B416 The Evolution Of Global Economies Lecture 9 Recent Global Economic Crisis Part 1

B416: The Evolution of Global Economies

Lecture 9: Recent Global Economic Crisis Part 1

Learning Outcomes

By the end of this lecture, you should understand the following:

• Analyzes the origins, extent, and duration of the Global Economic Crisis, which started in 2008 and took the world virtually by complete surprise, for different parts of the world in terms of collapsing trade flows and production levels, declining market value, and government response.

• Analyze various sources of the Global Economic Crisis and how global connections transferred problems from one part of the world to another.

• Analyze the response of governments to the Global Economic Crisis at the initial stages and the problems this created, particularly within Europe, at later stages.

2

Collapsing trade flows

• Since 1950 real world trade flows contracted year-on-year only four times:

• 1974 to 1975 by 2.8% during the 1st oil crisis

• 1981 to 1982 by 0.3% during the 2nd oil crisis

• Nov 2000 to Dec 2001 by 7.4% during the internet bubble

• Apr 2008 to May 2009 by 20.0% during the Global Economic Crisis

• The Global Economic Crisis is thus by far the most severe since the Second World War

Global Economic Crisis

Real world trade flows; constant 2000 US dollar, index (2000 = 100)

0

40

80

120

160

1970 1975 1980 1985 1990 1995 2000 2005 2010

annual

data

monthly

data

21 3 4

Global Economic Crisis

2.8%

decline

0.3%

decline

7.4%

decline

20.0%

decline

Duration, extent, and speed of decline• To calculate the duration, extent, and speed of the

trade decline during the Global Economic Crisis we:• Calculate 5-month centered moving averages (the

trade index for May 2009, say, is thus the average for the period March 2009 – July 2009).

• Determine the pre-2009 trade volume peak (= maximum) in the moving average.

• Rescale each series with the pre-2009 peak as base period (=100).

• Determine the post-2007 trough (= minimum) in the new series.

• Calculate the extent, speed (steepness), and durationof the decline in trade volume.

• Illustrated for import volume Euro area on next slide

Duration, extent, and speed of decline Import volume Euro area

5-month moving av. (ind indices; pre-2009 peak=100)

70

80

90

100

110

2004 2005 2006 2007 2008 2009 2010 2011

peak

2008-3

2009-6

trough

duration

extent speed

Timing trade volume peaks and troughsTable 2.1 Timing of trade volume peaks and troughs in Global Economic Crisis

Pre-2009 peak Post-2007 trough

Month Import volume Export volume Month Import volume Export volume

Feb-07 USA Feb-09 Asia Asia

: : : Mar-09 Africa & ME USA

Japan

Africa & ME

Feb-08 Africa & ME Apr-09 USA

Japan

Latin America

Euro area

Mar-08 Euro area

Asia

Euro area

Japan

C&E Europe

May-09 C&E Europe

Apr-08 Jun-09 Euro area

C&E Europe

May-08 Jul-09 Latin America

Jun-08 C&E Europe

Africa & ME

USA

Asia

Jul-08

Aug-08 Latin America

Sep-08 Latin America

Oct-08 Japan

USA has the first peak, real decline starts later

a. Import volume advanced economies

5-month moving av. (ind indices; pre-2009 peak=100)

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011

2007

-2

USA

Euro area

2008

-3

2008

-10

Japan

Emerging market volume rises fast

b. Import volume emerging markets 5-month moving av. (ind indices; pre-2009 peak=100)

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011

Asia

Africa +

Middle East

Latin America

Central

+ East

Europe20

08-3

2008

-8

Export decline of Japan is formidable

c. Export volume advanced economies 5-month moving av. (ind indices; pre-2009 peak=100)

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011

USA

Euro area

2008

-3

2008

-6

Japan

Asia export rises fast and recovers quickly

d. Export volume emerging markets 5-month moving av. (ind indices; pre-2009 peak=100)

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011

Asia

Africa +

Middle

East

Latin

America

Central

+ East

Europe

2008

-2

2008

-9

a. Extent, duration, and speed of import volume decline during GEC

0

5

10

15

20

25

30

35

40

USA Japan Euro area Asia C&E

Europe

Latin

America

Africa & M

Eastextent duration speed

Long import decline USA, rapid decline Japan

Large export decline Japan, fast decline Japan+USA

b. Extent, duration, and speed of exort volume decline during GEC

0

5

10

15

20

25

30

35

40


Europe

Latin

America

Africa & M


2009 trade decline took OECD by surprise

OECD world trade growth projections for 2009 (% increase)

8.1 8.2 8.2 8.26.6 6.9 7.0 7.1

1.3 1.9 2.53.8

-9.2

-3.9

1.1

-32.1-35

-30

-25

-20

-15

-10

-5

0

5

10

Quarter 1 Quarter 2 Quarter 3 Quarter 4

WEO 2007/2

WEO 2008/1

WEO 2008/2

WEO 2009/1

December 2007 forecast

June 2008 forecast

November 2008 forecast

June 2009 forecast

Seeds of the Global Economic Crisis

• Housing bubble in the USA; real house prices peaked in 2006; capital gains lead to large loans and high spending

• Financial innovation; makes high risk subprime mortgage loans possible; internationally traded through bundling (securitization); rising complexity (many firms, rebundling) leads to incorrectly priced risk; no adequate bank supervision

• Global imbalances of capital flows; year after year countries are accumulating more and more assets or more and more debt at increasing speed

American houses expensive in 2005-6

USA house prices, 1975 - 2010

0

50,000

100,000

150,000

200,000

250,000

300,000

1975 1980 1985 1990 1995 2000 2005 2010

3.0

3.5

4.0

4.5

5.0

5.5

6.0

median house price (left scale)

median house price divided by median

household income (right scale)

Growing global imbalances in 2004-8

Current account balance; selected countries / regions (US $ bn), 1970-2009

-161

-803

436

-900

-750

-600

-450

-300

-150

0

150

300

450

1970 1975 1980 1985 1990 1995 2000 2005 2010

USA

China

Japan

Arab world

EU

From US to global problems

• Stock markets collapsed June 2007; house prices declined; interest rates rose; people unable to refinance their loans; further decline house prices, etc.

• Financial innovation leads to leaks to other parts of the world; Banks in trouble worldwide; massive government intervention

• Financial problems affect real economy; production falls, trade collapses, 2008-9

Stock market peaked in June 2007

Dow Jones EURO STOXX broad index

0

1

1987 1992 1997 2002 2007 2012

Marc

h 2

000

Marc

h 2

003

June 2

007

Marc

h 2

009

Internet bubble

60% decline

Global

Economic

Crisis

57% decline

Enormous rescue packages from FED in 2008-9

0 20 40 60 80 100

Morgan Stanley

Citigroup

Bank of America

Royal Bank of Scotland

State Street Corp

UBS

Goldman Sachs

JP Morgan Chase

Deutsche Bank

Barclays

0 20 40 60 80 100

Morgan Stanley

Citigroup

Bank of America

Royal Bank of Scotland

State Street Corp

UBS

Goldman Sachs

JP Morgan Chase

Deutsche Bank

Barclays

$bn

Global industrial production and world trade volume

(centred 5-month moving average index, 2000=100)

0

50

100

150

1991 1994 1997 2000 2003 2006 2009 2012

world trade volume

global

industrial

production

2000-1

0

2001-1

0

2008-3

2009-3

Industrial production cycle coincides with trade cycle

Production decline large in Japan, small in Asia

Extent, duration, and speed of industrial production decline during GEC

0

5

10

15

20

25

30


Europe

Latin

America

Africa & M


Consequences of Government response• Governments massively support banking sector

in 2008-9

• Governments use large stimulus packages to keep the economy going (Keynesian spending) 2009-11

• Leads to large government budget deficits

• Leads to larger government debt levels

• Governments unable to continue these spending levels

• US depends on emerging markets for financing

Small budget deficits in SE Asia, large in USA+EU

Government budget deficit (% of GDP), 2011

9.8

9.1

9.0

8.4

6.5

5.8

4.7

4.2

3.8

3.8

3.8

3.7

3.4

2.6

2.0

1.7

1.7

1.2

0 1 2 3 4 5 6 7 8 9 10

Greece

UK

USA

Japan

Spain

France

India

Euro area

Canada

Belgium

Netherlands

Italy

Austria

Australia

Philippines

China

Germany

Indonesia

Large debt Japan USA+part of EU, small in SE Asia

General government gross debt (% of GDP), 2011

234

139

120

103

99

88

82

80

77

72

71

70

69

67

46

26

24

19

0 50 100 150 200 250

Japan

Greece

Italy

Belgium

USA

France

UK

Canada

Germany

Austria

India

Spain

Netherlands

Brazil

Philippines

Indonesia

Australia

China

Enormous foreign reserves in China

Emerging markets; 20 largest foreign exchange reserves, mid 2011 (US $ bn)

46

49

54

63

78

94

101

119

129

134

179

249

279

288

311

334

484

508

3198

401

0 500 1000 1500 2000 2500 3000 3500

Peru

Argentina

Hungary

Philippines

Israel

Turkey

Poland

Indonesia

Mexico

Malaysia

Thailand

Singapore

Hong Kong

India

S Korea

Brazil

Taiwan

Russia

Saudi Arabia

China

Most US debt held in China, Japan, and Europe

Foreign-held US government debt (US $ billion), 2011

1160

912

791

230 211153 148

122 115

670

0

200

400

600

800

1000

1200

China Japan Europe Oil exp nat Brazil Taiw an Carribean Hong Kong Russia Other

Global supply chains responsible for trade collapse?

• Baldwin & Evenett (2009, collapse global trade ..G20 report): “the two leading explanations of the sharp contraction in trade are the widespread use of supply chains and …”

• World Trade Organization (2009, world trade report): “A second reason for the magnitude of recent declines relates to the increasing presence of global supply chains in total trade. … – goods cross many frontiers during the production process and components in the final product are counted every time they cross a frontier. … this effect, whose magnitude can only be guessed at in the absence of systematic information...”

Supply chain example: hard disk drive in Thailand

Thailand

Filter Cap

Hong Kong

PCBA, Carriage, HGA,

Base, Head, Suspension

China

Singapore

Cover,

Screw,

Pivot, PC

ADP, Disc

Top Clamp

Taiwan

Cover, Disk, Screw, Seal, Ramp,

Top Clamp, Latch, Plate Case,

Label, Filter PCBA, SuspensionJapan

Base, Pivot, Spacer, VCM,

Base Card, Top Clamp, Disk

Malaysia

Damping

Plate, Coil

Support,

PCBA

Philippines

Head

Mexico

Disk, Head,

SuspensionUSA

Suspension,

VCM, PCBA

Indonesia

Big euro area differences in current account balance

EU imbalances; current account balance (% of GDP)

-2.5

-3.7

-8.1

-4.2

2.7

5.1

7.2

-15 -10 -5 0 5 10

2011

2009

2008

2007

2006

2005

2004

Greece

Spain

Italy

France

Finland

Netherlands

Germany

Big euro area differences in growth + unemployment

Euro area economic conditions; selected countries, 2011

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

0 5 10 15 20 25

unemployment (% of labour force)

gro

wth

rate

(%

)

Netherlands

Germany

Finland

France

Italy

Greece

Spain

Government bond yields (%)

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012

Germany

France

ItalySpain

Ireland

Greece

Large risk premium for fragile countries

Concluding remarks on Global Economic Crisis• Global Economic Crisis is by far largest trade collapse since

World War II

• Start in 2006-7 in US housing market; related to housing bubble, financial innovation, global imbalances

• Massive intervention banking sector; but real sector affected

• Production and trade decline 2008-9

• Extent and speed of decline not related to supply chains

• Stimulus packages lead to large deficits and debts

• Rapid recovery in emerging markets, slowly in ‘old world’

• New problems for old world cannot be solved in same way

• Internal tensions in Euro area (deficit, debt, growth, unemployment) lead to continued problems in 2011-12

And Now…Work Outside the Lecture

Preparation

For

Padagogic

Style

Preparation

Time Budget

Individual

TaskGroup Task Output Week 9 Preparation Activity

Read Chapters 30 & 31 from International

Econimics - 2nd Edition by Charles Van

Marrewijk, Oxford, ISBN 978-0-19-956709-6

Seminar 9 30 Minutes Read above Material + Seminar material

Workshop 9 1 HourOnline Collaboration Activities relating Final

Assignment

2 HourLecture 9

B416 The Evolution Of Global Economies Lecture 9 Recent Global Economic Crisis Part 1

Business

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