the crisis.

5. Misguided information from the rating agencies
Information provided by the rating agencies had a huge impact in shaping the global crisis. Credit agencies are totally entrusted with the responsibility of verification, certification and evaluation of the various services and tools of the market. Their main duty was to provide the correct and actual information to the investors. But unfortunately, they swayed from their basic function resulted to the wrong information being passed on.

Effects on global trade 1. Trade and Industrial production
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.’’4
The industrial output was declining continuously. In April February, it is reported that, since January 2008 the declining was: Japan -31%, Korea -26%, Italy -14% and Germany -12%. The private buyers of Middle-east, Asia and China were increasingly buying the share of U.S and European companies, including industrial enterprises.5

2. Unemployment
The unemployment rate rose quite high during the time of this recession. In December 2007, the unemployment rate of U.S was 4.9% and by September 2009, it rose up to 10.1%. Around 20 million jobs were lost during this time6. European countries were similarly hit by the recession like the U.S. And especially in Spain, unemployment rate went up to 18.7%, among them 37% were youth, which was the highest in euro-zone countries. Other countries of the world also faced similar problem on average and they pressurised the downward of the wages and also sacked lots of jobs. But by November 2009, a news report announced that many companies start to hire their employee back.7

3. Financial market
At the beginning of 21st century, many economies were believed to decrease volatility, because the economic approach and condition seemed to have achieved stability. The liquidity crises, return of commodity and currency value volatility are indications that the whole concept of the Great Moderation was built on false beliefs.
In January 2008, the stock market had a huge crash on U.S and global share market. Many economist and financial news reporters headlined January 21st as ‘’Black Monday’’ because of this global share crash, although the crash was different in different share market. There were several crashes like this, occurred in entire 2008 in many share markets in the world. As of November 2008, the stocks of U.S, Canada, Europe and Asia had all declined about 30% since the beginning of the year.8
Due to the decreasing of oil price and political issues, Russian stock price had fallen 10% in one day, which lead to a suspension of trading, while other emerging markets also suffered with great loses.
Because of this ongoing tension, the investors began to turn their assets which they perceived as tangible or sustainable. The Price of gold rose by 30% during this period. Some investors showed interest in buying precious metal and land.9

4. Travel
According to the WTO (World Tourism Organisation), International travel suffered a strong slow down started in the third quarter of 2008, which resulted the declining of tourists from 922 million to 880 million in 2009. That means worldwide decline of 4% and around 6% declines in international tourism receipts. On a global survey, around 30% traveller stated that they travelled less for their business trips during this period, while on 21% stated that they have travelled more.10

5. Insurance
In the beginning of 2009, the British insurance companies showed that they didn’t raise their insurance premium during this period, although it was predicted that the increase will be about 20% made by the Daily Mirror. However they tried to recover the loss of 644 million pound, which occurred in 2007.

6. Small business lending
According to New York times, U.S treasury decreased in small business lending by 22 largest bank recipients of federal bailout money. The banks decreased the small business lending about 12.5 billion, which is 4,6% less than the previous year, which ended after a seven month period in October 2009.11 8. Pollution
From the annual report of International Energy Agency, there is 3% decrease in manmade gas emissions in 2009, which was mainly resulted for the financial crisis. Previously it had a growth rate of 3% each year and this decline was only the 4th in last 50 years12.

Global responses
There were mixed global responses after the great recession. U.S, European union, Asia-pacific countries showed different responses and took some steps and approaches individually. In U.S. the Federal Reserve and treasury announced on September 19, a new 50 billion dollar rescue program to insure the investments similar to FDIC program. On October 2008, the British Government announced a bank rescue program of 500 billion pound. In European level some coordination took place, but the countries realized the need of global cooperation which leads the major G 20 economies entity. The G-20 countries met in a summit in Washington on November 2008 and gave pledge to support their economy and to coordinate them, and refused any resort to protectionism.11

Policy recommendations
There were some recommendations and actions regarding this matter. The IMF stated that the financial crisis would not come to an end without a major decrease in unemployment throughout the whole world. The IMF suggested the Governments to increase the social safety and create more jobs even as they were under pressure to cut spending. This would be the best way to recover from the crisis as they suggested.
Increasing interest rates would be another good approach to recover. Many banks like Bank of Israel, Reserve bank of Australia, Norges bank of Norway, and reserve bank of India raised their interest rates.

Risks
After the recovery of the recession and stagnation, several economists and observers warned about the possibility of a second recession. The rector of the Moscow state university Viktor Sadovnichiy published in his journal “Ekonomicheskaya politika” a forecast of the second coming of the crisis which suggested that it may strike on August 2011. In September 20011, the Reuters poll indicated that the economists thought about the probability of coming of a new recession is 31%, which was 6% higher than the last month. In U.S. jobs that paying between 14 to 16 dollar hourly wages made up about 60% those lost jobs during the recession period, but mid-wage jobs have comprised only 27% regained during the recovery in 2012.13

References 1. Gore, Charles (2010). "The global recession of 2009 in a long-term development perspective". Journal of International Development (John Wiley & Sons, Ltd.) 22,23 (6). Retrieved 5 December 2012 2. Moxey & Priddy, journal 2008, p. n 87-88. 3. The Economist-Points of Light-July 14, 2012". Economist.com. 2012-07-14. Retrieved 2013-04-22. 4. The collapse of manufacturing". Economist.com. 2009-02-19. Retrieved 2010-01-21. 5. Evans, Ambrose (2009-03-08). "Thanks to the Bank it's a crisis; in the eurozone it's a total catastrophe". London: Telegraph.co.uk. Retrieved 2010-01-21. 6. U.S. Department of Labor, Bureau of Labor Statistics, "The Employment Situation: January 2008", January 2008 7. Goodman, Peter S. (2009-11-07). "U.S. Unemployment Rate Hits 10.2%, and Highest in 26 Years". The New York Times. Retrieved 2010-05-07. 8. "Volatility returns with a vengeance". Ft.com. 2008-10-27. Retrieved 2010-01-21. 9. UNWTO World Tourism Barometer January 2010".World Tourism Organization. January 2010. Retrieved 2010-03-20. Volume 8 No. 1 10. Vidal, John (6 October 2009). "Carbon emissions will fall 3% due to recession, say world energy analysts". London: The Guardian. Retrieved 2009-10-06. 11. ^ Andrew Martin (2010-01-30). "The Places They Go When Banks Say No". New York Times. Unknown parameter |web=ignored (help); 12. Gordon Brown should say 'sorry'". London: Telegraph.co.uk. 2009-03-09. Retrieved 2009-03-09 13. Low wage jobs are dominating the U.S. recovery"Washington Post, August 31, 2012