A new white paper from Seapine Software provides steps for weathering trying economic times through an increased focus on quality
Mason, OH—September 10, 2008—According to Quality-Centric ALM in a Down Economy, a new white paper released by Seapine Software, companies can survive an economic downturn by increasing their focus on quality.
Seapine’s research shows that many organizations cut back on testing and QA activities in the rush to develop and release products. Releasing products regularly helps maintain mindshare, but ignoring quality to push software out the door results in:
Avoidable labor costs
Increased baseline costs
Delayed sales and lost revenue
Diminished reputation and market share
Regulatory non-compliance
Findings indicate that software quality often suffers because of one or more of the following:
Organizations assume that testing will find the problems.
Time to market is the key measurement for success.
QA is not involved from the beginning.
Developers only want to work on new features and leave quality up to the QA department.
The white paper includes research from the National Institute of Standards and Technology (NIST), the Gartner Group, and the Seapine Software Quality-Ready Assessment. Along with that data, it provides ways to overcome the issues threatening software quality and thrive during a recession.
Thursday, January 8, 2009
Recession And Sentiment
BSE Sensex fell to below 10,000 levels for the first time since January, 2006. This crash to 4 digits is a big blow to new investors who have never seen the implications of the bear market. Don’t try to find the logic behind this fall. FIIs are selling out of necessity but domestic funds are not in a position to fully stop the fall. Only positive aspect is that unlike in January, trading was not stopped even for a single minute means buying is still there from some quarters.
Sensex below 10,000 in June, 2006: Good growth with optimism.
Sensex below 10,000 in October, 2008: Slow growth with pessimism.
Significant rumours:
1. RBI will cut repo rate on October 24. Source: Times of India.
If this is true, Stock Markets will stabilise above 11,000 levels over short term. Indian Companies will take a breather and mutual funds will inject some money into the markets. If RBI delays this decision, BSE Sensex will soon touch below 9,000 levels.
2. High Court will give judgement in RIL-RNRL case by November. This will have huge implications on many Companies. Sooner the better! Loser may drag the case by going to the Supreme Court.
3. 3G auction will be held in January. Bad news.
Must read:
1. Warren Buffett wrote a good article in the New York Times on “Why I am buying Stocks?” But how many of us have his vision and patience levels. We buy stocks today and watch their prices from tomorrow onwards. Investors spoilt due to the last Bull Run.
Positive news:
1. Government is planning to remove the 49-MW cap on Wind Energy projects. This move will attract more foreign investments into this emerging sector.
2. United Phosphorus announced acquisition plans.
Recession news:
1. American Real Estate: construction of single-family homes plunged to the lowest level in 26 years.
2. French mutual bank, “Groupe Caisse d’Épargne” suffered a loss of $807 million in derivative trading.
3. Spanish-based airline LTE International has suspended operations after telling Spanish authorities that it was in serious financial difficulty.
4. Confidence among U.S. consumers fell by the most on record. It fell to 57.5 this month from 70.3 in September. Situation in US is looking grim despite Government’s bailout measures.
5. German Parliament lower house approved $675 billion financial bailout package.
6. JSW Steel postponed its Power IPO plans. Big set back to investors who are already reeling under economic slowdown.
Quarterly results analysis: Contrary to popular perception, midcaps and small caps are announcing superb results in this highly unfavourable atmosphere. These are the stocks that were corrected by 60-80% in the last 2 months despite posting good results in the last 2 quarters. Long term investors should accumulate these scrips for better returns.
1. Tata Coffee reported 228% increase in net profit in September quarter but sales rose only by 26%. Tata Tea will also announce good results in the last week of October.
2. Compact Disc India: This animation Company once again posted bumper results. It announced 119% increase in sales while profits rose by 114%. Its shares are trading at a forward P/E of 0.5. Unbelievable valuations. That is bear market!
CMP: 34.8 (BSE); P/E: 1.4
EPS: 25; Book Value: 40.
3. Like all brokerage firms, India Infoline also reported very poor results.
4. Goa Carbon: Bumper results. Company posted a net profit of Rs 2.8 crore Vs net loss of Rs o.45 crore in Q2 of previous year. 1289% increase in 6-month net profit! Can it able to continue its high growth?
CMP: 65 (BSE); P/E: 2.3
5. Poor results: Elecon Engineering, Madras Aluminium, Finolex Cables, Kavveri Telecom, Sasken Communication, Novartis India, Ratnamani Metals and SBI Home Finance.
6. Mphasis and Satyam posted wonderful results. But will they keep momentum? I am negative on this sector because of “Obama factor”. But they will participate actively in short term rallies.
7. FAG Bearings: Company posted outstanding results despite operating in unfavourable conditions. It reported 34% increase in sales while profits rose by 42%.
8. Sanwaria Agro Oils: Company announced 58.9% growth in net profit. Rs 23 crore Vs Rs 14.5 crore.
How to revive Indian Stock Markets:
Why good Companies are falling even after announcing bumper results? Why no one is buying even good Companies at cheap valuations? This is because of sentiment. Unless sentiment turns positive, it is impossible for stock markets to make positive gains. As long as panic is ruling, no one cares about results, valuations and fundamentals etc. Government, RBI and Industrialists need to do take steps that will drastically change the sentiment of investors especially FIIs.
1. RBI should immediately reduce interest rates by at least 1%. This is the most crucial step. CRR cuts will not help any more.
2. Ambani brothers should stop quarrelling in Courts and find an amicable solution. Reliance Gas has the potential to change the energy landscape of the country. Unless Reliance stocks perform, Stock markets will never recover in a big way. This spat is sending negative signals to the international community.
3. Rupee fall: RBI should stop this slide to save Indian Stock Markets. Why do FIIs want to invest in a country with weak currency?
4. Inflations need to continue its downward march. Oil prices should stay below $80 per barrel level.
5. Oil ministry should decrease petro product prices to control the inflation and input costs.
6. Companies need to announce more buybacks and acquisitions to trigger economy in positive direction. Liquidity is the problem. Financial Institutions should support such managements.
My opinion: Unless RBI takes measures like rate cuts; current market has more downside especially in large caps. But stocks (especially mid caps and small caps) which had more FII holdings before October are now corrected heavily and trading at least 50% below their fundamental prices. Except ICSA and Glenmark, most of these stocks have not recovered due to lack of support from either promoters or funds. But ICSA was well supported by promoters while Glenmark was supported by big investors.
Where will you get investment ideas?
Investment is all about common sense, keen observation and finding value. Keenly observe surroundings and find the emerging trends. Whether people are depositing more money in PSU banks out of panic? Whether you are seeing any rise in hospital visits? Whether people are consuming more alcohol to forget their problems? Whether there is any decrease in visits to multiplexes or Restaurants or shopping malls? Whether people are cancelling their expensive travel plans?
Defensive stocks Vs Growth stocks:
People generally tend to buy defensive stocks like HUL etc during panic situation. But long term investors should not do this mistake. Why? Do you want to satisfy with dividends? What is the difference in HUL price in 1983 and 2008?
Sensex below 10,000 in June, 2006: Good growth with optimism.
Sensex below 10,000 in October, 2008: Slow growth with pessimism.
Significant rumours:
1. RBI will cut repo rate on October 24. Source: Times of India.
If this is true, Stock Markets will stabilise above 11,000 levels over short term. Indian Companies will take a breather and mutual funds will inject some money into the markets. If RBI delays this decision, BSE Sensex will soon touch below 9,000 levels.
2. High Court will give judgement in RIL-RNRL case by November. This will have huge implications on many Companies. Sooner the better! Loser may drag the case by going to the Supreme Court.
3. 3G auction will be held in January. Bad news.
Must read:
1. Warren Buffett wrote a good article in the New York Times on “Why I am buying Stocks?” But how many of us have his vision and patience levels. We buy stocks today and watch their prices from tomorrow onwards. Investors spoilt due to the last Bull Run.
Positive news:
1. Government is planning to remove the 49-MW cap on Wind Energy projects. This move will attract more foreign investments into this emerging sector.
2. United Phosphorus announced acquisition plans.
Recession news:
1. American Real Estate: construction of single-family homes plunged to the lowest level in 26 years.
2. French mutual bank, “Groupe Caisse d’Épargne” suffered a loss of $807 million in derivative trading.
3. Spanish-based airline LTE International has suspended operations after telling Spanish authorities that it was in serious financial difficulty.
4. Confidence among U.S. consumers fell by the most on record. It fell to 57.5 this month from 70.3 in September. Situation in US is looking grim despite Government’s bailout measures.
5. German Parliament lower house approved $675 billion financial bailout package.
6. JSW Steel postponed its Power IPO plans. Big set back to investors who are already reeling under economic slowdown.
Quarterly results analysis: Contrary to popular perception, midcaps and small caps are announcing superb results in this highly unfavourable atmosphere. These are the stocks that were corrected by 60-80% in the last 2 months despite posting good results in the last 2 quarters. Long term investors should accumulate these scrips for better returns.
1. Tata Coffee reported 228% increase in net profit in September quarter but sales rose only by 26%. Tata Tea will also announce good results in the last week of October.
2. Compact Disc India: This animation Company once again posted bumper results. It announced 119% increase in sales while profits rose by 114%. Its shares are trading at a forward P/E of 0.5. Unbelievable valuations. That is bear market!
CMP: 34.8 (BSE); P/E: 1.4
EPS: 25; Book Value: 40.
3. Like all brokerage firms, India Infoline also reported very poor results.
4. Goa Carbon: Bumper results. Company posted a net profit of Rs 2.8 crore Vs net loss of Rs o.45 crore in Q2 of previous year. 1289% increase in 6-month net profit! Can it able to continue its high growth?
CMP: 65 (BSE); P/E: 2.3
5. Poor results: Elecon Engineering, Madras Aluminium, Finolex Cables, Kavveri Telecom, Sasken Communication, Novartis India, Ratnamani Metals and SBI Home Finance.
6. Mphasis and Satyam posted wonderful results. But will they keep momentum? I am negative on this sector because of “Obama factor”. But they will participate actively in short term rallies.
7. FAG Bearings: Company posted outstanding results despite operating in unfavourable conditions. It reported 34% increase in sales while profits rose by 42%.
8. Sanwaria Agro Oils: Company announced 58.9% growth in net profit. Rs 23 crore Vs Rs 14.5 crore.
How to revive Indian Stock Markets:
Why good Companies are falling even after announcing bumper results? Why no one is buying even good Companies at cheap valuations? This is because of sentiment. Unless sentiment turns positive, it is impossible for stock markets to make positive gains. As long as panic is ruling, no one cares about results, valuations and fundamentals etc. Government, RBI and Industrialists need to do take steps that will drastically change the sentiment of investors especially FIIs.
1. RBI should immediately reduce interest rates by at least 1%. This is the most crucial step. CRR cuts will not help any more.
2. Ambani brothers should stop quarrelling in Courts and find an amicable solution. Reliance Gas has the potential to change the energy landscape of the country. Unless Reliance stocks perform, Stock markets will never recover in a big way. This spat is sending negative signals to the international community.
3. Rupee fall: RBI should stop this slide to save Indian Stock Markets. Why do FIIs want to invest in a country with weak currency?
4. Inflations need to continue its downward march. Oil prices should stay below $80 per barrel level.
5. Oil ministry should decrease petro product prices to control the inflation and input costs.
6. Companies need to announce more buybacks and acquisitions to trigger economy in positive direction. Liquidity is the problem. Financial Institutions should support such managements.
My opinion: Unless RBI takes measures like rate cuts; current market has more downside especially in large caps. But stocks (especially mid caps and small caps) which had more FII holdings before October are now corrected heavily and trading at least 50% below their fundamental prices. Except ICSA and Glenmark, most of these stocks have not recovered due to lack of support from either promoters or funds. But ICSA was well supported by promoters while Glenmark was supported by big investors.
Where will you get investment ideas?
Investment is all about common sense, keen observation and finding value. Keenly observe surroundings and find the emerging trends. Whether people are depositing more money in PSU banks out of panic? Whether you are seeing any rise in hospital visits? Whether people are consuming more alcohol to forget their problems? Whether there is any decrease in visits to multiplexes or Restaurants or shopping malls? Whether people are cancelling their expensive travel plans?
Defensive stocks Vs Growth stocks:
People generally tend to buy defensive stocks like HUL etc during panic situation. But long term investors should not do this mistake. Why? Do you want to satisfy with dividends? What is the difference in HUL price in 1983 and 2008?
Ad spends during recession results in higher sales
With corporate managers under enormous pressure to control costs and maintain liquidity in the current credit crisis, advertising budgets often
appear to be a dispensable luxury in the struggle to survive. Executives who succumb to that temptation, however, put the long-term future of their companies at risk, according to Wharton faculty and advertising experts.
“The first reaction is to cut, cut, cut, and advertising is one of the first things to go,” says Wharton marketing professor Peter Fader, adding that as companies slash advertising in a downturn, they leave empty space in consumers’ minds for aggressive marketers to make strong inroads. Today’s economy “provides an unusual opportunity to differentiate yourself and stand out from the crowd,” says Fader, “but it takes a lot of courage and convincing to get senior management on board with that.”
According to Wharton marketing professor Leonard Lodish, with demand slack for advertising services, the cost of these services goes down, making advertising expenditures all the more defensible in a bad business climate . “If your company has something to say that is relevant in this environment, it’s going to be more efficient to say it now than to say it in better times,” says Lodish.
Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered . Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.
For companies that do stay the course and continue to advertise into a recession or increase their promotional activities , the key is to craft messages that reflect the times and describe how their product or service benefits the consumer . For example, companies might be tempted to emphasise price in a recession, but that only works for companies like Costco and Wal-Mart that are built around a core strategy of providing low prices year after year, says Lodish.
He points to the current Wal-Mart campaign, ‘Save Money. Live Better,’ as a successful approach to the recession.
Dean Jarrett, senior vice-president of marketing at The Martin Group in Richmond, Virginia, which developed the Wal-Mart ads, acknowledges the campaign began in 2007 before it was clear a harsh recession was building. “We can’t claim we knew a recession was coming , but ‘Save Money. Live Better’ is dead on-point with who they are and what they want to be.”
Eileen Campbell, chief executive of the Millward Brown Group advertising firm in New York City, says that while companies should probably not dwell on the recession and scare consumers into hoarding their pennies under a mattress , certain products require a straight-up approach — such as financial services.
“If you are in the financial services category, to behave as you did a year ago is silly.” At the same time, however, many consumers are weary of negativity generated by the recession and would be receptive to a more upbeat message, she adds. “If you can put a positive spin on how you can genuinely help without invoking doom and gloom, I think that’s going to be more compelling.”
appear to be a dispensable luxury in the struggle to survive. Executives who succumb to that temptation, however, put the long-term future of their companies at risk, according to Wharton faculty and advertising experts.
“The first reaction is to cut, cut, cut, and advertising is one of the first things to go,” says Wharton marketing professor Peter Fader, adding that as companies slash advertising in a downturn, they leave empty space in consumers’ minds for aggressive marketers to make strong inroads. Today’s economy “provides an unusual opportunity to differentiate yourself and stand out from the crowd,” says Fader, “but it takes a lot of courage and convincing to get senior management on board with that.”
According to Wharton marketing professor Leonard Lodish, with demand slack for advertising services, the cost of these services goes down, making advertising expenditures all the more defensible in a bad business climate . “If your company has something to say that is relevant in this environment, it’s going to be more efficient to say it now than to say it in better times,” says Lodish.
Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered . Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.
For companies that do stay the course and continue to advertise into a recession or increase their promotional activities , the key is to craft messages that reflect the times and describe how their product or service benefits the consumer . For example, companies might be tempted to emphasise price in a recession, but that only works for companies like Costco and Wal-Mart that are built around a core strategy of providing low prices year after year, says Lodish.
He points to the current Wal-Mart campaign, ‘Save Money. Live Better,’ as a successful approach to the recession.
Dean Jarrett, senior vice-president of marketing at The Martin Group in Richmond, Virginia, which developed the Wal-Mart ads, acknowledges the campaign began in 2007 before it was clear a harsh recession was building. “We can’t claim we knew a recession was coming , but ‘Save Money. Live Better’ is dead on-point with who they are and what they want to be.”
Eileen Campbell, chief executive of the Millward Brown Group advertising firm in New York City, says that while companies should probably not dwell on the recession and scare consumers into hoarding their pennies under a mattress , certain products require a straight-up approach — such as financial services.
“If you are in the financial services category, to behave as you did a year ago is silly.” At the same time, however, many consumers are weary of negativity generated by the recession and would be receptive to a more upbeat message, she adds. “If you can put a positive spin on how you can genuinely help without invoking doom and gloom, I think that’s going to be more compelling.”
Financial turmoil results in recession in the US
The United States may face a recession from the ongoing financial turbulence in view of the impact of financial crisis around the globe over the past 30 years, the International Monetary Fund said on Thursday.
"The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis," the IMF said in part of its twice-yearly World Economic Outlook report, citing "a substantial likelihood of a sharp downturn in the United States."
The warning is in stark contrast to the Washington-based institution's projection in July that the United States will "contract moderately" in the second half of this year before recovering next year.
It also came as the US Congress works to pass a USD 700 billion financial bailout bill to prevent the economy from collapsing.
The report suggested the risk of recession is higher when financial turmoil is preceded by rising house prices and rapidly expanding credit, which was the case in the United States.
"The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis," the IMF said in part of its twice-yearly World Economic Outlook report, citing "a substantial likelihood of a sharp downturn in the United States."
The warning is in stark contrast to the Washington-based institution's projection in July that the United States will "contract moderately" in the second half of this year before recovering next year.
It also came as the US Congress works to pass a USD 700 billion financial bailout bill to prevent the economy from collapsing.
The report suggested the risk of recession is higher when financial turmoil is preceded by rising house prices and rapidly expanding credit, which was the case in the United States.
Wednesday, January 7, 2009
Four scenarios for the global economic downturn
Uncertainty surrounds not only the downturn’s depth and duration—though these are decidedly big unknowns—but also the very future of a global economic order until recently characterized by free-flowing capital and trade and by ever-deepening economic ties. A few months ago, the only challenges to this global system seemed to be external ones like climate change, terrorism, and war. Now, every day brings news that makes all of us wonder if the system itself will survive.
The authors of the article have therefore sketched out four scenarios to capture the wide range of possible outcomes. The scenarios are based on two critical uncertainties.
Severe global recession – Moderate global recession
Global credit and capital markets reopen and recover – Global credit and capital markets close down and remain volatile.
By plotting these two axes against each other, four future scenarios are created. You can read more detail about these in the article, but in summary:
Regenerated global momentum
In the most optimistic scenario, government action revives the global credit system—the massive stimulus packages and aggressive monetary policies already adopted keep the global recession from lasting very long or being very deep. Globalization stays on course: trade and capital flows resume quickly, and the developed and emerging economies continue to integrate as confidence rebounds quickly.
Battered but resilient
In the second scenario, government-wrought improvements in the global credit and capital market are more than offset—for 18 months or more—by the impact of the global recession, which leads to further credit losses and to distrust of cross-border counterparties. Although the recession could be longer and deeper than any in the past 70 years, government action works, and the global capital and credit markets gradually recover. Global confidence, though shaken, does rebound, and trade and capital flows revive moderately. Globalization slowly gets back on course.
Stalled globalization
In the third scenario, the global recession is significant, but its intensity varies greatly from nation to nation—in particular, China and the United States prove surprisingly resilient. The integration of the world’s economies, however, stalls as continuing fear of counterparties makes the global capital market less integrated. Trade flows and capital flows decline and then stagnate. The regulatory regime holds the system together, but various governments overregulate lending and risk, so the world’s banking system becomes “oversafe.” Credit remains expensive and hard to get. As attitudes become more defensive and nationalistic, growth is relatively slow.
The long freeze
Under the final scenario, the global recession lasts more than five years (as Japan’s did in the 1990s) because of ineffective regulatory, fiscal, and monetary policy. Economies everywhere stagnate; overregulation and fear keep the global credit and capital markets closed. Trade and capital flows continue to decline for years as globalization goes into reverse, and the psychology of nations becomes much more defensive and nationalistic.
The authors of the article have therefore sketched out four scenarios to capture the wide range of possible outcomes. The scenarios are based on two critical uncertainties.
Severe global recession – Moderate global recession
Global credit and capital markets reopen and recover – Global credit and capital markets close down and remain volatile.
By plotting these two axes against each other, four future scenarios are created. You can read more detail about these in the article, but in summary:
Regenerated global momentum
In the most optimistic scenario, government action revives the global credit system—the massive stimulus packages and aggressive monetary policies already adopted keep the global recession from lasting very long or being very deep. Globalization stays on course: trade and capital flows resume quickly, and the developed and emerging economies continue to integrate as confidence rebounds quickly.
Battered but resilient
In the second scenario, government-wrought improvements in the global credit and capital market are more than offset—for 18 months or more—by the impact of the global recession, which leads to further credit losses and to distrust of cross-border counterparties. Although the recession could be longer and deeper than any in the past 70 years, government action works, and the global capital and credit markets gradually recover. Global confidence, though shaken, does rebound, and trade and capital flows revive moderately. Globalization slowly gets back on course.
Stalled globalization
In the third scenario, the global recession is significant, but its intensity varies greatly from nation to nation—in particular, China and the United States prove surprisingly resilient. The integration of the world’s economies, however, stalls as continuing fear of counterparties makes the global capital market less integrated. Trade flows and capital flows decline and then stagnate. The regulatory regime holds the system together, but various governments overregulate lending and risk, so the world’s banking system becomes “oversafe.” Credit remains expensive and hard to get. As attitudes become more defensive and nationalistic, growth is relatively slow.
The long freeze
Under the final scenario, the global recession lasts more than five years (as Japan’s did in the 1990s) because of ineffective regulatory, fiscal, and monetary policy. Economies everywhere stagnate; overregulation and fear keep the global credit and capital markets closed. Trade and capital flows continue to decline for years as globalization goes into reverse, and the psychology of nations becomes much more defensive and nationalistic.
Some Scenarios for a Global Recession
I read these articles published on popular websites. My first feeling was: I need to sell everything I have. How am I going to save my money here? Pessimism is everywhere. Energy and commodities prices are going down. They will continue to do so as the global recession scenario unfolds. Emerging markets will be particularly hit. Equities are in a bear market. Forecasts for equities in some cases are so negative that are really scary also for experienced investors. Bonds should do fine, but are we sure?
Inflation is the new big enemy of this decade according to some analysts. Interest rates can only go higher in the long term, some say (including Greenspan). The US financial system is about to blow up according to someone else. Actually, the Fannie Mae (FNM) and Freedie Mac (FRE) stories and others (Lehman (LEH), Bear Stearns, etc.) are a pretty serious concern. Liquidity is shrinking, consumers are shaken.
The US has so far fueled growth in many areas of the world, becoming a big debtor. In the long term, the trend will continue, but it is likely that it will slow down. It seems that this cannot be sustained much longer and a rebalance has finally started. The US still has an important influence in the global economy. China will suffer a lot from the ongoing US simultaneous crisis in the credit and housing markets. Internal contradictions and the need to grow will create difficulties. This is true for other surplus and emerging countries.
Let's try to build a scenario. The US deficit will be reduced and the dollar will be relatively stronger. Commodity and energy prices will go down, helping to control inflation at least momentarily. I have recently noted a rebound of the stock market associated with a stronger dollar and weaker commodities and energy prices. This correlation should continue.
The US financial system will find a base to stabilize itself, although it will be much weaker than before. Also housing will at last stabilize. The problem is: how quickly will these adjustments occur? At which levels markets will attract new buyers? Do we have any elements to make some assumptions? It is quite difficult to predict. The tightening of credit is not helping and there is a vicious circle ongoing.
Geopolitically, we are seeing a long term growth of new and old regional actors. This is likely to continue. Money will continue to flow from traditional economies to frontier and emerging markets, but slower than before after that the current crisis will have considerably weakened the investors' appetite for these volatile and often unstable markets and countries.
In the short term we have to fear a shock in the markets. An event, although sometimes crashes occur without apparent reasons, that will ignite a global panic selling. No one can now whether this time it will happen or not. Hopefully, inflation will be controlled soon enough to allow central banks to act and lower interest rates timely.
There are and there will be buying opportunities. The timing is quite difficult. The recent rebound of the stock market has not been very convincing. I do not have the evidence, however, to say that the bottom has already been hit in July. I think that the key for a relatively stronger equity market will come from a turnaround of financials. we need to monitor this sector very carefully. Bad news will continue to hit the sector for some time, but this sector's bottom is key to bring some optimism into the markets.
I think that stocks eventually will benefit the most from a stabilization of the economies. Hopefully, the US will manage with the new President to start a path of control of the deficit. This would help a lot. It would also make the dollar stronger. And we could see stock indexes print new highs.
Inflation is the new big enemy of this decade according to some analysts. Interest rates can only go higher in the long term, some say (including Greenspan). The US financial system is about to blow up according to someone else. Actually, the Fannie Mae (FNM) and Freedie Mac (FRE) stories and others (Lehman (LEH), Bear Stearns, etc.) are a pretty serious concern. Liquidity is shrinking, consumers are shaken.
The US has so far fueled growth in many areas of the world, becoming a big debtor. In the long term, the trend will continue, but it is likely that it will slow down. It seems that this cannot be sustained much longer and a rebalance has finally started. The US still has an important influence in the global economy. China will suffer a lot from the ongoing US simultaneous crisis in the credit and housing markets. Internal contradictions and the need to grow will create difficulties. This is true for other surplus and emerging countries.
Let's try to build a scenario. The US deficit will be reduced and the dollar will be relatively stronger. Commodity and energy prices will go down, helping to control inflation at least momentarily. I have recently noted a rebound of the stock market associated with a stronger dollar and weaker commodities and energy prices. This correlation should continue.
The US financial system will find a base to stabilize itself, although it will be much weaker than before. Also housing will at last stabilize. The problem is: how quickly will these adjustments occur? At which levels markets will attract new buyers? Do we have any elements to make some assumptions? It is quite difficult to predict. The tightening of credit is not helping and there is a vicious circle ongoing.
Geopolitically, we are seeing a long term growth of new and old regional actors. This is likely to continue. Money will continue to flow from traditional economies to frontier and emerging markets, but slower than before after that the current crisis will have considerably weakened the investors' appetite for these volatile and often unstable markets and countries.
In the short term we have to fear a shock in the markets. An event, although sometimes crashes occur without apparent reasons, that will ignite a global panic selling. No one can now whether this time it will happen or not. Hopefully, inflation will be controlled soon enough to allow central banks to act and lower interest rates timely.
There are and there will be buying opportunities. The timing is quite difficult. The recent rebound of the stock market has not been very convincing. I do not have the evidence, however, to say that the bottom has already been hit in July. I think that the key for a relatively stronger equity market will come from a turnaround of financials. we need to monitor this sector very carefully. Bad news will continue to hit the sector for some time, but this sector's bottom is key to bring some optimism into the markets.
I think that stocks eventually will benefit the most from a stabilization of the economies. Hopefully, the US will manage with the new President to start a path of control of the deficit. This would help a lot. It would also make the dollar stronger. And we could see stock indexes print new highs.
Economists Weigh Recession Scenarios
It's hard for officials to even utter the word "recession." They have to keep a stiff upper lip and try to keep confidence high — but it's possible that battle is already lost. A new Associated Press-Ipsos poll reported Monday that 61 percent of Americans believe the country is already in recession. More and more economists are also moving into that camp.
"We do see the economy shrinking this quarter, and for the second quarter it's going to be very weak as well," says Bernard Baumohl of The Economic Outlook Group. "It's just going to feel quite awful. And it's going to result in the unemployment rate increasing and consumers cutting back on more spending."
Although he believes the economy is shrinking right now, Baumohl isn't quite willing to predict a recession, roughly described as two consecutive quarters of economic contraction.
"Well, if you're pinning me down, I will say that we will — by the width of a hair — formally escape a recession," Baumohl says. "But I don't think anyone's going to feel the difference between a recession and the kind of weak growth we're going to experience the rest of this year."
Many economists are firmly moving into the recession camp. Among them are forecasters at big Wall Street firms, including Merrill Lynch and Goldman Sachs — and at market intelligence firms like Global Insight, where economist Brian Bethune and his colleagues have just released a new forecast.
"For the first half of 2008, we're expecting a mild recession," Bethune says.
Employment will fall in housing-related industries, financial services and building material, Bethune says. Strength in export industries like aircraft, technology and software, and farm equipment will help keep the recession shallow, and the stimulus package will help keep it short, he says.
Global Insight also believes there's a 25 percent chance of a longer, deeper recession brought on by the failure of a large financial institution toppled by bad mortgage-based investments.
"That would be a very large domino. And we know what happens in the game of dominoes when a large domino goes down. It takes down a lot of smaller dominoes. That's the biggest risk," Bethune says.
What To Do About Credit
This meltdown in the financial system would likely cause credit to get even tighter, strangling potential growth, says Mark Zandi of Moody's Economy.com. He thinks a short recession is most likely, but he also thinks a longer recession is a real possibility.
Zandi says a recession could last well into 2009, or it could be what he calls a "classic recession" of declining activity through the summer and fall. "And then we have stop-and-go growth after that for the next couple of years where the economy just can't find its groove, similar to what Japan has suffered over the past decade — not to the same degree, but to a degree," Zandi says.
To avoid this scenario, Zandi believes policymakers need to think about creating a government entity to buy bad mortgages to clear up the picture in the financial markets so credit can flow again.
Zandi said that would be similar to the Resolution Trust Corp. that the federal government established in the early 1990s to resolve the savings and loan crisis and the credit crunch of that era. The RTC took over failed banks and auctioned off their assets. That effort cleaned up the banking system and saved taxpayers a significant amount of money.
"We do see the economy shrinking this quarter, and for the second quarter it's going to be very weak as well," says Bernard Baumohl of The Economic Outlook Group. "It's just going to feel quite awful. And it's going to result in the unemployment rate increasing and consumers cutting back on more spending."
Although he believes the economy is shrinking right now, Baumohl isn't quite willing to predict a recession, roughly described as two consecutive quarters of economic contraction.
"Well, if you're pinning me down, I will say that we will — by the width of a hair — formally escape a recession," Baumohl says. "But I don't think anyone's going to feel the difference between a recession and the kind of weak growth we're going to experience the rest of this year."
Many economists are firmly moving into the recession camp. Among them are forecasters at big Wall Street firms, including Merrill Lynch and Goldman Sachs — and at market intelligence firms like Global Insight, where economist Brian Bethune and his colleagues have just released a new forecast.
"For the first half of 2008, we're expecting a mild recession," Bethune says.
Employment will fall in housing-related industries, financial services and building material, Bethune says. Strength in export industries like aircraft, technology and software, and farm equipment will help keep the recession shallow, and the stimulus package will help keep it short, he says.
Global Insight also believes there's a 25 percent chance of a longer, deeper recession brought on by the failure of a large financial institution toppled by bad mortgage-based investments.
"That would be a very large domino. And we know what happens in the game of dominoes when a large domino goes down. It takes down a lot of smaller dominoes. That's the biggest risk," Bethune says.
What To Do About Credit
This meltdown in the financial system would likely cause credit to get even tighter, strangling potential growth, says Mark Zandi of Moody's Economy.com. He thinks a short recession is most likely, but he also thinks a longer recession is a real possibility.
Zandi says a recession could last well into 2009, or it could be what he calls a "classic recession" of declining activity through the summer and fall. "And then we have stop-and-go growth after that for the next couple of years where the economy just can't find its groove, similar to what Japan has suffered over the past decade — not to the same degree, but to a degree," Zandi says.
To avoid this scenario, Zandi believes policymakers need to think about creating a government entity to buy bad mortgages to clear up the picture in the financial markets so credit can flow again.
Zandi said that would be similar to the Resolution Trust Corp. that the federal government established in the early 1990s to resolve the savings and loan crisis and the credit crunch of that era. The RTC took over failed banks and auctioned off their assets. That effort cleaned up the banking system and saved taxpayers a significant amount of money.
Recession Scenarios
On March 23, the Federal Deposit Insurance Corporation, which insures bank accounts in the United States, issued a report: "Scenarios for the Next U.S. Recession." On the whole, this was more forthright than most published reports by quasi-government agencies.
Before deciding how relevant this FDIC report is, check the latest shape of the interest yield curve. When the 90-day T-bill rate is higher than the 30-year T-note rate for 30 days, this is a very good indicator of a looming recession. Check here.
The FDIC panelists warned about the situation in the housing markets.
A large, long-term increase in consumer indebtedness has raised concerns that the next U.S. recession could originate in the household sector. The housing boom of recent years has resulted in a surge in new consumer debt, most of it in the form of mortgages.
In the first six years of this decade, the net increase of household wealth has been $5 trillion. This increase is enormous. American households, feeling wealthy, have cut back on their rate of savings . . . to zero, then negative. They are living inside their own savings accounts. Home owners see on paper that they are worth more money, and they assume "this real estate market is normal." But it isn’t normal. The condition of the housing market is unusual, to say the least.
Moreover, the increase in net housing wealth during the first half of this decade alone was two to three times as large as the gains posted during each of the prior two decades.
Despite the abnormality of this market, home owners are complacent. They see their homes as ATMs.
Although some new buyers have put very little down on their home and thus have accumulated little equity, many longtime homeowners have accumulated significant additional equity that remains untapped.
This increase in the market-imputed value of housing has persuaded residents that they are rich, that they need not save for retirement or anything else.
During recessions, households tighten their fiscal belts. They cut spending and begin saving more. This makes money available for capital construction and hiring. Thus, in the two years after most recessions end, economic growth is rapid and sustained. But the 2001 recession broke with this pattern.
Because Greenspan’s Federal Reserve poured money into the economy, cutting the federal funds rate from 6% to 1%, this capital accumulation phase of the recession was retarded. The recovery has therefore been the most anemic on record.
Furthermore, the housing market soared in response to the FED’s low interest rates. This makes the present situation unique, the panel concluded.
Historically, recessions have provided an opportunity for households and businesses to retrench and rebuild balance sheets that might have become strained late in the previous expansion. The response of businesses during the 2001 recession provides a classic example in this regard as investment, spending, and hiring activities were curtailed sharply from their heady, late-1990s pace.
The consumers felt wealthy because of the increase in the price of housing. They refused to cut spending.
In part because of the wealth-offset provided by housing, however, the long jobless recovery following the 2001 recession did not weigh heavily on the consumer sector. Consumers did slow their pace of spending growth in 2001 and 2002, but spending growth never fell below a 1 percent annual pace in any quarter, and in no quarter did it actually decline. By contrast, during the early 1990s recession, consumer spending declined for two straight quarters. At this point in time, however, the consumer sector has not experienced a real recession in 15 years.
The final sentence is worth considering. Consumers have not experienced a real job-threatening, gut-wrenching, savings-promoting recession in 15 years. They are totally confident today.
This has changed the mentality of consumers. They are not afraid of a turndown in the economy. They are convinced the government can and will protect them from adversity.
In some sense, this long recession hiatus itself raises concerns. Consumers have gradually become more indebted over time – so much so that they are now spending more in aggregate than they earn, resulting in the much-lamented negative personal savings rate.
In the classic child’s fable of the grasshopper and the ant, the grasshopper has a great summer but a bad winter. Greenspan decided to become the star of a re-make of Bruce Brown’s 1966 surf movie classic, The Endless Summer.
The personal savings rate may turn out to be a bit of a statistical anachronism in an economy where so much spending is driven by the accumulation of wealth rather than current income. Even so, home prices will not boom forever. Even a moderation in home-price growth would reduce the amount of new home equity added to the economy each year. This slower accumulation of wealth, coupled with rising interest rates that increase the cost of tapping that wealth, could soon begin to curtail the pace of U.S. consumer spending growth. Just as there has been a positive wealth effect from soaring home prices in recent years, the concern is that an end to the housing boom could result in a slowdown in consumer spending growth. However, it is important to keep in mind that such an outcome would likely play out over several years, as happened during the boom.
So, the panel is concerned about a long, slow decline in consumer spending. This in turn would slow the overall economy. This is another way of saying that the next recession could be far longer than the typical post-World War II recession that lasted a year.
DEBT, NOT PRODUCTIVITY
The report noted this amazing fact: The public’s increase in debt in 2005 was greater by far than its increase in after-tax income.
It is very likely that housing wealth has been a significant factor behind growth in consumer spending. Through the use of cash-out refinancing, increased mortgage balances, and greater use of home equity lines of credit, as well as through owners selling homes outright and cashing in on their accumulated equity, it is estimated that anywhere from $444 billion to $600 billion was liquidated from housing wealth during 2005. Whichever estimate one uses, the total almost surely eclipses the $375 billion gain in after-tax income for the year.
Now the sword of Damocles is beginning to swing. The FED has adopted policies that have raised short-term interest rates. This has led to rising rates for annual renewable mortgages (ARMs). The new buyers with bad credit who were extended these loans are now trapped. Rising rates mean rising monthly mortgage payments.
Meredith Whitney noted at the roundtable that the recent use of revolving home equity lines of credit in lieu of down payments has enabled an increasing number of first-time buyers to qualify for homes that they otherwise could not afford.
Overall, Ms. Whitney’s research suggests that a group that includes approximately 10 percent of U.S. households may be at heightened risk of credit problems in the current environment. This group mainly includes households that gained access to mortgage credit for the first time during the recent expansion of subprime and innovative mortgage loan programs. Not only do many borrowers in this group have pre-existing credit problems, they may also be more vulnerable than other groups to rising interest rates because of their reliance on interest-only and payment-option mortgages.
Think about this. Ten percent of mortgage payers may soon be in trouble. The threat of default by these people is growing.
The new bankruptcy law does not allow most of them to escape if they wind up owing more than the house can obtain in a foreclosure sale. But creditors will find that the cost of hiring lawyers to pursue these people will exceed the assets owned by these people. Nevertheless, the debtors’ credit ratings will be ruined for years.
Having said all this, the report says banks are in fine shape to weather the next recession. The problem is, the economy may not be.
CONCLUSION
The economy has been dependent on savings from foreign investors, including Asian central banks, for its growth. Consumer spending has increased, not by increasing productivity, but by debt. The American consumer is convinced that the bills will not come due, that he can tap into his home’s equity at low rates at any time. Save? Why?
This is transferring ownership of American capital and claims on future payments (bonds) to foreigners. Americans are de-capitalizing themselves. The central bankers of the world have spotted their marks, even as drug pushers in public high schools spot their marks. Americans are their marks. The "buy now, pay later" philosophy is gone. Today, it’s "buy now, pay never."
But, as the grasshopper learned, winter eventually comes. He can sing "the world owes me a living" all summer long, just as he sang in Disney’s 1934 version of the famous fable. But the world doesn’t owe him a living. Neither does the world owe us a living.
Summer isn’t endless. Also, killer waves eventually wipe out those surfers who refuse to paddle back to shore when the paddling is good.
Before deciding how relevant this FDIC report is, check the latest shape of the interest yield curve. When the 90-day T-bill rate is higher than the 30-year T-note rate for 30 days, this is a very good indicator of a looming recession. Check here.
The FDIC panelists warned about the situation in the housing markets.
A large, long-term increase in consumer indebtedness has raised concerns that the next U.S. recession could originate in the household sector. The housing boom of recent years has resulted in a surge in new consumer debt, most of it in the form of mortgages.
In the first six years of this decade, the net increase of household wealth has been $5 trillion. This increase is enormous. American households, feeling wealthy, have cut back on their rate of savings . . . to zero, then negative. They are living inside their own savings accounts. Home owners see on paper that they are worth more money, and they assume "this real estate market is normal." But it isn’t normal. The condition of the housing market is unusual, to say the least.
Moreover, the increase in net housing wealth during the first half of this decade alone was two to three times as large as the gains posted during each of the prior two decades.
Despite the abnormality of this market, home owners are complacent. They see their homes as ATMs.
Although some new buyers have put very little down on their home and thus have accumulated little equity, many longtime homeowners have accumulated significant additional equity that remains untapped.
This increase in the market-imputed value of housing has persuaded residents that they are rich, that they need not save for retirement or anything else.
During recessions, households tighten their fiscal belts. They cut spending and begin saving more. This makes money available for capital construction and hiring. Thus, in the two years after most recessions end, economic growth is rapid and sustained. But the 2001 recession broke with this pattern.
Because Greenspan’s Federal Reserve poured money into the economy, cutting the federal funds rate from 6% to 1%, this capital accumulation phase of the recession was retarded. The recovery has therefore been the most anemic on record.
Furthermore, the housing market soared in response to the FED’s low interest rates. This makes the present situation unique, the panel concluded.
Historically, recessions have provided an opportunity for households and businesses to retrench and rebuild balance sheets that might have become strained late in the previous expansion. The response of businesses during the 2001 recession provides a classic example in this regard as investment, spending, and hiring activities were curtailed sharply from their heady, late-1990s pace.
The consumers felt wealthy because of the increase in the price of housing. They refused to cut spending.
In part because of the wealth-offset provided by housing, however, the long jobless recovery following the 2001 recession did not weigh heavily on the consumer sector. Consumers did slow their pace of spending growth in 2001 and 2002, but spending growth never fell below a 1 percent annual pace in any quarter, and in no quarter did it actually decline. By contrast, during the early 1990s recession, consumer spending declined for two straight quarters. At this point in time, however, the consumer sector has not experienced a real recession in 15 years.
The final sentence is worth considering. Consumers have not experienced a real job-threatening, gut-wrenching, savings-promoting recession in 15 years. They are totally confident today.
This has changed the mentality of consumers. They are not afraid of a turndown in the economy. They are convinced the government can and will protect them from adversity.
In some sense, this long recession hiatus itself raises concerns. Consumers have gradually become more indebted over time – so much so that they are now spending more in aggregate than they earn, resulting in the much-lamented negative personal savings rate.
In the classic child’s fable of the grasshopper and the ant, the grasshopper has a great summer but a bad winter. Greenspan decided to become the star of a re-make of Bruce Brown’s 1966 surf movie classic, The Endless Summer.
The personal savings rate may turn out to be a bit of a statistical anachronism in an economy where so much spending is driven by the accumulation of wealth rather than current income. Even so, home prices will not boom forever. Even a moderation in home-price growth would reduce the amount of new home equity added to the economy each year. This slower accumulation of wealth, coupled with rising interest rates that increase the cost of tapping that wealth, could soon begin to curtail the pace of U.S. consumer spending growth. Just as there has been a positive wealth effect from soaring home prices in recent years, the concern is that an end to the housing boom could result in a slowdown in consumer spending growth. However, it is important to keep in mind that such an outcome would likely play out over several years, as happened during the boom.
So, the panel is concerned about a long, slow decline in consumer spending. This in turn would slow the overall economy. This is another way of saying that the next recession could be far longer than the typical post-World War II recession that lasted a year.
DEBT, NOT PRODUCTIVITY
The report noted this amazing fact: The public’s increase in debt in 2005 was greater by far than its increase in after-tax income.
It is very likely that housing wealth has been a significant factor behind growth in consumer spending. Through the use of cash-out refinancing, increased mortgage balances, and greater use of home equity lines of credit, as well as through owners selling homes outright and cashing in on their accumulated equity, it is estimated that anywhere from $444 billion to $600 billion was liquidated from housing wealth during 2005. Whichever estimate one uses, the total almost surely eclipses the $375 billion gain in after-tax income for the year.
Now the sword of Damocles is beginning to swing. The FED has adopted policies that have raised short-term interest rates. This has led to rising rates for annual renewable mortgages (ARMs). The new buyers with bad credit who were extended these loans are now trapped. Rising rates mean rising monthly mortgage payments.
Meredith Whitney noted at the roundtable that the recent use of revolving home equity lines of credit in lieu of down payments has enabled an increasing number of first-time buyers to qualify for homes that they otherwise could not afford.
Overall, Ms. Whitney’s research suggests that a group that includes approximately 10 percent of U.S. households may be at heightened risk of credit problems in the current environment. This group mainly includes households that gained access to mortgage credit for the first time during the recent expansion of subprime and innovative mortgage loan programs. Not only do many borrowers in this group have pre-existing credit problems, they may also be more vulnerable than other groups to rising interest rates because of their reliance on interest-only and payment-option mortgages.
Think about this. Ten percent of mortgage payers may soon be in trouble. The threat of default by these people is growing.
The new bankruptcy law does not allow most of them to escape if they wind up owing more than the house can obtain in a foreclosure sale. But creditors will find that the cost of hiring lawyers to pursue these people will exceed the assets owned by these people. Nevertheless, the debtors’ credit ratings will be ruined for years.
Having said all this, the report says banks are in fine shape to weather the next recession. The problem is, the economy may not be.
CONCLUSION
The economy has been dependent on savings from foreign investors, including Asian central banks, for its growth. Consumer spending has increased, not by increasing productivity, but by debt. The American consumer is convinced that the bills will not come due, that he can tap into his home’s equity at low rates at any time. Save? Why?
This is transferring ownership of American capital and claims on future payments (bonds) to foreigners. Americans are de-capitalizing themselves. The central bankers of the world have spotted their marks, even as drug pushers in public high schools spot their marks. Americans are their marks. The "buy now, pay later" philosophy is gone. Today, it’s "buy now, pay never."
But, as the grasshopper learned, winter eventually comes. He can sing "the world owes me a living" all summer long, just as he sang in Disney’s 1934 version of the famous fable. But the world doesn’t owe him a living. Neither does the world owe us a living.
Summer isn’t endless. Also, killer waves eventually wipe out those surfers who refuse to paddle back to shore when the paddling is good.
Outsourcing and Recession - What is the Connection?
Outsourcing is defined as subcontracting a process such as accounting, payroll or tax preparation services to a third party.
The main criterion for outsourcing is:
a. Making better use of time and energy; or
b. Redirecting or conserving energy directed at the competencies of the business; or
c. Make more efficient use of resources.
So, how are recession and outsourcing connected to each other? To understand the connect between the two, we would have to delve a bit deeper into recession and its impacts.
Normally, economists declare recession for any economy if there has been a negative growth in the GDP for more than 2 quarters. Because of the negative growth in the GDP, people normally take defensive actions to protect the outflow of money which in turn goes to aggravate the sluggish growth further.
The solution to beat recession therefore is to create opportunity for having higher margin from lower costs.
In a recent survey done by Offshoring Research Network (ORN) in alliance with Duke University and PricewaterhouseCoopers, 40 out of the 100 companies interviewed said they plan to put pressure on service providers for more favorable contract terms in order to trim costs. In fact the conclusion of the survey is summarized as "Enhancing efficiencies has become more urgent in recent months as pressure on margins forces companies to increase productivity while spending less."
This bears direct testimony to the fact that during recessionary times, it is more feasible for business to opt for outsourcing and create higher margins in order to pump liquidity inside the economy.
However, it is pertinent to understand that any outsourcing which involves capital outlay like some IT projects will definitely be impacted adversely. The areas that can be looked as prime targets to be outsourced would be services like project designs, bookkeeping, tax preparation services, AR & AP services etc.
It is thus safe to assume that the entire accounting function may be considered to be outsourced by businesses in order to reduce costs and increase profitability.
Businesses will however do more research during these recessionary times before deciding to outsource accounting and will opt for an outsourcing vendor only if:
a. There are visible gains in outsourcing the services.
b. The outsourcing vendor shall not charge any avoidable costs like initial set up charges.
c. The outsourcing vendor shall be able to provide value added services which can directly be converted into profitability.
Many of the outsourcing vendors have therefore taken extra care to ensure that businesses in US are able to tide over the tight fund situation in these recessionary times.
At many such outsourcing vendors,
a. There are no initial set up fees.
b. The pricing is lowest among all the outsourcing vendors.
c. There is a lot of flexibility in pricing that suits any need of a business in US.
d. The staff members are highly trained are proclaimed experts in bookkeeping and accounting.
Thus, it makes sense for a business to outsource its accounting function and beat the recession blues.
Steve is a qualified accountant (Indian CPA) and co-founder of APT Services, the fastest growing outsourced accounting service provider in India. Steve has over 10 years of expertise in audits, accounting (both US & Indian GAAP), payroll and tax preparation services.
The main criterion for outsourcing is:
a. Making better use of time and energy; or
b. Redirecting or conserving energy directed at the competencies of the business; or
c. Make more efficient use of resources.
So, how are recession and outsourcing connected to each other? To understand the connect between the two, we would have to delve a bit deeper into recession and its impacts.
Normally, economists declare recession for any economy if there has been a negative growth in the GDP for more than 2 quarters. Because of the negative growth in the GDP, people normally take defensive actions to protect the outflow of money which in turn goes to aggravate the sluggish growth further.
The solution to beat recession therefore is to create opportunity for having higher margin from lower costs.
In a recent survey done by Offshoring Research Network (ORN) in alliance with Duke University and PricewaterhouseCoopers, 40 out of the 100 companies interviewed said they plan to put pressure on service providers for more favorable contract terms in order to trim costs. In fact the conclusion of the survey is summarized as "Enhancing efficiencies has become more urgent in recent months as pressure on margins forces companies to increase productivity while spending less."
This bears direct testimony to the fact that during recessionary times, it is more feasible for business to opt for outsourcing and create higher margins in order to pump liquidity inside the economy.
However, it is pertinent to understand that any outsourcing which involves capital outlay like some IT projects will definitely be impacted adversely. The areas that can be looked as prime targets to be outsourced would be services like project designs, bookkeeping, tax preparation services, AR & AP services etc.
It is thus safe to assume that the entire accounting function may be considered to be outsourced by businesses in order to reduce costs and increase profitability.
Businesses will however do more research during these recessionary times before deciding to outsource accounting and will opt for an outsourcing vendor only if:
a. There are visible gains in outsourcing the services.
b. The outsourcing vendor shall not charge any avoidable costs like initial set up charges.
c. The outsourcing vendor shall be able to provide value added services which can directly be converted into profitability.
Many of the outsourcing vendors have therefore taken extra care to ensure that businesses in US are able to tide over the tight fund situation in these recessionary times.
At many such outsourcing vendors,
a. There are no initial set up fees.
b. The pricing is lowest among all the outsourcing vendors.
c. There is a lot of flexibility in pricing that suits any need of a business in US.
d. The staff members are highly trained are proclaimed experts in bookkeeping and accounting.
Thus, it makes sense for a business to outsource its accounting function and beat the recession blues.
Steve is a qualified accountant (Indian CPA) and co-founder of APT Services, the fastest growing outsourced accounting service provider in India. Steve has over 10 years of expertise in audits, accounting (both US & Indian GAAP), payroll and tax preparation services.
A look at outsourcing as recession looms
Analysts predict that unemployment will increase in Latvia already before the end of this year as the economy is slowing down, but outsourcing company Exigen Services believes this will be a great opportunity for companies in their line of business.
Exigen Services is a global leader in providing ‘Outsourcing 2.0', which focus on actual impact on the results of performance. The company provides technology driven application outsourcing services from multiple delivery centers across Central and Eastern Europe, the United States and the European Union. Guntis Urtans, who is responsible for Exigen's Baltic operations, told PRIME Match that a recession would be good for the outsourcing industry in Latvia since more companies would be looking at cutting staff and costs.
“It will have very good effects. In a recession, resources become more available, and it becomes possible to divert these free resources to outsourcing,” Urtans said and added that Latvia should start focusing more on outsourcing services towards other European countries.
People in the industry will agree that it is hard to say how popular it is with outsourcing in Latvia . In the private sector, many non-core business services in the banking sector have already been outsourced, and in the public sector IT solutions are usually outsourced.
“Very few ministries, for example, have their own programmers. Recently, even less have their own system administrators as all of these services are outsourced,” Urtans said but added that bigger companies in the private sector are gradually turning towards outsourcing.
Even though outsourcing as a business concept have not been around for very long, it has already evolved from what people in the industry call ‘Outsourcing 1.0' to ‘Outsourcing 2.0'. The “older” generation of outsourcing services focused more on reducing personnel costs while the upgraded “new generation” has an added bonus of sharing the risks for both the provider and user.
“The new generation of IT outsourcing, represented by Exigen Services, focuses on results and customer relations, and it shares the risks with the client. Also, the new generation outsourcing providers align the business objectives of their clients with those of their own companies. Therefore, it is quite fair to say that there are several benefits to the client – an outsourcing provider that provides much more than just a workforce at lower rates,” Urtans said.
Most companies who decide to opt for employing outsourcing services do so to cut costs but without sacrificing any of the core expertise. Another common reason is to raise the level of efficiency and speed of service. High expectations
The Latvian workforce has already been diminished severely by the exodus to richer European Union countries after Latvia joined in 2004. There is still no accurate statistics on exactly how many, but the Foreign Ministry estimates that as many as 200,000 people have left for working abroad. In the first quarter this year unemployment hit 6.5 percent, which compared to the same period in 2007 is a decrease from 6.9 percent, but this trend is likely to change in the coming months.
“A qualified workforce is what Latvia tries to use for positioning itself as a great outsourcing destination. We have good education, good knowledge of languages, quick learning skills and the wish to take advantage of all of that. However, a lot of this is still in the working process, and a lot of work still has to be done in order to provide a good range and quality of services,” Urtans said.
Nordea bank paints a rather grim outlook for Latvia in the coming years. Most noticeably, economic growth will pretty much come to a grinding halt while inflati on will continue to soar this year, which will lead to an increase of unemployment. The bank predicts that unemployment could reach 7.5 percent this year and 8.5 percent in 2009 as Latvia 's economy will continue to slow down. Still, Urtans said he thinks the economical climate in the country could lead to an increase in popularity of outsourcing services.
“A wave of increase in the popularity of IT outsourcing is expected, though. Latvia is not an exception, and we are expecting Latvia to become a country where services are outsourced to not only IT, but also in terms of business process outsourcing, e.g. call centers and support centers,” he said.
It is hard to say how many companies in Latvia are dealing with outsourcing in general and IT outsourcing in particular. One study published earlier this year by the Ukrainian Hi-Tech Initiative suggests that there are around 40 IT outsourcing companies in Latvia , employing some 600 people. According to the study it could cost anywhere from $28,000 to $55,500 to hire a Latvian IT specialist for one year, which would make Latvia the sixth most expensive country in Central and Eastern Europe in this respect. Most expensive is Poland where an IT specialist could cost from about $33,000 to $66,000 for a year. Still the entire IT outsourcing market in Poland is worth just $43 million while in Latvia it is $20 million. The leading country in the study was Ukraine where the market is estimated at $544 million while an IT specialist would cost between $26,000 and $49,600. The study concludes that: “ Latvia is a business friendly country, which makes it easy to outsource. The fastest GDP growth rates in Europe , low taxes (corporate income tax is 15 percent, fl at), but competitive labor costs and high productivity of Latvian professionals attract customers to this country.”
It is hard to say how many companies in Latvia employ outsourcing services, but analysts agree that it has been growing steadily over the years. Still, growth potential is very big.
Exigen Services is a global leader in providing ‘Outsourcing 2.0', which focus on actual impact on the results of performance. The company provides technology driven application outsourcing services from multiple delivery centers across Central and Eastern Europe, the United States and the European Union. Guntis Urtans, who is responsible for Exigen's Baltic operations, told PRIME Match that a recession would be good for the outsourcing industry in Latvia since more companies would be looking at cutting staff and costs.
“It will have very good effects. In a recession, resources become more available, and it becomes possible to divert these free resources to outsourcing,” Urtans said and added that Latvia should start focusing more on outsourcing services towards other European countries.
People in the industry will agree that it is hard to say how popular it is with outsourcing in Latvia . In the private sector, many non-core business services in the banking sector have already been outsourced, and in the public sector IT solutions are usually outsourced.
“Very few ministries, for example, have their own programmers. Recently, even less have their own system administrators as all of these services are outsourced,” Urtans said but added that bigger companies in the private sector are gradually turning towards outsourcing.
Even though outsourcing as a business concept have not been around for very long, it has already evolved from what people in the industry call ‘Outsourcing 1.0' to ‘Outsourcing 2.0'. The “older” generation of outsourcing services focused more on reducing personnel costs while the upgraded “new generation” has an added bonus of sharing the risks for both the provider and user.
“The new generation of IT outsourcing, represented by Exigen Services, focuses on results and customer relations, and it shares the risks with the client. Also, the new generation outsourcing providers align the business objectives of their clients with those of their own companies. Therefore, it is quite fair to say that there are several benefits to the client – an outsourcing provider that provides much more than just a workforce at lower rates,” Urtans said.
Most companies who decide to opt for employing outsourcing services do so to cut costs but without sacrificing any of the core expertise. Another common reason is to raise the level of efficiency and speed of service. High expectations
The Latvian workforce has already been diminished severely by the exodus to richer European Union countries after Latvia joined in 2004. There is still no accurate statistics on exactly how many, but the Foreign Ministry estimates that as many as 200,000 people have left for working abroad. In the first quarter this year unemployment hit 6.5 percent, which compared to the same period in 2007 is a decrease from 6.9 percent, but this trend is likely to change in the coming months.
“A qualified workforce is what Latvia tries to use for positioning itself as a great outsourcing destination. We have good education, good knowledge of languages, quick learning skills and the wish to take advantage of all of that. However, a lot of this is still in the working process, and a lot of work still has to be done in order to provide a good range and quality of services,” Urtans said.
Nordea bank paints a rather grim outlook for Latvia in the coming years. Most noticeably, economic growth will pretty much come to a grinding halt while inflati on will continue to soar this year, which will lead to an increase of unemployment. The bank predicts that unemployment could reach 7.5 percent this year and 8.5 percent in 2009 as Latvia 's economy will continue to slow down. Still, Urtans said he thinks the economical climate in the country could lead to an increase in popularity of outsourcing services.
“A wave of increase in the popularity of IT outsourcing is expected, though. Latvia is not an exception, and we are expecting Latvia to become a country where services are outsourced to not only IT, but also in terms of business process outsourcing, e.g. call centers and support centers,” he said.
It is hard to say how many companies in Latvia are dealing with outsourcing in general and IT outsourcing in particular. One study published earlier this year by the Ukrainian Hi-Tech Initiative suggests that there are around 40 IT outsourcing companies in Latvia , employing some 600 people. According to the study it could cost anywhere from $28,000 to $55,500 to hire a Latvian IT specialist for one year, which would make Latvia the sixth most expensive country in Central and Eastern Europe in this respect. Most expensive is Poland where an IT specialist could cost from about $33,000 to $66,000 for a year. Still the entire IT outsourcing market in Poland is worth just $43 million while in Latvia it is $20 million. The leading country in the study was Ukraine where the market is estimated at $544 million while an IT specialist would cost between $26,000 and $49,600. The study concludes that: “ Latvia is a business friendly country, which makes it easy to outsource. The fastest GDP growth rates in Europe , low taxes (corporate income tax is 15 percent, fl at), but competitive labor costs and high productivity of Latvian professionals attract customers to this country.”
It is hard to say how many companies in Latvia employ outsourcing services, but analysts agree that it has been growing steadily over the years. Still, growth potential is very big.
What Will a Recession Mean for IT Outsourcing?
Analysts don't think a recession is likely to slow the pace at which U.S. IT jobs are going overseas.
If the news stories are any indication, the U.S. economy has a rough road ahead of it in 2008.
Due to the rippling effects of the credit crisis, mounting trade deficit, soaring oil prices and sobering employment numbers, the United States is expected to be tightening belts in the coming months.
Observers have mixed views about what this might mean for outsourcing. Some argue that a depressed U.S. economic climate will make the cost savings of offshoring less dramatic, which could save jobs that were otherwise at risk of being sent.
Offshore outsourcing has long been seen by business leaders as a way that CIOs could save a few quick pennies. However, this line of reasoning has grown less popular in recent years because many organizations were burned by mounting costs and project delays when they shopped based on price alone.
"Our current economic condition is almost marked by the declining dollar, which makes offshoring less attractive. CIOs need to be very cautious before trying to save money by offshoring," Forrester analyst Alex Cullen told eWEEK in January.
Others, however, feel that a squeeze on IT spending will have the opposite effect. In a May 4 report, Forrester Research argued that the current economic pressures will only increase demands to quickly accrue cost savings by ramping up outsourcing relationships.
"There's been no roll-off in the demand for outsourcing providers. CIOs will have to look at cost savings, but we're advising them not to take shortcuts," Forrester analyst and report author Paul Roehrig told eWEEK.
In addition to the drive to cut costs, other issues will only augment the pressure to continue outsourcing, the first being an IT skills gap in the United States, where demand for tech skills is outpacing the supply. The Bureau of Labor Statistics reported in January that computer software engineer was one of the computer-related roles that were expected to add the most jobs between 2006 and 2016. Meanwhile, a new report from the Computer Research Association found that the number of people receiving computer science degrees has plummeted since 2000.
All this creates opportunity for tech professionals who want to put their careers in the best position as companies continue to outsource projects.
"If you work in a highly commoditized, easily outsourced line of business where the work can easily be done elsewhere for less, your job is not safe," Roehrig said. "But the real trick of outsourcing is how well you manage it, and the jobs that help manage outsourcing deals are going to be even more in demand."
A second factor that could contribute to an increase in offshoring as the U.S. economy heads into a down cycle is the growing maturity of the offshoring market, as service providers and their clients have gotten smarter since their early relationships. A third and related factor is the improvements in productivity that have resulted from increased efficiency.
"Really what is happening is that the definition of offshoring is changing. The erosion of the wage arbitrage equation is changing the market dynamic. The Indian-based service providers know this very well, so they're presenting business gains as well," Roehrig said.
If the news stories are any indication, the U.S. economy has a rough road ahead of it in 2008.
Due to the rippling effects of the credit crisis, mounting trade deficit, soaring oil prices and sobering employment numbers, the United States is expected to be tightening belts in the coming months.
Observers have mixed views about what this might mean for outsourcing. Some argue that a depressed U.S. economic climate will make the cost savings of offshoring less dramatic, which could save jobs that were otherwise at risk of being sent.
Offshore outsourcing has long been seen by business leaders as a way that CIOs could save a few quick pennies. However, this line of reasoning has grown less popular in recent years because many organizations were burned by mounting costs and project delays when they shopped based on price alone.
"Our current economic condition is almost marked by the declining dollar, which makes offshoring less attractive. CIOs need to be very cautious before trying to save money by offshoring," Forrester analyst Alex Cullen told eWEEK in January.
Others, however, feel that a squeeze on IT spending will have the opposite effect. In a May 4 report, Forrester Research argued that the current economic pressures will only increase demands to quickly accrue cost savings by ramping up outsourcing relationships.
"There's been no roll-off in the demand for outsourcing providers. CIOs will have to look at cost savings, but we're advising them not to take shortcuts," Forrester analyst and report author Paul Roehrig told eWEEK.
In addition to the drive to cut costs, other issues will only augment the pressure to continue outsourcing, the first being an IT skills gap in the United States, where demand for tech skills is outpacing the supply. The Bureau of Labor Statistics reported in January that computer software engineer was one of the computer-related roles that were expected to add the most jobs between 2006 and 2016. Meanwhile, a new report from the Computer Research Association found that the number of people receiving computer science degrees has plummeted since 2000.
All this creates opportunity for tech professionals who want to put their careers in the best position as companies continue to outsource projects.
"If you work in a highly commoditized, easily outsourced line of business where the work can easily be done elsewhere for less, your job is not safe," Roehrig said. "But the real trick of outsourcing is how well you manage it, and the jobs that help manage outsourcing deals are going to be even more in demand."
A second factor that could contribute to an increase in offshoring as the U.S. economy heads into a down cycle is the growing maturity of the offshoring market, as service providers and their clients have gotten smarter since their early relationships. A third and related factor is the improvements in productivity that have resulted from increased efficiency.
"Really what is happening is that the definition of offshoring is changing. The erosion of the wage arbitrage equation is changing the market dynamic. The Indian-based service providers know this very well, so they're presenting business gains as well," Roehrig said.
Outsourcing And The Recession
The body of evidence and industry pundits all seem to point that the world is heading towards a recession. The majority of industries know what to expect; manufacturing will slow down, consumer spending and retail will reduce significantly, whereas basic goods and services will generally weather the storm. Where does that leave the Outsourcing industry?
Given the explosion of the industry since the year 2000 there is no historic data to draw comparisons. Although people have been outsourcing since the 1960s the massive growth has meant that some countries are staking millions of jobs on the continued growth of this industry. The news is full of countries wanting to jump on the outsource bandwagon. Is this the right time, perhaps it is the best time. In this article “TCS, the market leader [outsource software provider in India], said that it was “cautiously confident” because it believed that Western clients would outsource more business overseas to cut costs.” In a time of recession that is at the forefront of everyone’s mind.
In this article Satyam (India’s 4th biggest software exporter) sees no slowdown,. In fact they report a 29 percent increase in profits due to new clients. This would seem to point to the fact that more companies are striving to achieve the benefits of outsource to maintain growth through recession. It might be too early in the recession to really judge. But these massive players in BPO outsourcing seem to think that the recession will pass them by. In this article Exl, a US based outsource company thinks that the recession will not damage their turnover but it will actually increase.
The last article I would like to cite says that the majority of CIOs who are currently not outsourcing are not planning to outsource in the next year. CIOs that are already outsourcing will increase but only slightly. This indicates a slow down but no decline in overall outsourcing.
There are many ways to analyse the data and everyone has an opinion. Frankly it is too early to tell what will actually happen a lot of the news that comes directly from companies is obviously directed towards investors and perhaps paints a rosy picture. The world will continue to outsource because owners and shareholders demand more profitability and a recognised way to do that is to outsource. In the end, only time will tell. outsourcing is such a broad industry that the more likely scenario is that some sectors will continue to thrive while others will have to consolidate to survive.
BPO , Companies , General , Offshoring , The Buzz
posted by Jason Creighton at 12:25 PM ET | comments [0]
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0.55 seconds
Given the explosion of the industry since the year 2000 there is no historic data to draw comparisons. Although people have been outsourcing since the 1960s the massive growth has meant that some countries are staking millions of jobs on the continued growth of this industry. The news is full of countries wanting to jump on the outsource bandwagon. Is this the right time, perhaps it is the best time. In this article “TCS, the market leader [outsource software provider in India], said that it was “cautiously confident” because it believed that Western clients would outsource more business overseas to cut costs.” In a time of recession that is at the forefront of everyone’s mind.
In this article Satyam (India’s 4th biggest software exporter) sees no slowdown,. In fact they report a 29 percent increase in profits due to new clients. This would seem to point to the fact that more companies are striving to achieve the benefits of outsource to maintain growth through recession. It might be too early in the recession to really judge. But these massive players in BPO outsourcing seem to think that the recession will pass them by. In this article Exl, a US based outsource company thinks that the recession will not damage their turnover but it will actually increase.
The last article I would like to cite says that the majority of CIOs who are currently not outsourcing are not planning to outsource in the next year. CIOs that are already outsourcing will increase but only slightly. This indicates a slow down but no decline in overall outsourcing.
There are many ways to analyse the data and everyone has an opinion. Frankly it is too early to tell what will actually happen a lot of the news that comes directly from companies is obviously directed towards investors and perhaps paints a rosy picture. The world will continue to outsource because owners and shareholders demand more profitability and a recognised way to do that is to outsource. In the end, only time will tell. outsourcing is such a broad industry that the more likely scenario is that some sectors will continue to thrive while others will have to consolidate to survive.
BPO , Companies , General , Offshoring , The Buzz
posted by Jason Creighton at 12:25 PM ET | comments [0]
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Comments currently disabled on this Blog system. We're sorry for the inconvenience.
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Learn more and sign up online today!
Riverbed WAN Optimization
Cut IT costs. Accelerate business performance.
www.riverbed.com/cost-savings
Microsoft Tech*Ed North America 2009
Save $300 Engage in over 750 IT learning opportunities at our premier technical ...
www.microsoft.com/teched2009
Microsoft® - Industrial Distribution White Papers
Find out How Microsoft Dynamics® can Improve Your Inventory and Supply Chain Per...
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The Public sector in a Recession
At 2pm on Friday, November 21, at RCPI No.6 Kildare Street, Professor Cary Cooper, a leading expert in organisational psychology and a professor at Lancaster University, will tell the Faculty of Occupational Medicine, Royal College of Physicians of Ireland (RCPI) that “In the midst of a recession the public and private sector in Ireland may need more flexible working arrangements and not less.”
Professor Cooper will deliver the 21st Annual James Smiley Lecture at the Faculty of Occupational Medicine, RCPI and will outline the need for great flexibility as a method of avoiding workplace stress.
“In the workplace, pressure is healthy but stress is destructive, while stress always has a negative impact on the health of an employee, it can have an even larger impact on the performance and productivity of the organisation.” said Prof Cooper
In a recession levels of stress and anxiety are likely to increase as resources become scarce. It is important for government to enable genuine flexible working practices and arrangements within the public sector and encourage similar changes within the private sector.
Professor Cooper warned that “we should not confuse ‘flexi-time’ with flexible working. In the public sector there is often the trappings of flexible working, which mask a lack of autonomy, a rigid decision making process and an inability to take action. This can lead to levels of control which do not allow line managers to manage the talent within the organisation.”
Flexible working arrangements recommended by Prof Cooper include;
Regular organisational audits of employee wellbeing
Giving employees more autonomy and control of their job
Work-Life Balance initiatives
Developing managers to be more socially and interpersonally sensitive.
Resilience training
Minimise the long working hours culture
Healthy Lifestyle & wellbeing programmes
Employee Assistance Programmes
According to Prof Cooper “Flexible working also makes economic sense with a return of €3 - €7 for every €1 spent by an organisation on flexible working. This is a great example of how so-called ‘softer’ interventions can have a positive impact on the bottom-line during these difficult times”.
ENDS
As Professor Cooper is traveling from the UK, he will only be available to speak with the media prior to the meeting, from 12 – 2 pm on Friday, November 21, 2008.
All are welcome to attend; admission is free but registration is required please contact the Faculty at fom@rcpi.ie to register
21st James Smiley Lecture - Click here to download
Programme ~ Registration Form
Background Information, Professor Cary Cooper, CBE
Professor Cary Cooper, CBE is Professor of Organisational Psychology and Health at Lancaster University. He is recognised as a world-leading expert on stress and is the media's first choice for comment on workplace issues. He is a Fellow of the British Psychological Society, The Royal Society of Arts, The Royal Society of Medicine, The Royal Society of Health and an Honorary Fellow of the Royal College of Physicians, London. He is also the President of the British Association of Counselling and Psychotherapy and the author of over 100 books. Prof Cooper also appears regularly on British radio and television, and co-wrote and presented a five-part Channel 4 documentary series on workplace stress entitled "How to Survive the 9 to 5".
The Faculty of Occupational Medicine is the recognised training body for doctors practising in the specialty of occupational medicine in Ireland. It is a constituent body within the Royal College of Physicians of Ireland. Its aim is to promote the highest standard of health and wellbeing for those of working age; to advocate that occupational illness and disease be eliminated from workplaces; and, to speak as the authoritive voice for all issues relating to occupational medicine within the country.
Professor Cooper will deliver the 21st Annual James Smiley Lecture at the Faculty of Occupational Medicine, RCPI and will outline the need for great flexibility as a method of avoiding workplace stress.
“In the workplace, pressure is healthy but stress is destructive, while stress always has a negative impact on the health of an employee, it can have an even larger impact on the performance and productivity of the organisation.” said Prof Cooper
In a recession levels of stress and anxiety are likely to increase as resources become scarce. It is important for government to enable genuine flexible working practices and arrangements within the public sector and encourage similar changes within the private sector.
Professor Cooper warned that “we should not confuse ‘flexi-time’ with flexible working. In the public sector there is often the trappings of flexible working, which mask a lack of autonomy, a rigid decision making process and an inability to take action. This can lead to levels of control which do not allow line managers to manage the talent within the organisation.”
Flexible working arrangements recommended by Prof Cooper include;
Regular organisational audits of employee wellbeing
Giving employees more autonomy and control of their job
Work-Life Balance initiatives
Developing managers to be more socially and interpersonally sensitive.
Resilience training
Minimise the long working hours culture
Healthy Lifestyle & wellbeing programmes
Employee Assistance Programmes
According to Prof Cooper “Flexible working also makes economic sense with a return of €3 - €7 for every €1 spent by an organisation on flexible working. This is a great example of how so-called ‘softer’ interventions can have a positive impact on the bottom-line during these difficult times”.
ENDS
As Professor Cooper is traveling from the UK, he will only be available to speak with the media prior to the meeting, from 12 – 2 pm on Friday, November 21, 2008.
All are welcome to attend; admission is free but registration is required please contact the Faculty at fom@rcpi.ie to register
21st James Smiley Lecture - Click here to download
Programme ~ Registration Form
Background Information, Professor Cary Cooper, CBE
Professor Cary Cooper, CBE is Professor of Organisational Psychology and Health at Lancaster University. He is recognised as a world-leading expert on stress and is the media's first choice for comment on workplace issues. He is a Fellow of the British Psychological Society, The Royal Society of Arts, The Royal Society of Medicine, The Royal Society of Health and an Honorary Fellow of the Royal College of Physicians, London. He is also the President of the British Association of Counselling and Psychotherapy and the author of over 100 books. Prof Cooper also appears regularly on British radio and television, and co-wrote and presented a five-part Channel 4 documentary series on workplace stress entitled "How to Survive the 9 to 5".
The Faculty of Occupational Medicine is the recognised training body for doctors practising in the specialty of occupational medicine in Ireland. It is a constituent body within the Royal College of Physicians of Ireland. Its aim is to promote the highest standard of health and wellbeing for those of working age; to advocate that occupational illness and disease be eliminated from workplaces; and, to speak as the authoritive voice for all issues relating to occupational medicine within the country.
Global Technology Markets Spending Data and Forecasts
Global Insight's Technology Markets practice provides you with an easy-to-use planning system to analyze and display historical and forecast data on global technology spending. Our Global IT Navigator is a one-of-a-kind database that enables you to understand the size and structure of international IT markets.
The Global IT Navigator database contains detailed IT spending estimates for 16 categories of hardware, software, and services; 72 industries; and 70 countries. We update our five-year forecasts twice a year and can customize them to include additional products, services, or geographies of interest to you.
With the Global IT Navigator, we can help you craft a business plan that leverages your unique strengths within these markets.
Global IT Navigator product categories include:
Computer hardware
Computer software
Computer services
A wide variety of custom Technology Markets spending categories are also available upon request and can be delivered via the Navigator platform.
The Global IT Navigator database contains detailed IT spending estimates for 16 categories of hardware, software, and services; 72 industries; and 70 countries. We update our five-year forecasts twice a year and can customize them to include additional products, services, or geographies of interest to you.
With the Global IT Navigator, we can help you craft a business plan that leverages your unique strengths within these markets.
Global IT Navigator product categories include:
Computer hardware
Computer software
Computer services
A wide variety of custom Technology Markets spending categories are also available upon request and can be delivered via the Navigator platform.
'Indian IT sector not hit by global Recession'
The prospects of India's information technology industry have not been adversely affected due to global recession following the September eleven terrorist attacks, experts said on Friday.
''There is not much cause for despair,'' said IT and communications secretary R R Shah. He quoted figures released recently by the Software Technology Parks of India which predict a growth rate of 62 per cent in the IT sector.
''The September 11 incidents have instead opened up more possibilities for the sector as a decline in air travel has increased the demand for communication and has had a positive impact,'' Shah said.
To meet the opportunities for the future, he said, the Indian IT industry must move up the value chain, get into production, increase efforts in the field of hardware and strengthen its advantage in embedded software.
''We also need to diversify our overseas markets and, for this, we need to train IT professionals who can converse in different languages,'' Shah said. He was speaking at a round table on 'Global Recession: Challenges and Opportunities for the Indian IT Sector' organised by the Amity Institute of Information Technology.
IT has helped unlock fields like bioinformatics and nanotechnology that have infinite potential. Shah said the government is giving a serious look at these emerging fields where India has unmatchable advantages.
Making his presentation, president of the National Association of Software and Service Companies Kiran Karnik said the world IT services market, which was estimated at $390 billion in 2000, is set to grow at 9 per cent per annum through 2005.
''Though Indian penetration of the addressable market totalling $90 billion is very low at seven per cent, its value proposition is compelling.''
Karnik quoted Forrester Research as saying that offshoring to India is bound to increase to 28 per cent of IT spending in 2003 from 12 per cent last year.
In the domestic market, the growth in IT spending is estimated at 8-10 per cent during 2001-2002 from the previous year's level of Rs 226 billion. But the growth rate in software exports could reach secular levels in 2001-2002 and touch the 30 per cent mark from last year's level of Rs 283.50 billion.
Karnik said India spends only 1.7 per cent of gross domestic product on the IT which is forecast to grow from $5 billion now to $18 billion by 2008.
Saurabh Srivastava, president of the Venture Capital Association of India, said the global recession is driving the IT industry to become more efficient. ''It is forcing the industry to diversify markets and to look at costs. Imagine what it is doing to our fledgling competitors. Hundreds of companies globally are now looking at outsourcing from India.''
Srivastava said one-fourth of Fortune 500 companies outsource their software needs from Indian companies. He said the IT industry will play a major role in enabling wireless technologies besides opening new avenues in biotechnology, pharmaceuticals, electronic manufacturing, media and entertainment.
Some speakers, like Major Chugh of Cisco Systems India, however struck a cautious note and said India still does not have adequate networking infrastructure to become a leader in knowledge-based global economy.
''There is not much cause for despair,'' said IT and communications secretary R R Shah. He quoted figures released recently by the Software Technology Parks of India which predict a growth rate of 62 per cent in the IT sector.
''The September 11 incidents have instead opened up more possibilities for the sector as a decline in air travel has increased the demand for communication and has had a positive impact,'' Shah said.
To meet the opportunities for the future, he said, the Indian IT industry must move up the value chain, get into production, increase efforts in the field of hardware and strengthen its advantage in embedded software.
''We also need to diversify our overseas markets and, for this, we need to train IT professionals who can converse in different languages,'' Shah said. He was speaking at a round table on 'Global Recession: Challenges and Opportunities for the Indian IT Sector' organised by the Amity Institute of Information Technology.
IT has helped unlock fields like bioinformatics and nanotechnology that have infinite potential. Shah said the government is giving a serious look at these emerging fields where India has unmatchable advantages.
Making his presentation, president of the National Association of Software and Service Companies Kiran Karnik said the world IT services market, which was estimated at $390 billion in 2000, is set to grow at 9 per cent per annum through 2005.
''Though Indian penetration of the addressable market totalling $90 billion is very low at seven per cent, its value proposition is compelling.''
Karnik quoted Forrester Research as saying that offshoring to India is bound to increase to 28 per cent of IT spending in 2003 from 12 per cent last year.
In the domestic market, the growth in IT spending is estimated at 8-10 per cent during 2001-2002 from the previous year's level of Rs 226 billion. But the growth rate in software exports could reach secular levels in 2001-2002 and touch the 30 per cent mark from last year's level of Rs 283.50 billion.
Karnik said India spends only 1.7 per cent of gross domestic product on the IT which is forecast to grow from $5 billion now to $18 billion by 2008.
Saurabh Srivastava, president of the Venture Capital Association of India, said the global recession is driving the IT industry to become more efficient. ''It is forcing the industry to diversify markets and to look at costs. Imagine what it is doing to our fledgling competitors. Hundreds of companies globally are now looking at outsourcing from India.''
Srivastava said one-fourth of Fortune 500 companies outsource their software needs from Indian companies. He said the IT industry will play a major role in enabling wireless technologies besides opening new avenues in biotechnology, pharmaceuticals, electronic manufacturing, media and entertainment.
Some speakers, like Major Chugh of Cisco Systems India, however struck a cautious note and said India still does not have adequate networking infrastructure to become a leader in knowledge-based global economy.
Recession hits BPOs, sector seeks bailout package
The tremors of American recession will soon be felt in India. The $11 billion BPO sector - which gets most of its business from the United States - will bear the brunt. Industry is projecting a cut over 2.5 lakh jobs starting from the first half of 2009.
According to Nasscom, the BPO sector employs 7,00,000 people
President BPO Industry Association, Samir Chopra says, "'Severe job loss is expected because of recession. We are going to request for a fiscal package from the Government but if that doesn't happen, then there be huge amount of losses in terms of manpower. I think a quarter of a million jobs will go.''
The job cuts follow a decline in growth. IT major Infosys predicts a drop of 15 per cent in growth from 30 per cent last year.
Infosys CEO & MD, S Gopalakrishnan says, "'There is a slowdown, no question about it. I think you know what is happening around the world has had an impact."
Coupled with the slowdown, the devastating attack on Mumbai too has lead to fears that new investments might not come. The companies now want a fiscal package from the Government to tide over. Their top demand would be to extend tax relief to the industry for another 5-10 years.
According to Nasscom, the BPO sector employs 7,00,000 people
President BPO Industry Association, Samir Chopra says, "'Severe job loss is expected because of recession. We are going to request for a fiscal package from the Government but if that doesn't happen, then there be huge amount of losses in terms of manpower. I think a quarter of a million jobs will go.''
The job cuts follow a decline in growth. IT major Infosys predicts a drop of 15 per cent in growth from 30 per cent last year.
Infosys CEO & MD, S Gopalakrishnan says, "'There is a slowdown, no question about it. I think you know what is happening around the world has had an impact."
Coupled with the slowdown, the devastating attack on Mumbai too has lead to fears that new investments might not come. The companies now want a fiscal package from the Government to tide over. Their top demand would be to extend tax relief to the industry for another 5-10 years.
Out Of Hibernation
Air is once again thick with talks of an economic recession. Last time we in India saw a recession was also the first time – year 2001. Its an old economic adage that developing countries do not have recession and yet we had it. Pangs of globalization! In fact, the sectors effected by recession were directly linked to the world economy and hence the impact.
Sub prime crisis, as they call it, has been deepening in the US. Even before that, throughout the 2006, skeptics and people like Soros kept on talking of an impending recession by the beginning of 2008. Housing bubble in US was sited as one reason, bad (???) monetary policies followed by the fed was another reason.
Since Marx gave an analysis of economic cycles, not much additions has been made to basic theory. However, there is much more data available and people have made all kinds of empirical models to predict and manage the cycles.
The moot questions here are:
Is the US heading into a recession?
What is going to be the impact on the rest of the world, especially India?
As the experts differ on all the matters, they differ here also, and I am not going to hazard a guess.
So let me come to practical question.
I am seeing that exchange rate fluctuation is being used as an alibi by many software companies to defend their flattish growth in revenue and the decline in hiring and rise in firing.
I have heard lots of rumors in the past where company X or Y laid off employees.
Please spread the word and post comments here to update me so that we all know what is going on.
To start with, I have heard that a Pune based big company has terminated services of hundreds of employees. The numbers vary from 700-2000 and there is no official corroboration of this news. Official do admit that the services of some contract employees have been terminated.
Sub prime crisis, as they call it, has been deepening in the US. Even before that, throughout the 2006, skeptics and people like Soros kept on talking of an impending recession by the beginning of 2008. Housing bubble in US was sited as one reason, bad (???) monetary policies followed by the fed was another reason.
Since Marx gave an analysis of economic cycles, not much additions has been made to basic theory. However, there is much more data available and people have made all kinds of empirical models to predict and manage the cycles.
The moot questions here are:
Is the US heading into a recession?
What is going to be the impact on the rest of the world, especially India?
As the experts differ on all the matters, they differ here also, and I am not going to hazard a guess.
So let me come to practical question.
I am seeing that exchange rate fluctuation is being used as an alibi by many software companies to defend their flattish growth in revenue and the decline in hiring and rise in firing.
I have heard lots of rumors in the past where company X or Y laid off employees.
Please spread the word and post comments here to update me so that we all know what is going on.
To start with, I have heard that a Pune based big company has terminated services of hundreds of employees. The numbers vary from 700-2000 and there is no official corroboration of this news. Official do admit that the services of some contract employees have been terminated.
Stocks To Beat The Recession
With the R-word on the lips if not the inner consciousness of every pundit, trader, economist and hedge fund manager with a pulse, we thought it would be quite timely to focus on three small caps that we believe can provide a ray of sunlight in these dreary days. Here are my top three--each expected to grow earnings 30% or more, beat last quarter's estimate and have had earnings per share estimates revised higher for this year. As an extra bonus, each is 20% or more off recent highs and has 30% or greater upside potential in the next 12 months.
Gaiam Inc. (nasdaq: GAIA - news - people )
Recent price: $24
12-month target: $31
Gaiam is a branded lifestyle media company focusing on fitness, wellness, spiritually meaningful entertainment, and sustainable living. The company has coined the acronym LOHAS (Lifestyles of Health and Sustainability) to describe its target audience. The company creates the majority of its media content in-house and distributes its products and services through multiple retail and online channels in the U.S. as well as internationally. The company's acronym LOHAS describes its target market, which the company estimates at $200 billion per annum globally.
It has also announced it will sell a minority stake in Real Goods Solar to the public in an initial public offering. Good for Real Goods, but also good for Gaiam shareholders. The company plans to sell a minority position consisting of 10 million shares of Class A common stock to the public and use $19 million of the proceeds to repay funds invested in Real Goods by GAIAM. Earnings growth is just ramping up and could exceed .60 for 2008.
Price Smart (nasdaq: PSMT - news - people )
Recent price: $25
12-month target: $37
Operates 23 membership-based warehouse club stores in Central America (outside of Mexico) and the Caribbean. Similar to U.S.-based warehouse stores, though smaller, PriceSmart stores primarily sell food, beverage, health and beauty, soft goods and house wares to small businesses and affluent consumers. Double-digit, same-store sales growth and the potential for new stores in existing markets suggest the company could sustain a 15% top line and 20% earnings growth rate longer term.
PriceSmart was founded by the Price family, who also founded Price Club, and later sold it to Costco (nasdaq: COST - news - people ) in 1993. Robert Price remains chairman and CEO of PriceSmart, and his depth of experience is a key investment positive.
The company has a strong balance sheet with no debt, expanding margins and a projected three-year earnings growth rate of 20%. PriceSmart began paying a 32 cents annual dividend in fiscal year 07, signaling management's confidence in strong cash flow. Insiders, including CEO Price, and his father, Sol, own 53% of the company. PriceSmart could earn $1.20 per share in the next 12 months.
International Assets Holding Corp. (nasdaq: IAAC - news - people )
Recent price: $24
12-month target: $37
International Assets Holding Corp. is a specialized financial services firm focused on providing trading and market-making services in five primary business segments: international equities market making, international debt capital markets, foreign exchange trading, commodities trading and asset management. The company seeks to take advantage of its expertise in niche markets not adequately covered by major global brokerage firms.
We continue to be impressed by IAAC's strong revenue and earnings growth, along with its ability to integrate recent acquisitions, whereby the company is gaining critical mass in many of its business segments. If investors only look at revenues and earnings, they would totally miss the positive growth story unfolding at IAAC. Accounting rules continue to misrepresent the company's true growth picture. On a mark-to-market basis, the company posted solid triple-digit revenue and earnings growth in last year's fourth quarter, which beat our estimates by 28% on the top line and 97% on the bottom line. Mark-to-market earnings could exceed $1.60 per share in 2008.
Gaiam Inc. (nasdaq: GAIA - news - people )
Recent price: $24
12-month target: $31
Gaiam is a branded lifestyle media company focusing on fitness, wellness, spiritually meaningful entertainment, and sustainable living. The company has coined the acronym LOHAS (Lifestyles of Health and Sustainability) to describe its target audience. The company creates the majority of its media content in-house and distributes its products and services through multiple retail and online channels in the U.S. as well as internationally. The company's acronym LOHAS describes its target market, which the company estimates at $200 billion per annum globally.
It has also announced it will sell a minority stake in Real Goods Solar to the public in an initial public offering. Good for Real Goods, but also good for Gaiam shareholders. The company plans to sell a minority position consisting of 10 million shares of Class A common stock to the public and use $19 million of the proceeds to repay funds invested in Real Goods by GAIAM. Earnings growth is just ramping up and could exceed .60 for 2008.
Price Smart (nasdaq: PSMT - news - people )
Recent price: $25
12-month target: $37
Operates 23 membership-based warehouse club stores in Central America (outside of Mexico) and the Caribbean. Similar to U.S.-based warehouse stores, though smaller, PriceSmart stores primarily sell food, beverage, health and beauty, soft goods and house wares to small businesses and affluent consumers. Double-digit, same-store sales growth and the potential for new stores in existing markets suggest the company could sustain a 15% top line and 20% earnings growth rate longer term.
PriceSmart was founded by the Price family, who also founded Price Club, and later sold it to Costco (nasdaq: COST - news - people ) in 1993. Robert Price remains chairman and CEO of PriceSmart, and his depth of experience is a key investment positive.
The company has a strong balance sheet with no debt, expanding margins and a projected three-year earnings growth rate of 20%. PriceSmart began paying a 32 cents annual dividend in fiscal year 07, signaling management's confidence in strong cash flow. Insiders, including CEO Price, and his father, Sol, own 53% of the company. PriceSmart could earn $1.20 per share in the next 12 months.
International Assets Holding Corp. (nasdaq: IAAC - news - people )
Recent price: $24
12-month target: $37
International Assets Holding Corp. is a specialized financial services firm focused on providing trading and market-making services in five primary business segments: international equities market making, international debt capital markets, foreign exchange trading, commodities trading and asset management. The company seeks to take advantage of its expertise in niche markets not adequately covered by major global brokerage firms.
We continue to be impressed by IAAC's strong revenue and earnings growth, along with its ability to integrate recent acquisitions, whereby the company is gaining critical mass in many of its business segments. If investors only look at revenues and earnings, they would totally miss the positive growth story unfolding at IAAC. Accounting rules continue to misrepresent the company's true growth picture. On a mark-to-market basis, the company posted solid triple-digit revenue and earnings growth in last year's fourth quarter, which beat our estimates by 28% on the top line and 97% on the bottom line. Mark-to-market earnings could exceed $1.60 per share in 2008.
Recession and Stocks
Gary,
Are we headed toward a recession? I am in stock mutual funds and wonder if it is time to go into a money market for safety.
SC
The correct answer to SC's question is: I don't know and I don't care. No, I'm not being sarcastic. In fact, trying to answer this question could harm SC's wealth.
Here's why. No one can know for sure what the future will bring. A recession is defined as two consecutive quarters where production declines. A lot of highly trained economists and forecasters are making various predictions about the future. Some of them will be right. And others won't.
It's not that the experts are stupid. It's just a very hard question to answer. A huge number of things affect the economy. Government policy, people's job security. And some things, like natural disasters, that no one can predict.
Besides that, it's really not a yes or no question. There's very little practical difference between the economy growing or shrinking by 1/10th of 1%. Yet, that's the difference between being 'in a recession' or not.
OK, so let's agree that we can't know for sure whether a recession is starting. The good news is that we don't need to forecast the economy to invest successfully. In fact, trying to predict the future could actually lead us to a lower return on our investments. There's a couple of reasons that's true.
SC's question assumed that an upcoming recession would be a time to sell stocks and move into a mutual fund. That's not necessarily true.
In fact, a recession could be a good time to buy stocks. There's an old Wall Street proverb that advises that you "buy on bad news and sell on good news". The reason is simple. People buy and sell stocks based on what they think is going to happen in the future. When most people are thinking about a recession stock prices have already been adjusted for it. So, to put it bluntly, it's too late.
There's another danger for SC to consider. Trying to guess the direction of the stock market is tricky business. To do it successfully you need to buy and sell before other people do. And the people that you're competing with are well paid, highly trained professionals. They work for the big Wall Street firms. Their full-time job is to guess where the market will go and move the billions of dollars that they manage to get there first.
That's some stiff competition. And unless SC is particularly skillful or just plain lucky, the big guys are almost bound to win. So it's probably foolish to try to play that game.
But, there's more good news. You don't have to play to make money in stocks. Two simple strategies can make anyone a winner in the stock market.
The first strategy is to buy with the long term in mind. Invest with an eye to winning over a 5, 10 or 20-year time frame. The reason is simple. Although the stock market is unpredictable in any one year, it's much more predictable over 5 years. And very safe if you invest for 10 years. The past proves it.
The historical return has been about 10% per year when you measure groups of 10 consecutive years. Going back to the great depression there's no case where you would you have lost money if you invested for 10 years or more.
Although not a part of the question, the second strategy that SC should implement is the practice of investing on a regular basis. Even if it's only a few dollars each month. During the years that stock prices fall SC will be buying at bargain prices.. The surest way to get those bargains is to invest some money on a steady basis.
So what should SC do? In part it depends on what they want to achieve. If safety is an issue then SC shouldn't be in stocks at all. They'd be wise to sell now and put the money into something stable like a money fund. That would be true no matter where the economy was going. Stocks are no place for your 'safe money'.
On the other hand, if SC is saving for the future then they should forget about the economy. They can rest comfortably knowing that time is on their side.
One final comment about stock investments. As complicated as the markets are today SC is wise to have chosen to use a mutual fund. Owning individual stocks adds risk to your investments. It's much harder for a company to do well for ten years than it is for a managed mutual fund.
Are we headed toward a recession? I am in stock mutual funds and wonder if it is time to go into a money market for safety.
SC
The correct answer to SC's question is: I don't know and I don't care. No, I'm not being sarcastic. In fact, trying to answer this question could harm SC's wealth.
Here's why. No one can know for sure what the future will bring. A recession is defined as two consecutive quarters where production declines. A lot of highly trained economists and forecasters are making various predictions about the future. Some of them will be right. And others won't.
It's not that the experts are stupid. It's just a very hard question to answer. A huge number of things affect the economy. Government policy, people's job security. And some things, like natural disasters, that no one can predict.
Besides that, it's really not a yes or no question. There's very little practical difference between the economy growing or shrinking by 1/10th of 1%. Yet, that's the difference between being 'in a recession' or not.
OK, so let's agree that we can't know for sure whether a recession is starting. The good news is that we don't need to forecast the economy to invest successfully. In fact, trying to predict the future could actually lead us to a lower return on our investments. There's a couple of reasons that's true.
SC's question assumed that an upcoming recession would be a time to sell stocks and move into a mutual fund. That's not necessarily true.
In fact, a recession could be a good time to buy stocks. There's an old Wall Street proverb that advises that you "buy on bad news and sell on good news". The reason is simple. People buy and sell stocks based on what they think is going to happen in the future. When most people are thinking about a recession stock prices have already been adjusted for it. So, to put it bluntly, it's too late.
There's another danger for SC to consider. Trying to guess the direction of the stock market is tricky business. To do it successfully you need to buy and sell before other people do. And the people that you're competing with are well paid, highly trained professionals. They work for the big Wall Street firms. Their full-time job is to guess where the market will go and move the billions of dollars that they manage to get there first.
That's some stiff competition. And unless SC is particularly skillful or just plain lucky, the big guys are almost bound to win. So it's probably foolish to try to play that game.
But, there's more good news. You don't have to play to make money in stocks. Two simple strategies can make anyone a winner in the stock market.
The first strategy is to buy with the long term in mind. Invest with an eye to winning over a 5, 10 or 20-year time frame. The reason is simple. Although the stock market is unpredictable in any one year, it's much more predictable over 5 years. And very safe if you invest for 10 years. The past proves it.
The historical return has been about 10% per year when you measure groups of 10 consecutive years. Going back to the great depression there's no case where you would you have lost money if you invested for 10 years or more.
Although not a part of the question, the second strategy that SC should implement is the practice of investing on a regular basis. Even if it's only a few dollars each month. During the years that stock prices fall SC will be buying at bargain prices.. The surest way to get those bargains is to invest some money on a steady basis.
So what should SC do? In part it depends on what they want to achieve. If safety is an issue then SC shouldn't be in stocks at all. They'd be wise to sell now and put the money into something stable like a money fund. That would be true no matter where the economy was going. Stocks are no place for your 'safe money'.
On the other hand, if SC is saving for the future then they should forget about the economy. They can rest comfortably knowing that time is on their side.
One final comment about stock investments. As complicated as the markets are today SC is wise to have chosen to use a mutual fund. Owning individual stocks adds risk to your investments. It's much harder for a company to do well for ten years than it is for a managed mutual fund.
The Economic Drift
Is the economy falling apart or not? The mixed signals include a crisis in home finance, a weak jobs report, strong productivity numbers and an expectation (from analysts) of a 15% gain in corporate profits for 2008. The good news is that collateral damage from the credit market fiasco and concerns about consumer spending have made shares of high-quality companies a lot more affordable. The S & P 500 index is down 6.9% so far this year, which puts it at 17 times estimated 2007 earnings. If earnings growth meets expectations, you're paying 15 times 2008 earnings. That ratio is right in the middle of the historical range.
Is the economy falling apart or not? The mixed signals include a crisis in home finance, a weak jobs report, strong productivity numbers and an expectation (from analysts) of a 15% gain in corporate profits for 2008. The good news is that collateral damage from the credit market fiasco and concerns about consumer spending have made shares of high-quality companies a lot more affordable. The S&P 500 index is down 6.9% so far this year, which puts it at 17 times estimated 2007 earnings. If earnings growth meets expectations, you're paying 15 times 2008 earnings. That ratio is right in the middle of the historical range.
Our Beyond the Balance Sheet department looks at the numbers behind the numbers--ways of analyzing companies that are different from the usual metrics such as book value and earnings. Previous editions covered earnings quality, free cash flow and breakup values, among other topics. This time we take a look at three topics that relate to how companies will weather the recession, if that's what we're in (the truth about this may not be known until it's over). They are: employment, dividend-paying ability and pensions.
If a company is adding employees to its payroll and investing in fixed capital, it expects to grow. That's a big vote of confidence--especially as employment in the U.S. economy heads in the other direction. In the table we display eight companies that added jobs in the December quarter and also increased their capital outlays between 2006 and 2007.
If there's a recession, you wouldn't know it by looking at Google (nasdaq: GOOG - news - people ). Discussing the fourth-quarter addition of 889 jobs--including engineers in the U.S.--on its conference call, Chief Financial Officer George Reyes said the company "will continue to invest in its core business" of distributing ads to Internet surfers. Chief Executive Eric Schmidt followed that up later, responding to an analyst's question about economic weakness: "You're using the term 'potential slowdown,' which is not a term we have used on this call, so again that's your view, not necessarily ours." While holding a leading market share in its core business, the company is also investing in ancillary ones, like office productivity software. Its December quarter of 2007 cap-ex was $678 million, up from $367 million for December quarter 2006.
Another tech titan adding firepower is AT&T. The old landline business isn't what it used to be, but this phone company is expanding its payroll in order to get into the cable television business. It is adding technicians and installers for a service it calls U-verse. UBS analyst John Hodulik gives the thumbs up to this technology, writing in a February report that those covering the cable industry haven't yet factored in the competitive threat AT&T now poses to traditional cable operators like Cablevision (nyse: CVC - news - people ) and Time Warner Cable (nyse: TWC - news - people ). Echoing Hodulik's comments in a conference call with investors, AT&T Chief Financial Officer Richard Lindner said the company had no choice but to spend on new hires and training. In other words, recession or not, here we come.
Corporate prosperity can be reflected in a different kind of jobs number: productivity. In the table we show companies with big changes in sales per employee. Hospital-supplies vendor AmerisourceBergen, benefiting from rising expenditures on health care and automation of the wholesale industry, enjoys sales of $5.8 million per employee. Whole Foods Market (nasdaq: WFMI - news - people ) is going the other way, one reason its stock is sagging. This organic grocer bought competitor Wild Oats; the latter's smaller, older stores seem to have dragged down the average.
Our next table looks at dividends. Stocks with rich dividends are often touted as safe havens during bear markets on the theory that investors disillusioned with capital gains will seek comfort in quarterly payouts. Our take on dividend seeking: Look closely at whether the company can afford the payout. The metric here compares dividends with free cash flow, defined as cash flow from operations minus capital expenditures. In a financial statement you'll find cash flow from ops right after the profit-and-loss summary; it's roughly equal to net income plus depreciation plus declines in inventory and receivables. Clorox yields more than the average stock, has been raising its dividend and could afford to pay more.
Our last set of tables concerns old-fashioned pension plans, the ones that promise a certain monthly benefit. Such pensions are no longer the millstone they once were for American industry, partly because employers are shifting to defined-contribution plans that leave them with no obligations. But lots of older companies still have defined-benefit plans on their books, and the accounting for these plans can give a hint about a company's financial strength.
Take a look at the future return the company assumes in calculating its pension liabilities. The higher the return, the lower the discounted present value of those monthly payouts, and therefore the lower the hole on the balance sheet and the lower the annual pension cost charged to earnings. A return assumption on the high side suggests that the company is straining to meet its earnings targets. That is not a good sign.
The mostly bullish stock market of the past five years has lessened the problem of pension funding, says Mark Ruloff, director of asset allocation at pension consultant Watson Wyatt. Pension fund assets as a percentage of obligations went from an average 81% in 2002 to an estimated 109% at the end of 2007. But if the stock market keeps sinking, funding shortfalls will catch up with employers, and they will have to chip in more cash to their plans than they expect. In the table, our "conservative expectation" for pension fund returns is based on the sponsor's asset allocation and on bond yields, recent hedge fund performance and historical stock market returns.
Is the economy falling apart or not? The mixed signals include a crisis in home finance, a weak jobs report, strong productivity numbers and an expectation (from analysts) of a 15% gain in corporate profits for 2008. The good news is that collateral damage from the credit market fiasco and concerns about consumer spending have made shares of high-quality companies a lot more affordable. The S&P 500 index is down 6.9% so far this year, which puts it at 17 times estimated 2007 earnings. If earnings growth meets expectations, you're paying 15 times 2008 earnings. That ratio is right in the middle of the historical range.
Our Beyond the Balance Sheet department looks at the numbers behind the numbers--ways of analyzing companies that are different from the usual metrics such as book value and earnings. Previous editions covered earnings quality, free cash flow and breakup values, among other topics. This time we take a look at three topics that relate to how companies will weather the recession, if that's what we're in (the truth about this may not be known until it's over). They are: employment, dividend-paying ability and pensions.
If a company is adding employees to its payroll and investing in fixed capital, it expects to grow. That's a big vote of confidence--especially as employment in the U.S. economy heads in the other direction. In the table we display eight companies that added jobs in the December quarter and also increased their capital outlays between 2006 and 2007.
If there's a recession, you wouldn't know it by looking at Google (nasdaq: GOOG - news - people ). Discussing the fourth-quarter addition of 889 jobs--including engineers in the U.S.--on its conference call, Chief Financial Officer George Reyes said the company "will continue to invest in its core business" of distributing ads to Internet surfers. Chief Executive Eric Schmidt followed that up later, responding to an analyst's question about economic weakness: "You're using the term 'potential slowdown,' which is not a term we have used on this call, so again that's your view, not necessarily ours." While holding a leading market share in its core business, the company is also investing in ancillary ones, like office productivity software. Its December quarter of 2007 cap-ex was $678 million, up from $367 million for December quarter 2006.
Another tech titan adding firepower is AT&T. The old landline business isn't what it used to be, but this phone company is expanding its payroll in order to get into the cable television business. It is adding technicians and installers for a service it calls U-verse. UBS analyst John Hodulik gives the thumbs up to this technology, writing in a February report that those covering the cable industry haven't yet factored in the competitive threat AT&T now poses to traditional cable operators like Cablevision (nyse: CVC - news - people ) and Time Warner Cable (nyse: TWC - news - people ). Echoing Hodulik's comments in a conference call with investors, AT&T Chief Financial Officer Richard Lindner said the company had no choice but to spend on new hires and training. In other words, recession or not, here we come.
Corporate prosperity can be reflected in a different kind of jobs number: productivity. In the table we show companies with big changes in sales per employee. Hospital-supplies vendor AmerisourceBergen, benefiting from rising expenditures on health care and automation of the wholesale industry, enjoys sales of $5.8 million per employee. Whole Foods Market (nasdaq: WFMI - news - people ) is going the other way, one reason its stock is sagging. This organic grocer bought competitor Wild Oats; the latter's smaller, older stores seem to have dragged down the average.
Our next table looks at dividends. Stocks with rich dividends are often touted as safe havens during bear markets on the theory that investors disillusioned with capital gains will seek comfort in quarterly payouts. Our take on dividend seeking: Look closely at whether the company can afford the payout. The metric here compares dividends with free cash flow, defined as cash flow from operations minus capital expenditures. In a financial statement you'll find cash flow from ops right after the profit-and-loss summary; it's roughly equal to net income plus depreciation plus declines in inventory and receivables. Clorox yields more than the average stock, has been raising its dividend and could afford to pay more.
Our last set of tables concerns old-fashioned pension plans, the ones that promise a certain monthly benefit. Such pensions are no longer the millstone they once were for American industry, partly because employers are shifting to defined-contribution plans that leave them with no obligations. But lots of older companies still have defined-benefit plans on their books, and the accounting for these plans can give a hint about a company's financial strength.
Take a look at the future return the company assumes in calculating its pension liabilities. The higher the return, the lower the discounted present value of those monthly payouts, and therefore the lower the hole on the balance sheet and the lower the annual pension cost charged to earnings. A return assumption on the high side suggests that the company is straining to meet its earnings targets. That is not a good sign.
The mostly bullish stock market of the past five years has lessened the problem of pension funding, says Mark Ruloff, director of asset allocation at pension consultant Watson Wyatt. Pension fund assets as a percentage of obligations went from an average 81% in 2002 to an estimated 109% at the end of 2007. But if the stock market keeps sinking, funding shortfalls will catch up with employers, and they will have to chip in more cash to their plans than they expect. In the table, our "conservative expectation" for pension fund returns is based on the sponsor's asset allocation and on bond yields, recent hedge fund performance and historical stock market returns.
The Recession 2008 for Dummies!
About the session:
This is a lecture for all those people who do not understand a word of economics. All around there is talk of a Recession. Words like sub prime mortgage, unemployment, inflation, bankruptcy, economic slowdown, global credit crunch keep coming back to us from the television, newspapers, shopkeepers and friends. What is this recession that everyone is talking about? What causes it and what are the key indicators? How does it affect us? What are the causes which are believed to have resulted in the recession of 2008? This session is my attempt to answer the above questions and to better acquaint the students with the existing gloomy global economic environment.
About the presenter: Aarti Pathak
Aarti Pathak completed most of her schooling from New Delhi and graduated (with distinction) in Economics from Symbiosis College of Arts and Commerce, Pune. She did her post graduation in the same subject from Fergussion College, Pune. She enjoyed working in the I.T industry for a year before she decided to follow her heart and shift towards the teaching profession. Aarti qualified the UGC-NET exam in 2005 and has been teaching formally and informally ever since. Besides teaching she takes immense pleasure in sketching, writing and traveling. In today's world seldom is a conversation carried on without at least a casual reference to economic terms like inflation, taxes, income, investment, interest rate, unemployment, black market, expenditure, profits, foreign exchange, stock market, bullion, GDP… Economics is one of the most dynamic subjects today. Clearly it has permeated all facets of our lives. In all her sessions, she hopes to simplify and explain the complex economic jargons and help students understand it better and also to relate the subject to their own day today lives.
This is a lecture for all those people who do not understand a word of economics. All around there is talk of a Recession. Words like sub prime mortgage, unemployment, inflation, bankruptcy, economic slowdown, global credit crunch keep coming back to us from the television, newspapers, shopkeepers and friends. What is this recession that everyone is talking about? What causes it and what are the key indicators? How does it affect us? What are the causes which are believed to have resulted in the recession of 2008? This session is my attempt to answer the above questions and to better acquaint the students with the existing gloomy global economic environment.
About the presenter: Aarti Pathak
Aarti Pathak completed most of her schooling from New Delhi and graduated (with distinction) in Economics from Symbiosis College of Arts and Commerce, Pune. She did her post graduation in the same subject from Fergussion College, Pune. She enjoyed working in the I.T industry for a year before she decided to follow her heart and shift towards the teaching profession. Aarti qualified the UGC-NET exam in 2005 and has been teaching formally and informally ever since. Besides teaching she takes immense pleasure in sketching, writing and traveling. In today's world seldom is a conversation carried on without at least a casual reference to economic terms like inflation, taxes, income, investment, interest rate, unemployment, black market, expenditure, profits, foreign exchange, stock market, bullion, GDP… Economics is one of the most dynamic subjects today. Clearly it has permeated all facets of our lives. In all her sessions, she hopes to simplify and explain the complex economic jargons and help students understand it better and also to relate the subject to their own day today lives.
Recession hits deal street in 2008
In 2008, India’s deal street saw very little traffic. But while the flurry of activity may be markedly less than 2007, it's still far ahead of 2006. So, how has recession hit deal street?
Here is a transcript of Kenan Machado and Anurag Tyagi’s comments on CNBC-TV18. Also watch the accompanying video.
An otherwise buzzing deal street was unable to deal with the US sub-prime credit crisis, when it hit Indian shores this year. The total number of deals in 2008 dropped to 751, with a combined announced value of USD 41.13 billion. That's small change, when compared to the 1,081 deals worth USD 70.14 billion struck last year. However, this number was still higher than the value in 2006, both in terms of volumes and value.
Recession hits deal street:
Year Volume Value ($/bn)
2008 751 41.13
2007 1081 70.14
2006 782 28.16
2008's big deals included Daiichi Sankyo's USD 4.5 billion acquisition of Ranbaxy, and Tata Motors' USD 2.3 billion acquisition of Jaguar-Land Rover. But experts say this dip was not completely unexpected.
Ashok Wadhwa, Group CEO, Ambit Holdings, said, “The global impact of the financial crisis reached India by the time we were in the second half of 2008. And that has positively had an impact on slowdown. There are transactions that were ready to happen and did not happen, there were transactions that were actively being negotiated, where negotiations have been postponed, there were transactions that were waiting for financing for closure and there is no financing, there was no financing in this market.”
Private equity players did not come to the rescue either. With the capital market crash and sharp fall in valuations, industry observers had expected PE investors, who had raised significant amounts of money in early 2008, to begin deploying them. These hopes were dashed too.
306 deals, together worth USD 10.42 billion, were announced this year. Lower than the 405 deals worth USD 19.03 billion seen in 2007, this year's number is just marginally better that the 2006 numbers.
Noted amongst these, was the acquisition of a 20% stake by Providence Equity Partners' in Idea Cellular's telecom tower for USD 640 million and Symphony Capital's acquisition of DLF's property fund for USD 450 million.
Investment bankers also say that the PE firms are going easy, as they want to wait and watch for the best valuations possible.
Ranu Vohra, MD and CEO, Avendus, said “It’s a situation where I would say you should compare it to a person who is going shopping and is opposed to seeing two shops, where there is sales sign on. He sees 20 shops where he sees the sale sign on and all giving significant discounts. So, in that particular case, the natural psyche of the buyer is actually to go across to every shop and check at least what the sale price is and what he can buy out of there and I think a similar situation is what has materialised in the private equity.
Brighter tomorrow:
Experts are confident the next six months will see mergers pick up in the construction, infrastructure, pharma and manufacturing sectors -- driven mostly by distress sales. They also say investment banks will see an increase in fees from advising companies on restructuring or repaying fccbs, at least in the short term.
Here is a transcript of Kenan Machado and Anurag Tyagi’s comments on CNBC-TV18. Also watch the accompanying video.
An otherwise buzzing deal street was unable to deal with the US sub-prime credit crisis, when it hit Indian shores this year. The total number of deals in 2008 dropped to 751, with a combined announced value of USD 41.13 billion. That's small change, when compared to the 1,081 deals worth USD 70.14 billion struck last year. However, this number was still higher than the value in 2006, both in terms of volumes and value.
Recession hits deal street:
Year Volume Value ($/bn)
2008 751 41.13
2007 1081 70.14
2006 782 28.16
2008's big deals included Daiichi Sankyo's USD 4.5 billion acquisition of Ranbaxy, and Tata Motors' USD 2.3 billion acquisition of Jaguar-Land Rover. But experts say this dip was not completely unexpected.
Ashok Wadhwa, Group CEO, Ambit Holdings, said, “The global impact of the financial crisis reached India by the time we were in the second half of 2008. And that has positively had an impact on slowdown. There are transactions that were ready to happen and did not happen, there were transactions that were actively being negotiated, where negotiations have been postponed, there were transactions that were waiting for financing for closure and there is no financing, there was no financing in this market.”
Private equity players did not come to the rescue either. With the capital market crash and sharp fall in valuations, industry observers had expected PE investors, who had raised significant amounts of money in early 2008, to begin deploying them. These hopes were dashed too.
306 deals, together worth USD 10.42 billion, were announced this year. Lower than the 405 deals worth USD 19.03 billion seen in 2007, this year's number is just marginally better that the 2006 numbers.
Noted amongst these, was the acquisition of a 20% stake by Providence Equity Partners' in Idea Cellular's telecom tower for USD 640 million and Symphony Capital's acquisition of DLF's property fund for USD 450 million.
Investment bankers also say that the PE firms are going easy, as they want to wait and watch for the best valuations possible.
Ranu Vohra, MD and CEO, Avendus, said “It’s a situation where I would say you should compare it to a person who is going shopping and is opposed to seeing two shops, where there is sales sign on. He sees 20 shops where he sees the sale sign on and all giving significant discounts. So, in that particular case, the natural psyche of the buyer is actually to go across to every shop and check at least what the sale price is and what he can buy out of there and I think a similar situation is what has materialised in the private equity.
Brighter tomorrow:
Experts are confident the next six months will see mergers pick up in the construction, infrastructure, pharma and manufacturing sectors -- driven mostly by distress sales. They also say investment banks will see an increase in fees from advising companies on restructuring or repaying fccbs, at least in the short term.
Recession 2008
Most of the world’s stock markets in late 2007 and early 2008 were touching sky. Even Indian stock market made hay while the sun shone on its horizon. Speculation was rife in many corporate headquarters that, this over exuberance and huge flow of money does not justify stock indices of several countries. There were signals of herd mentality and greed looming all over. Those signals finally came to life in early 2008. It started with IMF prediction of world growth falling to 4.0 percent from 4.9 percent. 4.0 was still a respectable prediction but that announcement was changed just after two months.
USA is a dominant force in world economy and as per data it represents 21 percent of the world economy. Changing economic statistics pointed towards a possible USA recession and that signified a global downtrend in economic cycle because of domineering impact of American economy. Many countries, particularly developing ones are heavily dependent on USA and a hint of slowdown in America spelled doom for them. The average spending of American consumers reduced significantly and that resulted in reduced demand for imported items.
Oil is extremely important for any country and 2008 witnessed highest ever increase in oil prices. Due to high oil prices, food prices also increased significantly. Crude oil prices rose to $ 147 per barrel from $ 80 per barrel in a span of 6-7 months. That fuelled global inflation to a dangerous mark. 2008 also witnessed unprecedented credit crisis across the world which resulted in closure of several established investment banks.
Things started getting worst with U.S. sub prime-mortgage market. This induced a tremendous housing market correction of huge implications for pushing up credit costs worldwide. Because of this correction, a good number of Americans, European and Asian banks had to write down billions of dollars in holdings. In fact, few banks filed for bankruptcy and that includes name like Lehman Brothers. It was biggest ever bankruptcy case in US history. More than 81 companies have filed for bankruptcy in USA.
Unemployment rate also increased substantially in USA and many people had to leave job. Another 1, 57, 000 jobs were lost in September 2008. Many developed and developing countries are struggling with low GDP and decreasing economic growth. Credit crunch has spread all over the world. However, world over, policy makers are putting in extra liquidity and several other measures to stem the fall but nevertheless, we seem to be going through economic recession.
USA is a dominant force in world economy and as per data it represents 21 percent of the world economy. Changing economic statistics pointed towards a possible USA recession and that signified a global downtrend in economic cycle because of domineering impact of American economy. Many countries, particularly developing ones are heavily dependent on USA and a hint of slowdown in America spelled doom for them. The average spending of American consumers reduced significantly and that resulted in reduced demand for imported items.
Oil is extremely important for any country and 2008 witnessed highest ever increase in oil prices. Due to high oil prices, food prices also increased significantly. Crude oil prices rose to $ 147 per barrel from $ 80 per barrel in a span of 6-7 months. That fuelled global inflation to a dangerous mark. 2008 also witnessed unprecedented credit crisis across the world which resulted in closure of several established investment banks.
Things started getting worst with U.S. sub prime-mortgage market. This induced a tremendous housing market correction of huge implications for pushing up credit costs worldwide. Because of this correction, a good number of Americans, European and Asian banks had to write down billions of dollars in holdings. In fact, few banks filed for bankruptcy and that includes name like Lehman Brothers. It was biggest ever bankruptcy case in US history. More than 81 companies have filed for bankruptcy in USA.
Unemployment rate also increased substantially in USA and many people had to leave job. Another 1, 57, 000 jobs were lost in September 2008. Many developed and developing countries are struggling with low GDP and decreasing economic growth. Credit crunch has spread all over the world. However, world over, policy makers are putting in extra liquidity and several other measures to stem the fall but nevertheless, we seem to be going through economic recession.
Late 2000s Recession
In 2008, an economic recession was suggested by several important indicators of economic downturn.[1] These included high oil prices, which led to drastic high food prices due to the extremely loose monetary policies and low interest rates of the U.S. Federal Reserve, as well as using food crop products such as corn ethanol and biodiesel as an alternative to petroleum) and global inflation; a substantial credit crisis leading to the drastic bankruptcy of large and well established investment banks as well as commercial banks in various, diverse nations around the world; increased unemployment; and signs of contemporaneous economic downturns in major economies of the world, a global recession.
In December 2008, the NBER declared that the United States had been in recession since December 2007
High prices
Further information: 2000s energy crisis and 2007–2008 world food price crisis
See also: 2008 Central Asia energy crisis and 2008 Bulgarian energy crisis
Medium term crude oil prices, (not adjusted for inflation)The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the prices of many commodities, notably oil and food, got so high to cause genuine economic damage, threatening stagflation and a reversal of globalization.[3]
In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year.[4] In July, oil peaked at $147.30 [5] a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. These high prices caused a dramatic drop in demand and prices fell below $35 a barrel at the end of 2008.[5]
The food and fuel crises were both discussed at the 34th G8 summit in July.[6]
Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 3.5-fold in less than 1 year whilst producers of sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price increases.[7][8]
In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.[9]
[edit] Trade
In middle -October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.[10]
[edit] Inflation
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations.[11] "Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation.[12]
In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term “unsterilized” referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country´s monetary policy target. However, inflation was also growing in countries classified by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and "Developing Asia", on account of the rise in oil and food prices.[13]
Inflation was also increasing in the developed countries,[14][15] but remained low compared to the developing world.
[edit] Unemployment
The International Labour Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in "construction, real estate, financial services, and the auto sector" - bringing world unemployment above 200 million for the first time.[16]
[edit] Return of volatility
For a time, major economies of the 21st century were believed to have begun a period of decreased volatility, which was sometimes dubbed The Great Moderation, because many economic variables appeared to have achieved relative stability. The return of commodity, stock market, and currency value volatility are regarded as indications that the concepts behind the Great Moderation were guided by false beliefs.[17]
[edit] Economic governance
Further information: 34th G8 summit and 2008 G-20 Washington summit
In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a locus of economic and financial crisis management.
Economic stimulus plans were announced or under discussion in China, the United States, and the European Union.[18] Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India.[19]
[edit] North America
[edit] U.S.
See also: Subprime mortgage crisis
Number of U.S. household properties subject to foreclosure actions by quarterThe United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value.[20] In February, 63,000 jobs were lost, a 5-year record.[21] In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008.[22]
Federal reserve rates changes[23]
Date Discount rate Discount rate Discount rate Fed funds Fed funds rate
Primary Secondary
rate change new interest rate new interest rate rate change new interest rate
Apr 30, 2008 -.25% 2.25% 2.75% -.25% 2.00%
Mar 18, 2008 -.75% 2.50% 3.00% -.75% 2.25%
Mar 16, 2008 -.25% 3.25% 3.75%
Jan 30, 2008 -.50% 3.50% 4.00% -.50% 3.00%
Jan 22, 2008 -.75% 4.00% 4.50% -.75% 3.50%
[edit] Early suggestions of recession
In the early months of 2008, many observers believed that a U.S. recession had begun.[24][25][26] As a direct result of the collapse of Bear Stearns, Global Insight increased the probability of a worse-than-expected recession to 40% (from 25% before the collapse). In addition, financial market turbulence signaled that the crisis will not be mild and brief.
Alan Greenspan, ex-Chairman of the Federal Reserve, stated in March 2008 that the 2008 financial crisis in the United States is likely to be judged as the harshest since the end of World War II.[27] A chief economist at Standard & Poor's, said in March 2008 he has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover in the summer 2008.[citation needed] Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period.[citation needed]
The former head of the National Bureau of Economic Research said in March 2008 he believed the country was then in a recession, and it could be a severe one.[citation needed] A number of private economists generally predicted a mild recession ending in the summer of 2008 when the economic stimulus checks going to 130 million households started being spent. A chief economist at Moody's predicted in March 2008 that policymakers would act in a concerted and aggressive way to stabilize the financial markets, and that then the economy would suffer but not enter a prolonged and severe recession.[citation needed] It takes many months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, makes its own ruling.[28]
According to numbers published by Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggest this indicates that the U.S. economy was not in a recession at the time.[29] However this estimate has been disputed by some analysts who argue that if inflation is taken into account, the GDP growth was negative for the past two quarters, making it a technical recession.[30] In a May 9, 2008, report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the recession started some time between September and January", on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.[31]
New York's budget director concluded the state of New York was officially in a recession. Governor David Paterson called an emergency economic session of the state legislature for August 19 to push a budget cut of $600 million on top of a hiring freeze and a 7 percent reduction in spending at state agencies already implemented by the Governor.[32] An August 1 report, issued by economists with Wachovia, said Florida was officially in a recession.[33]
White House budget director Jim Nussle said the U.S. avoided a recession following revised GDP numbers from the Commerce Department showing a 0.2 percent contraction in the fourth quarter of 2007 down from a 0.6 percent increase and a downward revision to 0.9 percent from 1 percent in the first quarter of 2008. The GDP for the second quarter was placed at 1.9 percent below an expected 2 percent.[34] Martin Feldstein, who headed the National Bureau of Economic Research until June and serves on the group's recession-dating panel, said he believed the U.S. was in a very long recession and that there was nothing the Federal Reserve could do to change it.[35]
In a CNBC interview at the end of July 2008 Alan Greenspan said he believed the U.S. was not yet in a recession, but that it could enter one due to a global economic slowdown.[36]
A study released by Moody's found two-thirds of the 381 largest metropolitan areas in the United States were in a recession. The study also said 28 states were in recession with 16 at risk. The findings were based on unemployment figures and industrial production data.[37]
In March 2008, Warren Buffett stated in a CNBC interview that by a "common sense definition", the U.S. economy is already in a recession. Warren Buffett has also stated that the definition of recession is flawed and that it should be 3 quarters of GDP growth that is less than population growth. However, the U.S. only experienced two consecutive quarters of GDP growth less than population growth. [38][39]
[edit] Recession declared by economists
On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in December 2007, citing employment and production figures as well as the third quarter decline in GDP.[40][41] The Dow Jones Industrial Average lost 679 points that same day.[42]
[edit] Rise in unemployment
On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years.[43][44] The news report cited the Department of Labor reports and interviewed Jared Bernstein, an economist:
“ The unemployment rate jumped to 6.1 percent in August, its highest level in five years, as the erosion of the job market accelerated over the summer. Employers cut 84,000 jobs last month, more than economists had expected, and the Labor Department said that more jobs were lost in June and July than previously thought. So far, 605,000 jobs have disappeared since January. The unemployment rate, which rose from 5.7 percent in July, is now at its highest level since September 2003. Jared Bernstein, economist at the Economics Policy Institute in Washington, said eight months of consecutive job losses had historically signaled that the economy was in a recession. "If anyone is still scratching their head over that one, they can stop," Mr. Bernstein said. Stocks fell after the release of the report, with the Dow Jones industrials down about 100 points after about 40 minutes of trading. ”
CNN also reported the news,[45] quoted another economist, and placed the news in context:
“ Job losses are still mild by recession standards, but the losses are relentless and they are accumulating. If job growth had paced with population growth during this year, it would have meant 1.3 million new jobs would have been created. Instead 605,000 were lost. That means about 2 million fewer people are working than if the economy were on a steady path. And that's a big number." But while economists generally study the payroll numbers most closely, it's the unemployment rate that registers with most Americans when they think about the labor market.[45]
-- Bob Brusca of FAO Economics ”
[edit] Liquidity crisis
Main article: Financial crisis of 2007–2008
From late 2007 through September 2008, before the official October 3rd bailout, there was a series of smaller bank rescues that occurred which totalled almost $800 billion.
In the summer of 2007, Countrywide Financial drew down a $11 billion line of credit and then secured an additional $12 billion bailout in September. This may be considered the start of the crisis.
In mid-December 2007, Washington Mutual bank cut more than 3,000 jobs and closed its subprime mortgage business.
In mid-March 2008, Bear Stearns was bailed out by a gift of $29 billion non-recourse treasury bill debt assets.
In early July 2008, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac, a spinoff of Countrywide, was seized by federal regulators - and called for a $32 billion bailout. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship on September 7, 2008.
During the weekend of September 13–14, 2008, Lehman Brothers declared bankruptcy after failing to find a buyer, Bank of America agreed to purchase Merrill Lynch, the insurance company AIG sought a bridge loan from the Federal Reserve, and a consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure,[46] similar to the consortium put forth by J.P. Morgan during the stock market panic of 1907 and the crash of 1929.[citation needed] Stocks on "Wall Street" tumbled on September 15.[47]
On September 16 2008, news emerged that the Federal Reserve may give AIG an $85 billion rescue package; on September 17, 2008, this was confirmed. The terms of the rescue package were that the Federal Reserve would receive an 80% public stake in the firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual.[48]
The year 2008, as of September 17, has seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals.[49] The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank.[50]
The Wall Street Journal states that venture capital funding has slowed down which in the past led to unemployment and slowed new job creation. [51]
[edit] Bailout of U.S. financial system
Main article: Emergency Economic Stabilization Act of 2008
On September 17, 2008, Federal Reserve chairman Ben Bernanke advised Secretary of the Treasury Hank Paulson that a large amount of public money would be needed to stabilize the financial system.[52] Short selling on 799 financial stocks was banned on September 19. Companies were also forced to disclose large short positions.[53] The Secretary of the Treasury also indicated that money market funds will create an insurance pool to cover themselves against losses and that the government will buy mortgage-backed securities from banks and investment houses.[53] Initial estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft legislation (as of September 19, 2008) were in the range of $700 billion[54] to $1 trillion U.S. dollars.[55] President George W. Bush asked Congress on September 20, 2008 for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis.[56][57] The crisis continued when the United States House of Representatives rejected the bill and the Dow Jones took a 777 point plunge.[58] A revised version of the bill was later passed by Congress, but the stock market continued to fall nevertheless.[59] [60]
As of mid-November 2008, it was estimated that the new loans, purchases, and liabilities of the Federal Reserve, the US Treasury, and FDIC, brought on by the financial crisis, totalled over $5 trillion: $1 trillion in loans by the Fed to broker-dealers through the emergency discount window, $1.8 trillion in loans by the Fed through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled Assets Relief Program, $200 billion insurance for the GSEs by the Treasury, and $1.5 trillion insurance for unsecured bank debt by FDIC.[61] (Some portion of the Fed's emergency loans would already have been repaid.)
[edit] Canada
In May 2008 Canada's GDP was reported to have decreased 0.1 percent due to decline in mining, oil and gas industry by 1.2 percent and fall in automobile production by 3.6 percent. Construction output in Canada declined 0.4 percent, utilities 1.3 percent, and farms produced 0.9 percent less.[62] In the first quarter of 2008 Canada's economy shrank by 0.3 percent and the Bank of Canada said second quarter growth would likely be less than 0.8 percent projected.[63] Canada later revised its first quarter GDP showing a contraction of 0.8% and gave second quarter GDP showing an increase of only 0.3%.[64] In early December 2008, the Bank of Canada, in announcing that it was lowering its central bank interest rate to the lowest level since 1958, also declared that Canada's economy was entering in recession.[65] Unfolding of this prospect will take until late Spring 2009, as Q3 GDP was announced as a 0.3% gain on December 1st by Statistics Canada.
[edit] Mexico
Mexico is well managed by the incumbent government with strict fiscal discipline. However, the effects of the financial crisis originating from the United States has already impacted on Mexico's export sector. Reduced demand and high unemployment in almost a decade and the depreciation of the Mexico peso has caused analyst to revised growth estimates officially from 1.8 percent to somewhere closer to 0. [66][67]
[edit] Europe
Denmark showed a contraction of 0.6 percent in the first quarter of 2008 following a contraction of 0.2 percent in the fourth quarter of 2007.[68] Estonia similarly saw an economic contraction of 0.9 percent in the second quarter, following a 0.5 percent contraction in the first quarter.[69] Latvia's gross domestic product fell 0.2 percent in the second quarter following a fall of 0.3 percent in the first quarter.[70] Sweden's economy showed zero growth in the second quarter of 2008.[71] The entire economy of the European Union declined by 0.1 percent in the second quarter.[72] A European Commission forecast predicted Germany, Spain and the UK would all enter a recession by the end of the year while France and Italy would have flat growth in the third quarter following second quarter contractions.[73]
Chairwoman of the Association of Estonian Food Industry, Sirje Potisepp, warned the Estonian food industry would probably face bankruptcies citing two major beverage companies in Estonia filing for bankruptcy.[74] Ratings agency Fitch warned Ukraine could be headed for a currency crisis as economic fundamentals deteriorate and the country enters another period of political uncertainty. Fitch said the current account deficit was likely to widen further as prices of gas imports rise and prices of its steel exports fall and said Ukraine was likely to need to borrow more at a time when global debt markets have ground to a virtual standstill. Ukraine's central bank chief, Petro Poroshenko, said he saw no need to intervene to protect the currency.[75] Only a few countries retained their high GDP predictions for the year 2008, and can be mentioned Romania and Slovakia. Despite high economic growth for this year (8.7%), Romania will be touched by the crisis, analysts forecasting only 4.7 growth for 2009.
[edit] Iceland
Further information: 2008 Icelandic financial crisis
The Icelandic króna has declined 40% against the euro during 2008 and has experienced inflation of 14%.[76] Iceland's interest rates have been raised to 15.5% to deal with the high inflation and the króna's decline is reportedly only beaten by that of the Zimbabwean dollar.[77] This depreciation in currency value has put pressure on banks in Iceland, which are largely dependent on foreign debt. On September 29, 2008 Iceland's Glitnir was effectively nationalized after the Icelandic government acquired 75% of the bank's stock. According to the government the bank "would have ceased to exist" within a few weeks if there had not been intervention.[78]
Iceland's Prime Minister Geir Haarde in a television address on October 6, 2008 said credit lines to Icelandic banks had been cut off and that "the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy" and that the government was looking to other countries for sources of liquidity.[76] Iceland's parliament responded to the crisis by approving a bill giving the Government wideranging powers over the banks, including the ability to seize their assets, force them to merge or compel them to sell off their overseas subsidiaries.[79] The parliament went on to seize control and nationalize Iceland's second largest bank, Landsbanki, on October 8, 2008.[80] The Parliament also extended a £400m loan to the nation's largest bank, Kaupthing, in hopes that it would strengthen the institution's balance sheet.[81]
On 8th October UK Prime Minister Gordon Brown announced that the UK government would launch legal action against Iceland, whose government announced that they had no intention of compensating any of the estimated 300,000 UK savers after the nationalization of Landsbanki and its online brand, Icesave.[82] Chancellor of the Exchequer Alistair Darling announced that the UK government would foot the entire bill, estimated at £4bn,[83][84] and that he was taking steps to freeze the assets of Landsbanki.[85] The following day, Darling used the Anti-Terrorism, Crime and Security Act 2001 as the basis for seizing the assets of Landsbanki Islands hf, an Iceland-based bank.[86] Icelanders launched an on-line petition drive to protest this action, which as seen as comparing Icelandic banks with Al-Qaida.[87]
Iceland's GDP is expected by economists to shrink at least 10 percent as a result of the crisis, putting Iceland by some measure in an economic depression.[88]
[edit] United Kingdom
People queuing on September 15, 2007 outside a Northern Rock bank branch in the United Kingdom, to withdraw money from their accounts.The economy of the United Kingdom has also been hit by rising oil prices and the credit crisis. Sir Win Bischoff, chairman of Citigroup, said he believes that house prices in Britain will keep falling for another two years. The Ernst & Young Item club predicted growth of only 1.5 percent in 2008, slowing to 1 percent in 2009. They also predicted consumer spending would slow to only 0.2 percent, and forecast a two-year drop in investment. The Institute of Directors’ quarterly business opinion survey showed business optimism at its lowest level since the survey began in 1996.[89] Deputy Governor of the Bank of England, John Gieve said inflation would accelerate "well over" 4 percent while economic growth is "slowing fast." Bank of England Governor Mervyn King said there may be "an odd quarter or two of negative growth," following the first quarter of 2009. Gieve said he couldn't rule out the U.K. economy heading into a recession, adding the economy was "quite a long way" from the end of the slowdown.[90]
Nationwide, the UK's biggest building society, warned the UK could head into a recession after house prices in July fell 8.1 percent from the previous year. Housing prices declined by 1.7 percent in July, double the decline recorded in June. Standard & Poor's said on July 30, 2008 that 70,000 homeowners were in negative equity and it could rise to 1.7 million or about one in six homeowners in the UK based on an expected 17 percent decline into 2009. The Bank of England reported that mortgage approvals fell by a record of nearly 70 percent.[91] In Northern Ireland, house sales saw a fall of some 50 per cent according to a survey by the University of Ulster/Bank of Ireland and housing prices fell on average by 4 percent.[92] British manufacturing activity declined by the most in almost a decade in July, the third consecutive month of declines. The number of companies that went into administration in May–July was 938, an increase of 60 percent compared with the same period in 2007. The number of company liquidations in the second quarter rose to 3,689, a 16 percent increase and the highest quarterly figure in five years. House builders expect the number of houses built in 2008 in England and Wales to be the lowest since 1924. The declines are seen as an indication the United Kingdom has high chance of entering a recession.[93] Factory production in the UK dropped 0.5 percent in June when twelve out of 13 categories of factory production fell. The economic output of the UK was reported to have increased by just 0.2 percent in the second quarter, the joint-slowest pace since 2001.[94] The Office for National Statistics later gave a revised number saying growth in the British economy was at zero, the worst since the second quarter of 1992.[95] The current slowdown has ended 16 years of continuous economic growth, the longest period of economic expansion in Britain since the 19th century.[96] A report from the National Institute for Economic and Social Research said the economy contracted by 0.1 percent in the period from May to July and 0.2 percent from June to August.[97]
A voter backlash due to the personal financial effects of the global credit crunch was widely attributed by politicians of the United Kingdom Labour Party, which had been in power since 1997, as the reason their political fortunes took a dramatic downturn through May 2008, with a succession of defeats in by-elections and the London Mayoral election, and the worst opinion poll result in their history.[citation needed] Political opponents countered this apparent excuse by pointing to the fact that the incumbent Prime Minister Gordon Brown, who had taken office in June 2007 just before the crisis broke, had been the country's 'Iron Chancellor', and had allegedly not ensured the country had sufficient monetary reserves to be able to lower taxes and ease the burden on voters, despite overseeing one of the longest sustained periods of economic growth in the country's history. In August 2008 the party also faced calls to impose a windfall tax on the utility companies, who were reaping record profits due to the fuel crisis, perceived as in bad taste given rising food and fuel prices.
On 17 September 2008, news emerged that the banking and insurance group HBOS (Halifax Bank of Scotland) was in merger talks with Lloyds TSB about creating a UK retail banking giant worth £30bn. The move received the backing of the British government which stated that it will over-rule any claims from the competition authorities.
According to the Office for National Statistics unemployment claims in August 2008 increased by 32,500 to reach 904,900. The wider Labour Force Survey measure found joblessness rose by 81,000 to 1.72 million between May and July, the largest increase since 1999.[98]
In September 2008, British bank Bradford & Bingley's £20billion savings business was acquired by Spanish bank Grupo Santander. While its retail deposit business along with its branch network will be sold to Santander. The mortgage book, personal loan book, headquarters, treasury assets and its wholesale liabilities will be taken into public ownership.
By November 2008, unemployment had risen to over 1.8 million and is projected to surpass 2 million by Christmas and perhaps even as high as 3 million by 2010.
From 1 December 2008, the UK Government made the decision to cut VAT from 17.5% to 15% for 13 months in an attempt to encourage a big spend from UK shoppers before Christmas.
On 4 December 2008, the Bank Of England cut interest rates from 3% to 2%, which amounts to the lowest level since 1951.[99]
[edit] Russia
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Further information: 2008 Russian financial crisis
The 2008 crisis in the Russian financial markets stemmed from the US sub-prime mortgage crisis and has been compounded by the plummeting price of oil, which has lost more than two thirds of its value since its record peak of USD 147 on 11 July 2008.[100] While according to the World Bank Russia’s strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than otherwise. Prudent fiscal management and substantial financial reserves have protected Russia from deeper consequences of this external shock. The government’s policy response so far — swift, comprehensive, and coordinated — has helped limit the impact. [101]
On December 13, The Minister of Economic Development Andrei Klepach said that the country had entered into recession, as they have recorded a drop in production for two consecutive quarters. He recognized that the GDP growth rate would be lower than the expected 6.8% at the end of 2008. He clarified that the industrial production would be around 1.9% this year, well below the government forecast 4.7%.[102]
[edit] Sweden
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Sweden has not been severely affected, and no banks or financial institutions have had real trouble. However, some effects have been visible, mostly based on distrust and similar psychological mechanisms. The stockmarket has declined heavily, because of influence from New York and other markets. Some banks, especially Swedbank had invested heavily in US housing bonds.
The banks did not trust each other well and the difference between the interbank interest rate and the state interest rate has gone up at least 1%. The housing loan interest rates have gone up even further. The global sales especially of cars has gone down, forcing the Swedish car industry to lay off staff and contractors. The increased fear of enduring recession and the increased financing costs have lowered company investments and private consumption.
Sweden entered recession after a two consecutive quarter of economic contraction. The Swedish GDP contracted by 0,1% during both the second and third quarters of 2008.[103] Sweden's economy sank into recession in the third quarter of 2008. In October retail sales dropped 0.6 percent in the month, and household consumption fell 0.2 percent in the third quarter.[104] The Riksbank offered 60 billion kronor ($7.71 billion) in loans to financial firms at an auction, after having opened credit facilities to maintain the liquidity in the banking sector.[105] At the beginning of December, the government launched a financial stability package to rev up the economy,[106] while the central bank, urged by the OECD,[107] cut down its interest rates to 2%[108]
[edit] Ukraine
Further information: Economy of Ukraine#Ukraine and the economic crisis of 2008
Ukraine was hit heavy by the economic crisis of 2008, analysts say the plights of Ukraine are slumping steel prices, local banking problems and the cutting of Russian gas supply in January 2009.[109][110] Key industries such as metallurgy and machine building are laying off workers, and real wages have started to fall for the first time in a decade. This makes it hard for Ukrainians to make payments on loans, many of which, especially mortgages, were issued in dollars. Since most people are paid in hryvnyas, they have to buy dollars with the weak hryvnya and are paying back much more on the loans than they had expected. The share of problem loans in bank portfolios grew to 10.3 percent by December 11 and is continuing to grow. Banks have all but stopped issuing loans, and clients have hurried to withdraw deposits. In October the National Bank of Ukraine introduced a moratorium on withdrawals ahead of schedule.[110]
Mid-December 2008 the International Monetary Fund (IMF) has lowered the forecast for Ukraine's GDP in 2009 from a 2.5% growth rate to a 5% decline,[111] the same day the Cabinet of Ministers worsened the GDP growth forecast to 0.4% from 6% for 2009.[112]
In November 2008, the IMF approved a stand-by loan program for Ukraine to the tune of $16.5 billion.[113]
[edit] Eurozone
In the eurozone as a whole, industrial production fell 1.9 percent in May, the sharpest one-month decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8 percent in May compared with a year earlier.[114] Retail sales fell by 0.6 percent in June from the May level and by 3.1 percent from June in the previous year. Germany was the only country out of the four biggest economies in the eurozone to register an increase of activity in July though the increase was sharply down. Economic analysts from RBS and capital Economics say the decline raises the risk of the eurozone entering a recession in 2008.[115] In the second quarter, the eurozone's economy was reported to have declined by 0.2 percent.[116] The economy declined again in the third quarter putting the eurozone in a technical recession.
[edit] Ireland
Ireland in the first quarter of 2008 reported a contraction in GDP of 1.5 percent, its first economic contraction since it began reporting by quarter and first recorded contraction since 1983.[117] However, Ireland's Central Statistics Office reported growth in GNP of about 0.8 percent, Ireland's government considers GNP a better measure of the economy. Analysts have predicted Ireland's economy will contract further in the rest of the year.[118] A report from NCB Stockbrokers predicts gross national product will fall by 1 percent in 2008 and by 0.4 percent in 2009 due to a decline in multinationals hit by the global economic slowdown. An economist from NCB said non-residential investment would fall by 5 percent in 2008 and by 12 percent in 2009.[119] Ireland's GDP saw a contraction in the second quarter by 0.5 percent making Ireland the first member of the eurozone to enter a recession.[120]
[edit] Spain
Spain's Martinsa-Fadesa, a construction company, has declared bankruptcy as it failed to refinance a debt of €5.1 billion. The two banks with most exposure to Martinsa-Fadesa are reportedly Caja Madrid, at €900m, and Banco Popular Español, at €400m. Spain's finance minister Pedro Solbes has said it would not bail out the company. In the second quarter in Spain house prices reportedly fell 20 percent.[121] In Castilla-La Mancha some 69 percent of all houses built over the past three years are still unsold. Deutsche Bank said it expects a 35 percent fall in real house prices by 2011. Spain's premier, Jose Luis Zapatero, blamed the European Central Bank for making matters worse by raising interest rates. More than 98 percent of home loans in Spain are priced off floating rates linked to Euribor, which has risen 145 basis points since August. Housing accounts for over 10 percent of Spain's economy. The Bank of Spain is concerned about the health of smaller regional lenders with heavy exposure to the mortgage market.
Although Spain has avoided recession in the first half of 2008, unemployment in the country has risen by 425,000 over the past year, reaching 9.9 percent. Car sales in Spain fell 31 percent in May.[114] Spain's factory output slumped 5.5 percent in May. The country's business lobby Circulo de Empresarios warned of a "high probability" that Spain's economy would fall into recession in the second half of 2008 due to the housing collapse.[122] Spain had a 7.9 percent decline in retail sales in June compared to the previous year, the largest drop since Spain began registering the results and the seventh consecutive monthly decline. This included a 17.9 percent drop in retail sales of household goods. June food sales in Spain fell by 6.8 percent.[123] Morgan Stanley issued a major alert on the health of Spanish banks and the Spanish economy in a report, saying, "A momentous economic slowdown is now under way. We believe the deterioration in Spain is just in the beginning stages. The bulk of the pain will be suffered in 2009." Morgan Stanley also warned there was 40 percent chance of a 0.5 percent contraction of the Spanish economy in 2009, with a risk of an even more extreme 1.4 percent contraction in 2009.[124] According to Spanish automobile manufacturers' association ANFAC new car sales fell 27.5 percent in July from the same time in 2007, the third consecutive monthly drop of over 20 percent. Spain's government forecast the unemployment rate would rise to 10.4 percent in 2008 and to 12.5 percent in 2009. Spain's second largest bank BBVA predicted the unemployment rate could reach 14 percent in 2009.[125] Spain's Purchasing Managers Index for the manufacturing sector in July fell to a new low suggesting a deep recession.[126] In the second quarter Spain's economy grew by 0.1 percent, the lowest gain in 15 years.[116]
[edit] Germany, Italy, Greece, Portugal
In Germany officials are warning the economy could contract by as much as 1.5 percent in the second quarter because of declining export orders. The economy of Germany contracted in both the second and third quarters putting Germany now in a technical recession. Industrial output in both Italy and Greece has slumped 6.6 percent over the past year. However, Greece's economy will continue to grow for both 2008 and 2009; Eurostat expects the Greek economy to grow 3.1% and 2.5% respectively. Portugal is off 6.2 percent.[114] The country, which was just recovering from a period of economic crisis during the past years, had several industries closing, one bank saved by the state, the remaining banks showing signs of significant unrest and unemployment figures rising to almost 11%. Germany's industrial output was down 2.4 percent in May, the fastest rate for a decade. Orders have now fallen for six months in a row, the worst run since the early 1990s.[citation needed] The German Chamber of Industry and Commerce warned of up to 200,000 job losses in coming months.[122] German retails sales fell 1.4 percent in June more than any expectations.[127] The German economy declined by 0.5 percent in the second quarter.[116] In Italy, Fiat announced plant closures and temporary layoffs at factories in Turin, Melfi, Imola and Sicily. Car sales in Italy have fallen by almost 20 percent over each of the past two months. Metalmeccanici, Italy's car workers' union said, "The situation is evidently more serious than had been understood."[122] On July 10, 2008 economic think tank ISAE lowered its growth forecast for Italy to 0.4 percent from 0.5 percent and cut the 2009 outlook to 0.7 percent from 1.2 percent.[128] Analysts have predicted Italy had entered a recession in the second quarter or would enter one by the end of the year with business confidence at its lowest levels since the 9-11 terrorist attacks.[129] Italy's economy contracted by 0.3 percent in the second quarter of 2008.[130]
[edit] France, Finland, Benelux
Other eurozone members saw a decline in their economy in the second quarter. France's economy declined by 0.3 percent, Finland's economy declined by 0.2 percent, and the Netherland's showed zero growth in the second quarter.[116]
According to INSEE, France's statistical agency, the French GDP was projected to decline by 0.1 percent in the third quarter of 2008 with another 0.1 percent decline in the fourth quarter and Eric Woerth, the French budget minister, said France was in a technical recession.[131] However the final estimations gave by the INSEE showed the French GDP actually increased by 0.14 percent thus avoiding a technical recession.[132] In order to fight the economic crisis a €26 billion strong rescue plan was announced by President Sarkozy. This saving plan however includes the scheduled budget for 2009, this makes €15.5 billion in addition to the normal budget for 2009. The French public deficit in 2009 is expected to raise to 4% with of this plan. It is similar in its conception to Obama's rescue plan in that it will be used, to a large extent, for public investments on infrastructures. More precisely railways, waterways, motorways will be improved; Hospitals, tribunals, the Gendarmerie and the Police will be modernised. In addition to these infrastructure the national defence will also benefit from this plan as well as public landmarks. Small business companies will get a tax rebate in 2009. Another part of the deficit will be used to pay for the national debt to French companies. Regulations over the public market, especialy construction and civil engineering, will be softened. Laws on urbanism will also be softened to favour construction and significantly lower delays between the moment a project is discussed and then built.[133]
On September 28, Dutch-Belgian bank Fortis was partially nationalized with a cash infusion from the Benelux countries amounting to €11.2 billion. Fortis' troubles started in the beginning of the year with an announcement that it faced around $1.5bn of losses in the American sub-prime catastrophe. In June, the company announced a selloff of assets to raise €5 bn to improve the liquidity of the organisation. This, however, proved insufficient.[134] On 6 October 2008, the French bank BNP Paribas took over 75 percent of Fortis' activities in Belgium, and 66 percent in Luxembourg, in exchange for the Belgian government becoming the new group's major shareholder.[135]
In May industrial output fell in the Netherlands by 6 percent.[136]
[edit] Middle East
[edit] Gulf Corporation Council
Decreasing oil prices will affect Persian gulf countries.
[edit] Lebanon
Lebanon is one of the only seven countries in the world to have scored profits in 2008.[137] Given the regular security turmoil it has faced in the past, its banks have adopted a conservative approach. The strict regulations imposed by the central bank were crafted to make the Lebanese economy immune to political crisis; and so far, this has applied to the global economic crisis as well. The Lebanese banks remain, under the current circumstances, high on liquidity and reputed for their security. [138]
Moody's has recently shifted Lebanon's sovereign rankings from stable to positive acknowledging its financial security.[139] Moreover, with a Beirut stock market increase of 51%, the index provider MSCI, ranked Lebanon as the world's best performer in 2008.[137] Analysts are, nonetheless, skeptic about the future indirect effects of the crisis, but so far, the direct consequences have proved to be positive.
[edit] Asia
[edit] China
In China, the IMF predicts GDP growth for 2008 will be 9.7% and drop to 8.5% in 2009.[140] A struggle was underway to see who would swallow the losses on US Agencies and Treasuries.[141] On November 9, 2008 China announced a package of capital spending plus income and consumption support measures. Four trillion yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.[142][143]
[edit] Hong Kong
The Hong Kong economy officially slid into recession in the final quarter of 2008. The economy is predicted to grow at 2 percent in 2009. Hong Kong is an advanced tertiary economy built on services, retail, tourism, transport and financial industries. Hong Kong's manufacturing industry is located in Guangdong province which employs over 11 million people.[144] The Hang Seng has lost over 60 percent of its value, property market lost over 40 percent in value and unemployment is at a record high of 4.8 percent. [145]
[edit] India
India's economy is expected to grow about 6.8% during FY2008 and as low as 5.5% in FY2009.[146][147] India's economy grew at an annual rate of 9% or more in the past three years, second only to China among the major economies, and the projections for FY2008 indicate that India's economic growth has been affected by the economic crisis.[148] The former Indian Finance Minister P. Chidambaram, however, said that he expected India's economy to "bounce back" to 9% during FY2009.[149] This prediction has been met with skepticism by observers.[147][150] The Asian Development Bank predicted India to recover from weakening momentum in 4-6 quarters.[151] At the G20 Summit, India called for coordinated global fiscal stimulus to mitigate the severity of the global credit crunch.[152] India said that it would inject US$4.5 billion into the financial system to help exporters.[153] Some analysts pointed that India's growing trade with other Asian countries, especially China, will help reduce the negative impact of the crisis.[154] Analysts also said that India's high domestic demand and large infrastructure projects will act as a buffer reducing the impact of the global downturn on its economy.[155] Economists argued that India's financial system is relatively insulated and its banks do not have significant exposure to subprime mortgage.[156] In an editorial, the New York Times praised the strong regulations placed on the Indian banking system by the Reserve Bank of India.[157]
[edit] Japan
In Japan exports in June declined for the first time in about five years falling by 1.7 percent. Exports to the United States and European Union fell 15.4 percent and 11.2 percent respectively. The decline in exports and increase in imports cut Japan's trade surplus $1.28 billion a decline of 90 percent from the previous year. An economist at the Royal Bank of Scotland said the decline means the Japanese economy most likely declined in the second quarter.[158] Taro Aso, secretary-general of Japan's ruling Liberal Democratic Party, said he believes Japan had entered a recession.[159] Japan's economy declined by 0.6 percent in the second quarter of 2008.[160] This was later revised to a decline of 0.7 percent.[161] Japanese exports grew 0.3 percent in August of 2008 compared to a year before down from 8 percent the previous month. Exports to the U.S. fell 21.8 percent, the biggest decline on record, and exports to Europe fell 3.5 percent.[162] Two Japanese banks appeared on the list of major Lehman creditors.[163] On November 17th, the Japanese Economy Minister announced that the nation was officially in a recession.[164]
[edit] Pakistan
In Pakistan the central bank's foreign currency reserves, when counting forward liabilities is said to only amount to as little as $3 billion, sufficient for a single month of imports. Corruption and mismanagement have combined with high oil prices to damage Pakistan's economy. Pakistan's rupee has lost more than 21 per cent of its value in 2008 and inflation is at 25 per cent. The government has failed to defer payments for Saudi oil or raise favorable loans. President Asif Ali Zardari claimed Pakistan needed a bailout worth $100 billion which he was expected to ask for at a meeting in Abu Dhabi in November. Ratings agency Standard and Poor's rates Pakistan's sovereign debt at CCC +, only a few ratings above the default level, warning the country may be unable to cover about $3 billion in upcoming debt payments.[165] This led a change in economic managers,and politically elected finance minister Naveed Qamar was replaced by a financial advisor, Shaukat Tareen, a former banker belonging to Citigroup on October 8, 2008. The new finance advisor led the Pakistani delegation to IMF-World Bank meeting in USA with a hope to obtain a loan from the World Bank which has been stopped now due to reservations from IMF on World Bank for releasing this nature of Loan to any country.
[edit] Singapore
Singapore's economy saw its biggest drop in five years in the second quarter, falling by 6.6 percent; however, the Managing Director of Singapore's central bank said a technical recession was not likely.[166] Singapore cut its 2008 GDP forecast to between 4 and 5 from 4 to 6 percent before, and then again down to 3 percent.[167] Singapore's economy contracted in the third quarter, placing the country in recession.[168]
[edit] South Korea
By September 2008, the crisis threatening the GSEs (US mortgage lenders Fannie Mae and Freddie Mac) began to have consequences in Asia. The foreign exchange reserves of South Korea's central bank contained many depreciating "Agency bonds" from the GSEs, threatening a currency crisis and leading to depreciation of the South Korean won against the US dollar and other major currencies,[169]. Samsung Electronics has been reported to be posting a decrease in sales for the first time since the 1997 Asian financial crisis that home appliances saw a decrease in the domestic market of up to 20 percent since mid-June compared to the previous year. Domestic auto sales also saw a decrease in the second quarter. Auto exports also posted a loss and exports of home appliances were also reported to be in decline.[170]
[edit] Sri Lanka
This section does not cite any references or sources.
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Sri Lanka too is affected with the global recession as the demand for their major products such as garments, tea, rubber, coconut based products and agricultural products are at a downturn. At the moment, tea is severely affected and it is analysed that the country is experiencing 35% drop in the exports presently.also tourist industry also downsise. last year 7% downsise the industry. most of the europian are cut of their unimportant expenses.
[edit] Taiwan
Taiwan announced billions of dollars in spending and tax cuts due to declining growth and a 26 percent slump in the stock market in 2008.[171] The bankruptcy of Lehman Brothers raised concerns about global exposure to the assets and stock of Lehman Brothers and the potential for the bankruptcy to cause further tightening of credit. Taiwan, despite reporting few losses from the subprime mortgage crisis, was said to have Lehman-related exposure for its companies and retail investors totaling $2.5 billion.
[edit] South America
As it mainly consists of food exporters, South America was not directly affected by the financial turmoil, even if the bond markets of Brazil, Argentina, Colombia and Venezuela have been hit.[172]
On the other side, the continent has known a tough agricultural crisis at the beginning of 2008.[173] Food prices have increased a lot, due to a lack in arable land. One of the main reasons for the loss of agricultural land was the high value offered by the production of biofuels. Food prices, rising since 2002, ascended from 2006, reaching a peak during the first quarter of 2008. In one year the average price of food rose by about 50%.
Then South American countries were affected by both the slowdown in most developed countries and the decrease in food prices due to the declining demand.[174] In June 2008, the Economic Commission for Latin America and the Caribbean (ECLAC) declared it expected a 4% growth for 2009. However at the end of the year it predicted that the year 2009 would put an end to six years of prosperity during which Latin America has benefited from high raw materials prices.[175] The production in the region is likely to decline and unemployment to increase.[176] Among the countries expected to suffer most, these include Argentina, which should see its growth rate reduced from nearly 7% in 2008 to 2.5% in 2009.[177] However, the Center for Economic and Policy Research has estimated that the region may be able to cope with the global downturn with right macro-economic policies, as these countries no longer depend on the U.S. economy.[178]
Please help improve this section by expanding it. Further information might be found on the talk page. (December 2008)
[edit] Brazil
Brazil is Latin America's largest economy and biggest exporter of raw materials such as iron ore and agricultural products such as coffee, sugarcane and oranges.[179] The economy is predicted to grow between 2.4 to 3 percent next year down from 5 percent originally forecast. [180]
[edit] Ecuador
Ecuador is seeking ways to default on sovereign debts incurred under the government of Gustavo Noboa, which the present government deems to have been incurred illegally.[181] If Ecuador defaults, it will be the first developing country to default on sovereign debt since the crisis began.[182]
[edit] Caribbean Islands
The IMF said as soon as February 2008 that a U.S. slowdown would hurt the economies of the Caribbean Islands, especially those in the Eastern Islands. Indeed, the sector of tourism makes up a large part of the Islands' economies, so that they are heavily dependent on the number of U.S. visitors each year.[183] However, the lower inflation and currency depreciation in several Latin American and Caribbean nations can have offset this impact of the financial crisis, sustaining the activity.[184]
[edit] Oceania
[edit] New Zealand
New Zealand Institute of Economic Research's quarterly survey showing New Zealand's economy contracted 0.3 percent in the first quarter and Treasury figures suggested the economy also contracted in the June quarter putting New Zealand in a technical recession.[185] The Treasury says the economy could recover in the second half of the year under the impact of high dairy prices boosting farmer incomes and cuts to personal tax rates, which come into effect on Oct. 1.[186] About 23 financial companies in New Zealand have filed for bankruptcy in a year. Housing starts in New Zealand fell 20 percent in June, the lowest levels since 1986.[187] Excluding apartments, approvals dropped 13 percent from May. Approvals in the year ended June fell 12 percent from a year earlier. Second-quarter approvals dropped 19 percent. The figures suggest a decrease in construction and economic growth. House sales fell 42 percent in June from a year earlier.[188] The New Zealand Treasury concluded that the country's economy had contracted for a second quarter based on economic indicators, putting New Zealand in a recession.[189] New Zealand's central bank cut rates by half a percent arguing the economy was in recession.[171] New Zealand's GDP declined by 0.2 percent in the second quarter putting the country in its first recession in a decade.[190]
[edit] Australia
In Australia, Hans Redeker, currency chief at BNP Paribas has said Australia would have to generate 4 percent of its GDP to meet payments to foreign holders of its assets. National Australia Bank on July 29, 2008 cut a A$850 million bond sale by two thirds following investor flight and opted for a 100 percent write-off on a clutch of "senior strips" of AAA-rated collateralized debt obligations (CDO) worth A$900 million.[187][191][192] Approvals for loans to build or buy homes and apartments decreased 3.7 percent in June of 2008. Housing prices in Australia fell in the second quarter of 2008 for the first time in about three years. Consumer confidence in Australia fell to a 16-year low in July and retail sales fell 1 percent in June.[193] High profile casualties of the credit crunch include Allco Finance, MFS, ABC Learning, Babcock & Brown and Centro while numerous other institutions have lost a significant part of their value.[194]
Sources such as the IMF and the Reserve Bank of Australia predict Australia is well positioned to weather the crisis with minimal disruption, sustaining more than 2% GDP growth in 2009 (while many Western nations go into recession). The World Economic Forum recently ranked Australia's banking system the fourth best in the world, while the Australian dollar's 30% drop is seen as a boom for trade, shielding from the crisis, and for helping to slow growth and consumption.[195][196]
Some analysts have forecast the Australian economy to dip into a recession due to the worsening economic conditions in western economies such as Western Europe, United States and Japan. Unemployment will increase because of slower growth, declining profits and government revenues.[197]
[edit] Africa
[edit] South Africa
Moody's Investors Service warned on July 7, 2008 that South Africa could slip into a recession by the turn of the year. Moody's cited electricity shortages, high interest rates, soaring inflation, a slumping housing and vehicle market and lower business and consumer confidence indicators. Growth in South Africa's gross domestic product for the first quarter of 2008 slowed to 2.1%. CPIX inflation, the monetary-policy inflation target measure, rose 10.9% on a year-on-year basis in May, its highest level since November 2002.[198] South Africa's National Treasury criticized the statement by Moody's saying, "It's not possible that we'll end up in recession." He added that the government may revise lower its 4 percent growth forecast for the year following growth of 5.1% in 2007. Car sales in South Africa dropped an annual 22 percent in June due to higher interest rates.[199]
[edit] Financial markets
[edit] January 2008 stock market volatility
January 2008 was an especially volatile month in world stock markets, with a surge in implied volatility measurements of the US-based S&P 500 index,[200] and a sharp decrease in non-U.S. stock market prices on Monday, January 21, 2008 (continuing to a lesser extent in some markets on January 22). Some headline writers and a general news columnist called January 21 "Black Monday" and referred to a "global shares crash,"[201][202] though the effects were quite different in different markets.
American stock markets were closed on Monday, January 21 for Martin Luther King, Jr. Day. Seemingly in response to the fall in non-U.S. markets,[203] the U.S. Federal Reserve announced a surprise rate cut of 0.75% on Tuesday at 8 a.m. This rate cut is believed to have been influential in preventing large declines in the American stock markets, with the Dow Jones Industrial Average down only 1.1% for the day, never closing that week worse than a 1.6% decrease from the previous Friday, and indeed closed up for the week. Later it was announced that Société Générale, one of the largest banks in Europe, accused its employee Jérôme Kerviel of fraudulent trades costing it €4.9 billion, and causing it to sell approximately €50 billion in European equity derivatives from January 21–23.
The effects of these events were also felt on the Shanghai Composite Index in China which lost 5.14 percent, most of this on financial stocks such as Ping An Insurance and China Life which lost 10 and 8.76 percent respectively.[204] Investors worried about the effect of a recession in the US economy would have on the Chinese economy. Citigroup estimates due to the number of exports from China to America a one percent drop in US economic growth would lead to a 1.3 percent drop in China's growth rate.
[edit] Market downturn Fall 2008
Main article: Global financial crisis of 2008
As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year.[205] The Dow Jones Industrial Average had fallen about 37% since January 2008.[206]
There were several large Monday declines in stock markets world wide during 2008, including one in January, one in August, one in September, and another in early October.
The simultaneous multiple crises affecting the US financial system in mid-September 2008 caused large falls in markets both in the US and elsewhere. Numerous indicators of risk and of investor fear (the TED spread, Treasury yields, the dollar value of gold) set records.[207]
Russian markets, already falling due to declining oil prices and political tensions with the West, fell over 10% in one day, leading to a suspension of trading,[208] while other emerging markets also exhibited losses.[209]
On September 18, UK regulators announced a temporary ban on short-selling of financial stocks.[210] On September 19 the United States' SEC followed by placing a temporary ban of short-selling stocks of 799 specific financial institutions. In addition, the SEC made it easier for institutions to buy back shares of their institutions. The action is based on the view that short selling in a crisis market undermines confidence in financial institutions and erodes their stability.[211]
On September 22, the Australian Securities Exchange (ASX) delayed opening by an hour [212] after a decision was made by the Australian Securities and Investments Commission (ASIC) to ban all short selling on the ASX.[213] This was revised slightly a few days later.[214]
[edit] Causes of the contemporary economic crisis
On October 15, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote a lengthy article in the Washington Post titled, "What Went Wrong".[215] In their investigation, the authors claim that former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claim that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crises of 2008.
On October 17, 2008, attorney Timothy D. Naegele wrote an article in the American Banker entitled, "Greenspan's Fingerprints All Over Enduring Mess," which argues that Alan Greenspan's actions and inactions triggered the economic crises of 2008. The article discusses 'the economic tsunami that has been rolling worldwide with devastating effects'; and the author asserts that 'Greenspan is the architect of the enormous economic "bubble" that burst globally'. The author cites Giulio Tremonti, Italy's Minister of Economy and Finance, who said: "Greenspan was considered a master. Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most."[216]
While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of Federal funds rate at only 1% for more than a year which, according to the Austrian School of economics, allowed huge amounts of "easy" credit-based money to be injected into the financial system and thus create an unsustainable economic boom[217][218]), there is also the argument that Greenspan actions in the years 2002-2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of dot-com bubble - although by doing so he did not help avert the crisis, but only postpone it.[219][220]
Many libertarians, including Congressman and former 2008 Presidential candidate Ron Paul[221] and Peter Schiff in his book Crash Proof, predicted the crisis prior to its occurrence. They are critical of theories that the free market caused the crisis[222] and instead argue that the Federal Reserve's printing of money out of thin air and the Community Reinvestment Act are the primary causes of the crisis.[223] However Alan Greenspan himself has conceded he was partially wrong to oppose regulation of the markets, and expressed "shocked disbelief" at the failure of the self interest of the markets, which according to neo-liberal economic theory should have protected shareholder equity.[224]
It has also been argued that the root cause of the crisis is overproduction of goods caused by globalization.[225] Overproduction tends to cause deflation and signs of deflation were evident in October and November, as commodity prices tumbled and the Federal Reserve was lowering its target rate to an all-time-low 0.25%.[226] On the other hand, Professor Herman Daly suggests that it is not actually an economic crisis, but a crisis of overgrowth beyond sustainable ecological limits.[227]
[edit] Other countries in economic recession
Many countries experienced recession in 2008.[228] The countries currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy and Germany. Despite the contention that the United States of America has been in a recession since 2007, GDP growth has remained positive until the second quarter of 2008.
Denmark and Iceland went into recession in the first quarter of 2008, but came out again in the second quarter.[229]
The following countries went into recession in the second quarter of 2008: Estonia,[230] Latvia,[231] Ireland[232] and New Zealand.[233]
The following countries/territories went into recession in the third quarter of 2008: Japan,[234] Sweden,[235] Hong Kong,[236] Singapore,[237] Italy [238] and Germany.[239] As a whole the fifteen nations in the European Union that use the euro went into recession in the third quarter.[240]
The following countries experienced negative growth in the third quarter 2008 and all are expected to go into recession in the fourth: United States and Britain.
If all of those countries stay in recession, then of the seven largest economies in the world by GDP, only China and France would avoid a recession in 2008. In the year to the third quarter of 2008 China grew by 9%. This is interesting as China has until recently considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.[241] This figure may more accurately be considered to be 5-7% now that population growth is declining. Growth of between 5%-8% could well have the type of effect in China that a recession has elsewhere.
[edit] Official forecasts in parts of the world
On November 3, 2008, according to all newspapers, the European Commission in Brussels predicted for 2009 only an extremely low increase by 0.1% of the GDP, for the countries of the Euro zone (France, Germany, Italy, etc.).[242] They also predicted negative numbers for the UK (-1.0%), Ireland, Spain, and other countries of the EU. Three days later, the IMF at Washington, D.C., predicted for 2009 a worldwide decrease, -0.3%, of the same number, on average over the developed economies (-0.7% for the US, and -0.8% for Germany).[243] Economically, the car industry is especially concerned; as a consequence, several countries have already launched immediate help-packages, each involving several billions of dollars, euros or pounds.
According to new forecasts of the Deutsche Bank (end of November 2008), the economy of Germany will go down by more than 4% in 2009.[244]
[edit] Timeline of countries in recession
July 1, 2008: Denmark
Denmark becomes the first European economy to confirm it is in recession since the global credit crunch began. Its GDP shrinks 0.6 percent in the first quarter after an 0.2 percent contraction in the fourth quarter of 2007. In the third quarter, the economy again contracted. This time it was by 0.5 percent.
August 13, 2008: Estonia
The Baltic state slides into recession with a 0.9 percent fall in second-quarter GDP after a drop of 0.5 percent in the first quarter. It falls deeper into recession in the third quarter when the economy contracted 3.3 percent.
September 8, 2008: Latvia
Latvia joins its northern neighbor Estonia in recession as GDP falls 0.2 percent in the second quarter from the first quarter, when it fell 0.3 percent. Property markets and construction have suffered in both Baltic states.
September 25, 2008: Ireland
The "Celtic Tiger" becomes the first country in the euro zone to slide into recession, with a 0.5 percent fall in second quarter GDP, following a 0.3 percent decline in the first quarter. Its last recession in 1983 saw thousands of people leave Ireland to seek work overseas.[245]
September 26, 2008: New Zealand
New Zealand falls into a recession for the first time in more than a decade, with a 0.2 percent fall in seasonally adjusted GDP for the second quarter. First-quarter GDP dropped 0.3 percent.
October 10, 2008: Singapore
First Asian country to slip into a recession since the credit crisis began. Singapore's export-dependent economy shrinks annualized rate of 6.8 percent in the third quarter after a 6.0 percent contraction in the second quarter, its first recession since 2002.
November 13, 2008: Germany
Europe's largest economy contracted by 0.5 percent in the third quarter after GDP fell 0.4 percent in the second quarter, putting it in recession for the first time in five years.[246]
November 14, 2008: Italy, Hong Kong and the Eurozone.
Italy
Italy plunges into recession, its first since the start of 2005, after GDP contracts a steeper-than-expected 0.5 percent in the third quarter. Second quarter GDP dropped 0.3 percent.[247]
Hong Kong
Hong Kong becomes the second Asian economy to tip into recession, it's exports hit by weakening global demand. Third-quarter GDP drops a seasonally adjusted 0.5 percent after a 1.4 percent fall in the previous quarter.
The Eurozone
The 15-country euro zone officially slips under, pushed down by recessions in Germany and Italy for its first recession since its creation in 1999.[248][249] These 15 countries are:
Austria
Belgium
Cyprus
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Malta
Netherlands
Portugal
Slovenia
Spain
November 17, 2008: Japan
The world's second-biggest economy slides into recession, its first in seven years. Its GDP contracts 0.1 percent in the July-September quarter, as the financial crisis curbs demand for its exports. It shrank 0.9 percent in the previous quarter.[250]
November 28, 2008: Sweden
The Nordic nation announces it is in recession after GDP shrinks 0.1 percent in both the second and third quarters.
December 1, 2008: United States of America
The US economy has been in recession since December 2007, the National Bureau of Economic Research said. The bureau is a private research institute widely regarded as the official arbiter of US economic cycles. It said a 73-month economic expansion had come to an end.[251]
December 9, 2008: Canada
Bank of Canada officially announced that Canada's economy is currently in recession.
In December 2008, the NBER declared that the United States had been in recession since December 2007
High prices
Further information: 2000s energy crisis and 2007–2008 world food price crisis
See also: 2008 Central Asia energy crisis and 2008 Bulgarian energy crisis
Medium term crude oil prices, (not adjusted for inflation)The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the prices of many commodities, notably oil and food, got so high to cause genuine economic damage, threatening stagflation and a reversal of globalization.[3]
In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year.[4] In July, oil peaked at $147.30 [5] a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. These high prices caused a dramatic drop in demand and prices fell below $35 a barrel at the end of 2008.[5]
The food and fuel crises were both discussed at the 34th G8 summit in July.[6]
Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 3.5-fold in less than 1 year whilst producers of sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price increases.[7][8]
In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.[9]
[edit] Trade
In middle -October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.[10]
[edit] Inflation
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations.[11] "Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation.[12]
In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term “unsterilized” referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country´s monetary policy target. However, inflation was also growing in countries classified by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and "Developing Asia", on account of the rise in oil and food prices.[13]
Inflation was also increasing in the developed countries,[14][15] but remained low compared to the developing world.
[edit] Unemployment
The International Labour Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in "construction, real estate, financial services, and the auto sector" - bringing world unemployment above 200 million for the first time.[16]
[edit] Return of volatility
For a time, major economies of the 21st century were believed to have begun a period of decreased volatility, which was sometimes dubbed The Great Moderation, because many economic variables appeared to have achieved relative stability. The return of commodity, stock market, and currency value volatility are regarded as indications that the concepts behind the Great Moderation were guided by false beliefs.[17]
[edit] Economic governance
Further information: 34th G8 summit and 2008 G-20 Washington summit
In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a locus of economic and financial crisis management.
Economic stimulus plans were announced or under discussion in China, the United States, and the European Union.[18] Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India.[19]
[edit] North America
[edit] U.S.
See also: Subprime mortgage crisis
Number of U.S. household properties subject to foreclosure actions by quarterThe United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value.[20] In February, 63,000 jobs were lost, a 5-year record.[21] In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008.[22]
Federal reserve rates changes[23]
Date Discount rate Discount rate Discount rate Fed funds Fed funds rate
Primary Secondary
rate change new interest rate new interest rate rate change new interest rate
Apr 30, 2008 -.25% 2.25% 2.75% -.25% 2.00%
Mar 18, 2008 -.75% 2.50% 3.00% -.75% 2.25%
Mar 16, 2008 -.25% 3.25% 3.75%
Jan 30, 2008 -.50% 3.50% 4.00% -.50% 3.00%
Jan 22, 2008 -.75% 4.00% 4.50% -.75% 3.50%
[edit] Early suggestions of recession
In the early months of 2008, many observers believed that a U.S. recession had begun.[24][25][26] As a direct result of the collapse of Bear Stearns, Global Insight increased the probability of a worse-than-expected recession to 40% (from 25% before the collapse). In addition, financial market turbulence signaled that the crisis will not be mild and brief.
Alan Greenspan, ex-Chairman of the Federal Reserve, stated in March 2008 that the 2008 financial crisis in the United States is likely to be judged as the harshest since the end of World War II.[27] A chief economist at Standard & Poor's, said in March 2008 he has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover in the summer 2008.[citation needed] Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period.[citation needed]
The former head of the National Bureau of Economic Research said in March 2008 he believed the country was then in a recession, and it could be a severe one.[citation needed] A number of private economists generally predicted a mild recession ending in the summer of 2008 when the economic stimulus checks going to 130 million households started being spent. A chief economist at Moody's predicted in March 2008 that policymakers would act in a concerted and aggressive way to stabilize the financial markets, and that then the economy would suffer but not enter a prolonged and severe recession.[citation needed] It takes many months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, makes its own ruling.[28]
According to numbers published by Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggest this indicates that the U.S. economy was not in a recession at the time.[29] However this estimate has been disputed by some analysts who argue that if inflation is taken into account, the GDP growth was negative for the past two quarters, making it a technical recession.[30] In a May 9, 2008, report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the recession started some time between September and January", on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.[31]
New York's budget director concluded the state of New York was officially in a recession. Governor David Paterson called an emergency economic session of the state legislature for August 19 to push a budget cut of $600 million on top of a hiring freeze and a 7 percent reduction in spending at state agencies already implemented by the Governor.[32] An August 1 report, issued by economists with Wachovia, said Florida was officially in a recession.[33]
White House budget director Jim Nussle said the U.S. avoided a recession following revised GDP numbers from the Commerce Department showing a 0.2 percent contraction in the fourth quarter of 2007 down from a 0.6 percent increase and a downward revision to 0.9 percent from 1 percent in the first quarter of 2008. The GDP for the second quarter was placed at 1.9 percent below an expected 2 percent.[34] Martin Feldstein, who headed the National Bureau of Economic Research until June and serves on the group's recession-dating panel, said he believed the U.S. was in a very long recession and that there was nothing the Federal Reserve could do to change it.[35]
In a CNBC interview at the end of July 2008 Alan Greenspan said he believed the U.S. was not yet in a recession, but that it could enter one due to a global economic slowdown.[36]
A study released by Moody's found two-thirds of the 381 largest metropolitan areas in the United States were in a recession. The study also said 28 states were in recession with 16 at risk. The findings were based on unemployment figures and industrial production data.[37]
In March 2008, Warren Buffett stated in a CNBC interview that by a "common sense definition", the U.S. economy is already in a recession. Warren Buffett has also stated that the definition of recession is flawed and that it should be 3 quarters of GDP growth that is less than population growth. However, the U.S. only experienced two consecutive quarters of GDP growth less than population growth. [38][39]
[edit] Recession declared by economists
On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in December 2007, citing employment and production figures as well as the third quarter decline in GDP.[40][41] The Dow Jones Industrial Average lost 679 points that same day.[42]
[edit] Rise in unemployment
On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years.[43][44] The news report cited the Department of Labor reports and interviewed Jared Bernstein, an economist:
“ The unemployment rate jumped to 6.1 percent in August, its highest level in five years, as the erosion of the job market accelerated over the summer. Employers cut 84,000 jobs last month, more than economists had expected, and the Labor Department said that more jobs were lost in June and July than previously thought. So far, 605,000 jobs have disappeared since January. The unemployment rate, which rose from 5.7 percent in July, is now at its highest level since September 2003. Jared Bernstein, economist at the Economics Policy Institute in Washington, said eight months of consecutive job losses had historically signaled that the economy was in a recession. "If anyone is still scratching their head over that one, they can stop," Mr. Bernstein said. Stocks fell after the release of the report, with the Dow Jones industrials down about 100 points after about 40 minutes of trading. ”
CNN also reported the news,[45] quoted another economist, and placed the news in context:
“ Job losses are still mild by recession standards, but the losses are relentless and they are accumulating. If job growth had paced with population growth during this year, it would have meant 1.3 million new jobs would have been created. Instead 605,000 were lost. That means about 2 million fewer people are working than if the economy were on a steady path. And that's a big number." But while economists generally study the payroll numbers most closely, it's the unemployment rate that registers with most Americans when they think about the labor market.[45]
-- Bob Brusca of FAO Economics ”
[edit] Liquidity crisis
Main article: Financial crisis of 2007–2008
From late 2007 through September 2008, before the official October 3rd bailout, there was a series of smaller bank rescues that occurred which totalled almost $800 billion.
In the summer of 2007, Countrywide Financial drew down a $11 billion line of credit and then secured an additional $12 billion bailout in September. This may be considered the start of the crisis.
In mid-December 2007, Washington Mutual bank cut more than 3,000 jobs and closed its subprime mortgage business.
In mid-March 2008, Bear Stearns was bailed out by a gift of $29 billion non-recourse treasury bill debt assets.
In early July 2008, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac, a spinoff of Countrywide, was seized by federal regulators - and called for a $32 billion bailout. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship on September 7, 2008.
During the weekend of September 13–14, 2008, Lehman Brothers declared bankruptcy after failing to find a buyer, Bank of America agreed to purchase Merrill Lynch, the insurance company AIG sought a bridge loan from the Federal Reserve, and a consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure,[46] similar to the consortium put forth by J.P. Morgan during the stock market panic of 1907 and the crash of 1929.[citation needed] Stocks on "Wall Street" tumbled on September 15.[47]
On September 16 2008, news emerged that the Federal Reserve may give AIG an $85 billion rescue package; on September 17, 2008, this was confirmed. The terms of the rescue package were that the Federal Reserve would receive an 80% public stake in the firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual.[48]
The year 2008, as of September 17, has seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals.[49] The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank.[50]
The Wall Street Journal states that venture capital funding has slowed down which in the past led to unemployment and slowed new job creation. [51]
[edit] Bailout of U.S. financial system
Main article: Emergency Economic Stabilization Act of 2008
On September 17, 2008, Federal Reserve chairman Ben Bernanke advised Secretary of the Treasury Hank Paulson that a large amount of public money would be needed to stabilize the financial system.[52] Short selling on 799 financial stocks was banned on September 19. Companies were also forced to disclose large short positions.[53] The Secretary of the Treasury also indicated that money market funds will create an insurance pool to cover themselves against losses and that the government will buy mortgage-backed securities from banks and investment houses.[53] Initial estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft legislation (as of September 19, 2008) were in the range of $700 billion[54] to $1 trillion U.S. dollars.[55] President George W. Bush asked Congress on September 20, 2008 for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis.[56][57] The crisis continued when the United States House of Representatives rejected the bill and the Dow Jones took a 777 point plunge.[58] A revised version of the bill was later passed by Congress, but the stock market continued to fall nevertheless.[59] [60]
As of mid-November 2008, it was estimated that the new loans, purchases, and liabilities of the Federal Reserve, the US Treasury, and FDIC, brought on by the financial crisis, totalled over $5 trillion: $1 trillion in loans by the Fed to broker-dealers through the emergency discount window, $1.8 trillion in loans by the Fed through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled Assets Relief Program, $200 billion insurance for the GSEs by the Treasury, and $1.5 trillion insurance for unsecured bank debt by FDIC.[61] (Some portion of the Fed's emergency loans would already have been repaid.)
[edit] Canada
In May 2008 Canada's GDP was reported to have decreased 0.1 percent due to decline in mining, oil and gas industry by 1.2 percent and fall in automobile production by 3.6 percent. Construction output in Canada declined 0.4 percent, utilities 1.3 percent, and farms produced 0.9 percent less.[62] In the first quarter of 2008 Canada's economy shrank by 0.3 percent and the Bank of Canada said second quarter growth would likely be less than 0.8 percent projected.[63] Canada later revised its first quarter GDP showing a contraction of 0.8% and gave second quarter GDP showing an increase of only 0.3%.[64] In early December 2008, the Bank of Canada, in announcing that it was lowering its central bank interest rate to the lowest level since 1958, also declared that Canada's economy was entering in recession.[65] Unfolding of this prospect will take until late Spring 2009, as Q3 GDP was announced as a 0.3% gain on December 1st by Statistics Canada.
[edit] Mexico
Mexico is well managed by the incumbent government with strict fiscal discipline. However, the effects of the financial crisis originating from the United States has already impacted on Mexico's export sector. Reduced demand and high unemployment in almost a decade and the depreciation of the Mexico peso has caused analyst to revised growth estimates officially from 1.8 percent to somewhere closer to 0. [66][67]
[edit] Europe
Denmark showed a contraction of 0.6 percent in the first quarter of 2008 following a contraction of 0.2 percent in the fourth quarter of 2007.[68] Estonia similarly saw an economic contraction of 0.9 percent in the second quarter, following a 0.5 percent contraction in the first quarter.[69] Latvia's gross domestic product fell 0.2 percent in the second quarter following a fall of 0.3 percent in the first quarter.[70] Sweden's economy showed zero growth in the second quarter of 2008.[71] The entire economy of the European Union declined by 0.1 percent in the second quarter.[72] A European Commission forecast predicted Germany, Spain and the UK would all enter a recession by the end of the year while France and Italy would have flat growth in the third quarter following second quarter contractions.[73]
Chairwoman of the Association of Estonian Food Industry, Sirje Potisepp, warned the Estonian food industry would probably face bankruptcies citing two major beverage companies in Estonia filing for bankruptcy.[74] Ratings agency Fitch warned Ukraine could be headed for a currency crisis as economic fundamentals deteriorate and the country enters another period of political uncertainty. Fitch said the current account deficit was likely to widen further as prices of gas imports rise and prices of its steel exports fall and said Ukraine was likely to need to borrow more at a time when global debt markets have ground to a virtual standstill. Ukraine's central bank chief, Petro Poroshenko, said he saw no need to intervene to protect the currency.[75] Only a few countries retained their high GDP predictions for the year 2008, and can be mentioned Romania and Slovakia. Despite high economic growth for this year (8.7%), Romania will be touched by the crisis, analysts forecasting only 4.7 growth for 2009.
[edit] Iceland
Further information: 2008 Icelandic financial crisis
The Icelandic króna has declined 40% against the euro during 2008 and has experienced inflation of 14%.[76] Iceland's interest rates have been raised to 15.5% to deal with the high inflation and the króna's decline is reportedly only beaten by that of the Zimbabwean dollar.[77] This depreciation in currency value has put pressure on banks in Iceland, which are largely dependent on foreign debt. On September 29, 2008 Iceland's Glitnir was effectively nationalized after the Icelandic government acquired 75% of the bank's stock. According to the government the bank "would have ceased to exist" within a few weeks if there had not been intervention.[78]
Iceland's Prime Minister Geir Haarde in a television address on October 6, 2008 said credit lines to Icelandic banks had been cut off and that "the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy" and that the government was looking to other countries for sources of liquidity.[76] Iceland's parliament responded to the crisis by approving a bill giving the Government wideranging powers over the banks, including the ability to seize their assets, force them to merge or compel them to sell off their overseas subsidiaries.[79] The parliament went on to seize control and nationalize Iceland's second largest bank, Landsbanki, on October 8, 2008.[80] The Parliament also extended a £400m loan to the nation's largest bank, Kaupthing, in hopes that it would strengthen the institution's balance sheet.[81]
On 8th October UK Prime Minister Gordon Brown announced that the UK government would launch legal action against Iceland, whose government announced that they had no intention of compensating any of the estimated 300,000 UK savers after the nationalization of Landsbanki and its online brand, Icesave.[82] Chancellor of the Exchequer Alistair Darling announced that the UK government would foot the entire bill, estimated at £4bn,[83][84] and that he was taking steps to freeze the assets of Landsbanki.[85] The following day, Darling used the Anti-Terrorism, Crime and Security Act 2001 as the basis for seizing the assets of Landsbanki Islands hf, an Iceland-based bank.[86] Icelanders launched an on-line petition drive to protest this action, which as seen as comparing Icelandic banks with Al-Qaida.[87]
Iceland's GDP is expected by economists to shrink at least 10 percent as a result of the crisis, putting Iceland by some measure in an economic depression.[88]
[edit] United Kingdom
People queuing on September 15, 2007 outside a Northern Rock bank branch in the United Kingdom, to withdraw money from their accounts.The economy of the United Kingdom has also been hit by rising oil prices and the credit crisis. Sir Win Bischoff, chairman of Citigroup, said he believes that house prices in Britain will keep falling for another two years. The Ernst & Young Item club predicted growth of only 1.5 percent in 2008, slowing to 1 percent in 2009. They also predicted consumer spending would slow to only 0.2 percent, and forecast a two-year drop in investment. The Institute of Directors’ quarterly business opinion survey showed business optimism at its lowest level since the survey began in 1996.[89] Deputy Governor of the Bank of England, John Gieve said inflation would accelerate "well over" 4 percent while economic growth is "slowing fast." Bank of England Governor Mervyn King said there may be "an odd quarter or two of negative growth," following the first quarter of 2009. Gieve said he couldn't rule out the U.K. economy heading into a recession, adding the economy was "quite a long way" from the end of the slowdown.[90]
Nationwide, the UK's biggest building society, warned the UK could head into a recession after house prices in July fell 8.1 percent from the previous year. Housing prices declined by 1.7 percent in July, double the decline recorded in June. Standard & Poor's said on July 30, 2008 that 70,000 homeowners were in negative equity and it could rise to 1.7 million or about one in six homeowners in the UK based on an expected 17 percent decline into 2009. The Bank of England reported that mortgage approvals fell by a record of nearly 70 percent.[91] In Northern Ireland, house sales saw a fall of some 50 per cent according to a survey by the University of Ulster/Bank of Ireland and housing prices fell on average by 4 percent.[92] British manufacturing activity declined by the most in almost a decade in July, the third consecutive month of declines. The number of companies that went into administration in May–July was 938, an increase of 60 percent compared with the same period in 2007. The number of company liquidations in the second quarter rose to 3,689, a 16 percent increase and the highest quarterly figure in five years. House builders expect the number of houses built in 2008 in England and Wales to be the lowest since 1924. The declines are seen as an indication the United Kingdom has high chance of entering a recession.[93] Factory production in the UK dropped 0.5 percent in June when twelve out of 13 categories of factory production fell. The economic output of the UK was reported to have increased by just 0.2 percent in the second quarter, the joint-slowest pace since 2001.[94] The Office for National Statistics later gave a revised number saying growth in the British economy was at zero, the worst since the second quarter of 1992.[95] The current slowdown has ended 16 years of continuous economic growth, the longest period of economic expansion in Britain since the 19th century.[96] A report from the National Institute for Economic and Social Research said the economy contracted by 0.1 percent in the period from May to July and 0.2 percent from June to August.[97]
A voter backlash due to the personal financial effects of the global credit crunch was widely attributed by politicians of the United Kingdom Labour Party, which had been in power since 1997, as the reason their political fortunes took a dramatic downturn through May 2008, with a succession of defeats in by-elections and the London Mayoral election, and the worst opinion poll result in their history.[citation needed] Political opponents countered this apparent excuse by pointing to the fact that the incumbent Prime Minister Gordon Brown, who had taken office in June 2007 just before the crisis broke, had been the country's 'Iron Chancellor', and had allegedly not ensured the country had sufficient monetary reserves to be able to lower taxes and ease the burden on voters, despite overseeing one of the longest sustained periods of economic growth in the country's history. In August 2008 the party also faced calls to impose a windfall tax on the utility companies, who were reaping record profits due to the fuel crisis, perceived as in bad taste given rising food and fuel prices.
On 17 September 2008, news emerged that the banking and insurance group HBOS (Halifax Bank of Scotland) was in merger talks with Lloyds TSB about creating a UK retail banking giant worth £30bn. The move received the backing of the British government which stated that it will over-rule any claims from the competition authorities.
According to the Office for National Statistics unemployment claims in August 2008 increased by 32,500 to reach 904,900. The wider Labour Force Survey measure found joblessness rose by 81,000 to 1.72 million between May and July, the largest increase since 1999.[98]
In September 2008, British bank Bradford & Bingley's £20billion savings business was acquired by Spanish bank Grupo Santander. While its retail deposit business along with its branch network will be sold to Santander. The mortgage book, personal loan book, headquarters, treasury assets and its wholesale liabilities will be taken into public ownership.
By November 2008, unemployment had risen to over 1.8 million and is projected to surpass 2 million by Christmas and perhaps even as high as 3 million by 2010.
From 1 December 2008, the UK Government made the decision to cut VAT from 17.5% to 15% for 13 months in an attempt to encourage a big spend from UK shoppers before Christmas.
On 4 December 2008, the Bank Of England cut interest rates from 3% to 2%, which amounts to the lowest level since 1951.[99]
[edit] Russia
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Further information: 2008 Russian financial crisis
The 2008 crisis in the Russian financial markets stemmed from the US sub-prime mortgage crisis and has been compounded by the plummeting price of oil, which has lost more than two thirds of its value since its record peak of USD 147 on 11 July 2008.[100] While according to the World Bank Russia’s strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than otherwise. Prudent fiscal management and substantial financial reserves have protected Russia from deeper consequences of this external shock. The government’s policy response so far — swift, comprehensive, and coordinated — has helped limit the impact. [101]
On December 13, The Minister of Economic Development Andrei Klepach said that the country had entered into recession, as they have recorded a drop in production for two consecutive quarters. He recognized that the GDP growth rate would be lower than the expected 6.8% at the end of 2008. He clarified that the industrial production would be around 1.9% this year, well below the government forecast 4.7%.[102]
[edit] Sweden
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Sweden has not been severely affected, and no banks or financial institutions have had real trouble. However, some effects have been visible, mostly based on distrust and similar psychological mechanisms. The stockmarket has declined heavily, because of influence from New York and other markets. Some banks, especially Swedbank had invested heavily in US housing bonds.
The banks did not trust each other well and the difference between the interbank interest rate and the state interest rate has gone up at least 1%. The housing loan interest rates have gone up even further. The global sales especially of cars has gone down, forcing the Swedish car industry to lay off staff and contractors. The increased fear of enduring recession and the increased financing costs have lowered company investments and private consumption.
Sweden entered recession after a two consecutive quarter of economic contraction. The Swedish GDP contracted by 0,1% during both the second and third quarters of 2008.[103] Sweden's economy sank into recession in the third quarter of 2008. In October retail sales dropped 0.6 percent in the month, and household consumption fell 0.2 percent in the third quarter.[104] The Riksbank offered 60 billion kronor ($7.71 billion) in loans to financial firms at an auction, after having opened credit facilities to maintain the liquidity in the banking sector.[105] At the beginning of December, the government launched a financial stability package to rev up the economy,[106] while the central bank, urged by the OECD,[107] cut down its interest rates to 2%[108]
[edit] Ukraine
Further information: Economy of Ukraine#Ukraine and the economic crisis of 2008
Ukraine was hit heavy by the economic crisis of 2008, analysts say the plights of Ukraine are slumping steel prices, local banking problems and the cutting of Russian gas supply in January 2009.[109][110] Key industries such as metallurgy and machine building are laying off workers, and real wages have started to fall for the first time in a decade. This makes it hard for Ukrainians to make payments on loans, many of which, especially mortgages, were issued in dollars. Since most people are paid in hryvnyas, they have to buy dollars with the weak hryvnya and are paying back much more on the loans than they had expected. The share of problem loans in bank portfolios grew to 10.3 percent by December 11 and is continuing to grow. Banks have all but stopped issuing loans, and clients have hurried to withdraw deposits. In October the National Bank of Ukraine introduced a moratorium on withdrawals ahead of schedule.[110]
Mid-December 2008 the International Monetary Fund (IMF) has lowered the forecast for Ukraine's GDP in 2009 from a 2.5% growth rate to a 5% decline,[111] the same day the Cabinet of Ministers worsened the GDP growth forecast to 0.4% from 6% for 2009.[112]
In November 2008, the IMF approved a stand-by loan program for Ukraine to the tune of $16.5 billion.[113]
[edit] Eurozone
In the eurozone as a whole, industrial production fell 1.9 percent in May, the sharpest one-month decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8 percent in May compared with a year earlier.[114] Retail sales fell by 0.6 percent in June from the May level and by 3.1 percent from June in the previous year. Germany was the only country out of the four biggest economies in the eurozone to register an increase of activity in July though the increase was sharply down. Economic analysts from RBS and capital Economics say the decline raises the risk of the eurozone entering a recession in 2008.[115] In the second quarter, the eurozone's economy was reported to have declined by 0.2 percent.[116] The economy declined again in the third quarter putting the eurozone in a technical recession.
[edit] Ireland
Ireland in the first quarter of 2008 reported a contraction in GDP of 1.5 percent, its first economic contraction since it began reporting by quarter and first recorded contraction since 1983.[117] However, Ireland's Central Statistics Office reported growth in GNP of about 0.8 percent, Ireland's government considers GNP a better measure of the economy. Analysts have predicted Ireland's economy will contract further in the rest of the year.[118] A report from NCB Stockbrokers predicts gross national product will fall by 1 percent in 2008 and by 0.4 percent in 2009 due to a decline in multinationals hit by the global economic slowdown. An economist from NCB said non-residential investment would fall by 5 percent in 2008 and by 12 percent in 2009.[119] Ireland's GDP saw a contraction in the second quarter by 0.5 percent making Ireland the first member of the eurozone to enter a recession.[120]
[edit] Spain
Spain's Martinsa-Fadesa, a construction company, has declared bankruptcy as it failed to refinance a debt of €5.1 billion. The two banks with most exposure to Martinsa-Fadesa are reportedly Caja Madrid, at €900m, and Banco Popular Español, at €400m. Spain's finance minister Pedro Solbes has said it would not bail out the company. In the second quarter in Spain house prices reportedly fell 20 percent.[121] In Castilla-La Mancha some 69 percent of all houses built over the past three years are still unsold. Deutsche Bank said it expects a 35 percent fall in real house prices by 2011. Spain's premier, Jose Luis Zapatero, blamed the European Central Bank for making matters worse by raising interest rates. More than 98 percent of home loans in Spain are priced off floating rates linked to Euribor, which has risen 145 basis points since August. Housing accounts for over 10 percent of Spain's economy. The Bank of Spain is concerned about the health of smaller regional lenders with heavy exposure to the mortgage market.
Although Spain has avoided recession in the first half of 2008, unemployment in the country has risen by 425,000 over the past year, reaching 9.9 percent. Car sales in Spain fell 31 percent in May.[114] Spain's factory output slumped 5.5 percent in May. The country's business lobby Circulo de Empresarios warned of a "high probability" that Spain's economy would fall into recession in the second half of 2008 due to the housing collapse.[122] Spain had a 7.9 percent decline in retail sales in June compared to the previous year, the largest drop since Spain began registering the results and the seventh consecutive monthly decline. This included a 17.9 percent drop in retail sales of household goods. June food sales in Spain fell by 6.8 percent.[123] Morgan Stanley issued a major alert on the health of Spanish banks and the Spanish economy in a report, saying, "A momentous economic slowdown is now under way. We believe the deterioration in Spain is just in the beginning stages. The bulk of the pain will be suffered in 2009." Morgan Stanley also warned there was 40 percent chance of a 0.5 percent contraction of the Spanish economy in 2009, with a risk of an even more extreme 1.4 percent contraction in 2009.[124] According to Spanish automobile manufacturers' association ANFAC new car sales fell 27.5 percent in July from the same time in 2007, the third consecutive monthly drop of over 20 percent. Spain's government forecast the unemployment rate would rise to 10.4 percent in 2008 and to 12.5 percent in 2009. Spain's second largest bank BBVA predicted the unemployment rate could reach 14 percent in 2009.[125] Spain's Purchasing Managers Index for the manufacturing sector in July fell to a new low suggesting a deep recession.[126] In the second quarter Spain's economy grew by 0.1 percent, the lowest gain in 15 years.[116]
[edit] Germany, Italy, Greece, Portugal
In Germany officials are warning the economy could contract by as much as 1.5 percent in the second quarter because of declining export orders. The economy of Germany contracted in both the second and third quarters putting Germany now in a technical recession. Industrial output in both Italy and Greece has slumped 6.6 percent over the past year. However, Greece's economy will continue to grow for both 2008 and 2009; Eurostat expects the Greek economy to grow 3.1% and 2.5% respectively. Portugal is off 6.2 percent.[114] The country, which was just recovering from a period of economic crisis during the past years, had several industries closing, one bank saved by the state, the remaining banks showing signs of significant unrest and unemployment figures rising to almost 11%. Germany's industrial output was down 2.4 percent in May, the fastest rate for a decade. Orders have now fallen for six months in a row, the worst run since the early 1990s.[citation needed] The German Chamber of Industry and Commerce warned of up to 200,000 job losses in coming months.[122] German retails sales fell 1.4 percent in June more than any expectations.[127] The German economy declined by 0.5 percent in the second quarter.[116] In Italy, Fiat announced plant closures and temporary layoffs at factories in Turin, Melfi, Imola and Sicily. Car sales in Italy have fallen by almost 20 percent over each of the past two months. Metalmeccanici, Italy's car workers' union said, "The situation is evidently more serious than had been understood."[122] On July 10, 2008 economic think tank ISAE lowered its growth forecast for Italy to 0.4 percent from 0.5 percent and cut the 2009 outlook to 0.7 percent from 1.2 percent.[128] Analysts have predicted Italy had entered a recession in the second quarter or would enter one by the end of the year with business confidence at its lowest levels since the 9-11 terrorist attacks.[129] Italy's economy contracted by 0.3 percent in the second quarter of 2008.[130]
[edit] France, Finland, Benelux
Other eurozone members saw a decline in their economy in the second quarter. France's economy declined by 0.3 percent, Finland's economy declined by 0.2 percent, and the Netherland's showed zero growth in the second quarter.[116]
According to INSEE, France's statistical agency, the French GDP was projected to decline by 0.1 percent in the third quarter of 2008 with another 0.1 percent decline in the fourth quarter and Eric Woerth, the French budget minister, said France was in a technical recession.[131] However the final estimations gave by the INSEE showed the French GDP actually increased by 0.14 percent thus avoiding a technical recession.[132] In order to fight the economic crisis a €26 billion strong rescue plan was announced by President Sarkozy. This saving plan however includes the scheduled budget for 2009, this makes €15.5 billion in addition to the normal budget for 2009. The French public deficit in 2009 is expected to raise to 4% with of this plan. It is similar in its conception to Obama's rescue plan in that it will be used, to a large extent, for public investments on infrastructures. More precisely railways, waterways, motorways will be improved; Hospitals, tribunals, the Gendarmerie and the Police will be modernised. In addition to these infrastructure the national defence will also benefit from this plan as well as public landmarks. Small business companies will get a tax rebate in 2009. Another part of the deficit will be used to pay for the national debt to French companies. Regulations over the public market, especialy construction and civil engineering, will be softened. Laws on urbanism will also be softened to favour construction and significantly lower delays between the moment a project is discussed and then built.[133]
On September 28, Dutch-Belgian bank Fortis was partially nationalized with a cash infusion from the Benelux countries amounting to €11.2 billion. Fortis' troubles started in the beginning of the year with an announcement that it faced around $1.5bn of losses in the American sub-prime catastrophe. In June, the company announced a selloff of assets to raise €5 bn to improve the liquidity of the organisation. This, however, proved insufficient.[134] On 6 October 2008, the French bank BNP Paribas took over 75 percent of Fortis' activities in Belgium, and 66 percent in Luxembourg, in exchange for the Belgian government becoming the new group's major shareholder.[135]
In May industrial output fell in the Netherlands by 6 percent.[136]
[edit] Middle East
[edit] Gulf Corporation Council
Decreasing oil prices will affect Persian gulf countries.
[edit] Lebanon
Lebanon is one of the only seven countries in the world to have scored profits in 2008.[137] Given the regular security turmoil it has faced in the past, its banks have adopted a conservative approach. The strict regulations imposed by the central bank were crafted to make the Lebanese economy immune to political crisis; and so far, this has applied to the global economic crisis as well. The Lebanese banks remain, under the current circumstances, high on liquidity and reputed for their security. [138]
Moody's has recently shifted Lebanon's sovereign rankings from stable to positive acknowledging its financial security.[139] Moreover, with a Beirut stock market increase of 51%, the index provider MSCI, ranked Lebanon as the world's best performer in 2008.[137] Analysts are, nonetheless, skeptic about the future indirect effects of the crisis, but so far, the direct consequences have proved to be positive.
[edit] Asia
[edit] China
In China, the IMF predicts GDP growth for 2008 will be 9.7% and drop to 8.5% in 2009.[140] A struggle was underway to see who would swallow the losses on US Agencies and Treasuries.[141] On November 9, 2008 China announced a package of capital spending plus income and consumption support measures. Four trillion yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.[142][143]
[edit] Hong Kong
The Hong Kong economy officially slid into recession in the final quarter of 2008. The economy is predicted to grow at 2 percent in 2009. Hong Kong is an advanced tertiary economy built on services, retail, tourism, transport and financial industries. Hong Kong's manufacturing industry is located in Guangdong province which employs over 11 million people.[144] The Hang Seng has lost over 60 percent of its value, property market lost over 40 percent in value and unemployment is at a record high of 4.8 percent. [145]
[edit] India
India's economy is expected to grow about 6.8% during FY2008 and as low as 5.5% in FY2009.[146][147] India's economy grew at an annual rate of 9% or more in the past three years, second only to China among the major economies, and the projections for FY2008 indicate that India's economic growth has been affected by the economic crisis.[148] The former Indian Finance Minister P. Chidambaram, however, said that he expected India's economy to "bounce back" to 9% during FY2009.[149] This prediction has been met with skepticism by observers.[147][150] The Asian Development Bank predicted India to recover from weakening momentum in 4-6 quarters.[151] At the G20 Summit, India called for coordinated global fiscal stimulus to mitigate the severity of the global credit crunch.[152] India said that it would inject US$4.5 billion into the financial system to help exporters.[153] Some analysts pointed that India's growing trade with other Asian countries, especially China, will help reduce the negative impact of the crisis.[154] Analysts also said that India's high domestic demand and large infrastructure projects will act as a buffer reducing the impact of the global downturn on its economy.[155] Economists argued that India's financial system is relatively insulated and its banks do not have significant exposure to subprime mortgage.[156] In an editorial, the New York Times praised the strong regulations placed on the Indian banking system by the Reserve Bank of India.[157]
[edit] Japan
In Japan exports in June declined for the first time in about five years falling by 1.7 percent. Exports to the United States and European Union fell 15.4 percent and 11.2 percent respectively. The decline in exports and increase in imports cut Japan's trade surplus $1.28 billion a decline of 90 percent from the previous year. An economist at the Royal Bank of Scotland said the decline means the Japanese economy most likely declined in the second quarter.[158] Taro Aso, secretary-general of Japan's ruling Liberal Democratic Party, said he believes Japan had entered a recession.[159] Japan's economy declined by 0.6 percent in the second quarter of 2008.[160] This was later revised to a decline of 0.7 percent.[161] Japanese exports grew 0.3 percent in August of 2008 compared to a year before down from 8 percent the previous month. Exports to the U.S. fell 21.8 percent, the biggest decline on record, and exports to Europe fell 3.5 percent.[162] Two Japanese banks appeared on the list of major Lehman creditors.[163] On November 17th, the Japanese Economy Minister announced that the nation was officially in a recession.[164]
[edit] Pakistan
In Pakistan the central bank's foreign currency reserves, when counting forward liabilities is said to only amount to as little as $3 billion, sufficient for a single month of imports. Corruption and mismanagement have combined with high oil prices to damage Pakistan's economy. Pakistan's rupee has lost more than 21 per cent of its value in 2008 and inflation is at 25 per cent. The government has failed to defer payments for Saudi oil or raise favorable loans. President Asif Ali Zardari claimed Pakistan needed a bailout worth $100 billion which he was expected to ask for at a meeting in Abu Dhabi in November. Ratings agency Standard and Poor's rates Pakistan's sovereign debt at CCC +, only a few ratings above the default level, warning the country may be unable to cover about $3 billion in upcoming debt payments.[165] This led a change in economic managers,and politically elected finance minister Naveed Qamar was replaced by a financial advisor, Shaukat Tareen, a former banker belonging to Citigroup on October 8, 2008. The new finance advisor led the Pakistani delegation to IMF-World Bank meeting in USA with a hope to obtain a loan from the World Bank which has been stopped now due to reservations from IMF on World Bank for releasing this nature of Loan to any country.
[edit] Singapore
Singapore's economy saw its biggest drop in five years in the second quarter, falling by 6.6 percent; however, the Managing Director of Singapore's central bank said a technical recession was not likely.[166] Singapore cut its 2008 GDP forecast to between 4 and 5 from 4 to 6 percent before, and then again down to 3 percent.[167] Singapore's economy contracted in the third quarter, placing the country in recession.[168]
[edit] South Korea
By September 2008, the crisis threatening the GSEs (US mortgage lenders Fannie Mae and Freddie Mac) began to have consequences in Asia. The foreign exchange reserves of South Korea's central bank contained many depreciating "Agency bonds" from the GSEs, threatening a currency crisis and leading to depreciation of the South Korean won against the US dollar and other major currencies,[169]. Samsung Electronics has been reported to be posting a decrease in sales for the first time since the 1997 Asian financial crisis that home appliances saw a decrease in the domestic market of up to 20 percent since mid-June compared to the previous year. Domestic auto sales also saw a decrease in the second quarter. Auto exports also posted a loss and exports of home appliances were also reported to be in decline.[170]
[edit] Sri Lanka
This section does not cite any references or sources.
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Sri Lanka too is affected with the global recession as the demand for their major products such as garments, tea, rubber, coconut based products and agricultural products are at a downturn. At the moment, tea is severely affected and it is analysed that the country is experiencing 35% drop in the exports presently.also tourist industry also downsise. last year 7% downsise the industry. most of the europian are cut of their unimportant expenses.
[edit] Taiwan
Taiwan announced billions of dollars in spending and tax cuts due to declining growth and a 26 percent slump in the stock market in 2008.[171] The bankruptcy of Lehman Brothers raised concerns about global exposure to the assets and stock of Lehman Brothers and the potential for the bankruptcy to cause further tightening of credit. Taiwan, despite reporting few losses from the subprime mortgage crisis, was said to have Lehman-related exposure for its companies and retail investors totaling $2.5 billion.
[edit] South America
As it mainly consists of food exporters, South America was not directly affected by the financial turmoil, even if the bond markets of Brazil, Argentina, Colombia and Venezuela have been hit.[172]
On the other side, the continent has known a tough agricultural crisis at the beginning of 2008.[173] Food prices have increased a lot, due to a lack in arable land. One of the main reasons for the loss of agricultural land was the high value offered by the production of biofuels. Food prices, rising since 2002, ascended from 2006, reaching a peak during the first quarter of 2008. In one year the average price of food rose by about 50%.
Then South American countries were affected by both the slowdown in most developed countries and the decrease in food prices due to the declining demand.[174] In June 2008, the Economic Commission for Latin America and the Caribbean (ECLAC) declared it expected a 4% growth for 2009. However at the end of the year it predicted that the year 2009 would put an end to six years of prosperity during which Latin America has benefited from high raw materials prices.[175] The production in the region is likely to decline and unemployment to increase.[176] Among the countries expected to suffer most, these include Argentina, which should see its growth rate reduced from nearly 7% in 2008 to 2.5% in 2009.[177] However, the Center for Economic and Policy Research has estimated that the region may be able to cope with the global downturn with right macro-economic policies, as these countries no longer depend on the U.S. economy.[178]
Please help improve this section by expanding it. Further information might be found on the talk page. (December 2008)
[edit] Brazil
Brazil is Latin America's largest economy and biggest exporter of raw materials such as iron ore and agricultural products such as coffee, sugarcane and oranges.[179] The economy is predicted to grow between 2.4 to 3 percent next year down from 5 percent originally forecast. [180]
[edit] Ecuador
Ecuador is seeking ways to default on sovereign debts incurred under the government of Gustavo Noboa, which the present government deems to have been incurred illegally.[181] If Ecuador defaults, it will be the first developing country to default on sovereign debt since the crisis began.[182]
[edit] Caribbean Islands
The IMF said as soon as February 2008 that a U.S. slowdown would hurt the economies of the Caribbean Islands, especially those in the Eastern Islands. Indeed, the sector of tourism makes up a large part of the Islands' economies, so that they are heavily dependent on the number of U.S. visitors each year.[183] However, the lower inflation and currency depreciation in several Latin American and Caribbean nations can have offset this impact of the financial crisis, sustaining the activity.[184]
[edit] Oceania
[edit] New Zealand
New Zealand Institute of Economic Research's quarterly survey showing New Zealand's economy contracted 0.3 percent in the first quarter and Treasury figures suggested the economy also contracted in the June quarter putting New Zealand in a technical recession.[185] The Treasury says the economy could recover in the second half of the year under the impact of high dairy prices boosting farmer incomes and cuts to personal tax rates, which come into effect on Oct. 1.[186] About 23 financial companies in New Zealand have filed for bankruptcy in a year. Housing starts in New Zealand fell 20 percent in June, the lowest levels since 1986.[187] Excluding apartments, approvals dropped 13 percent from May. Approvals in the year ended June fell 12 percent from a year earlier. Second-quarter approvals dropped 19 percent. The figures suggest a decrease in construction and economic growth. House sales fell 42 percent in June from a year earlier.[188] The New Zealand Treasury concluded that the country's economy had contracted for a second quarter based on economic indicators, putting New Zealand in a recession.[189] New Zealand's central bank cut rates by half a percent arguing the economy was in recession.[171] New Zealand's GDP declined by 0.2 percent in the second quarter putting the country in its first recession in a decade.[190]
[edit] Australia
In Australia, Hans Redeker, currency chief at BNP Paribas has said Australia would have to generate 4 percent of its GDP to meet payments to foreign holders of its assets. National Australia Bank on July 29, 2008 cut a A$850 million bond sale by two thirds following investor flight and opted for a 100 percent write-off on a clutch of "senior strips" of AAA-rated collateralized debt obligations (CDO) worth A$900 million.[187][191][192] Approvals for loans to build or buy homes and apartments decreased 3.7 percent in June of 2008. Housing prices in Australia fell in the second quarter of 2008 for the first time in about three years. Consumer confidence in Australia fell to a 16-year low in July and retail sales fell 1 percent in June.[193] High profile casualties of the credit crunch include Allco Finance, MFS, ABC Learning, Babcock & Brown and Centro while numerous other institutions have lost a significant part of their value.[194]
Sources such as the IMF and the Reserve Bank of Australia predict Australia is well positioned to weather the crisis with minimal disruption, sustaining more than 2% GDP growth in 2009 (while many Western nations go into recession). The World Economic Forum recently ranked Australia's banking system the fourth best in the world, while the Australian dollar's 30% drop is seen as a boom for trade, shielding from the crisis, and for helping to slow growth and consumption.[195][196]
Some analysts have forecast the Australian economy to dip into a recession due to the worsening economic conditions in western economies such as Western Europe, United States and Japan. Unemployment will increase because of slower growth, declining profits and government revenues.[197]
[edit] Africa
[edit] South Africa
Moody's Investors Service warned on July 7, 2008 that South Africa could slip into a recession by the turn of the year. Moody's cited electricity shortages, high interest rates, soaring inflation, a slumping housing and vehicle market and lower business and consumer confidence indicators. Growth in South Africa's gross domestic product for the first quarter of 2008 slowed to 2.1%. CPIX inflation, the monetary-policy inflation target measure, rose 10.9% on a year-on-year basis in May, its highest level since November 2002.[198] South Africa's National Treasury criticized the statement by Moody's saying, "It's not possible that we'll end up in recession." He added that the government may revise lower its 4 percent growth forecast for the year following growth of 5.1% in 2007. Car sales in South Africa dropped an annual 22 percent in June due to higher interest rates.[199]
[edit] Financial markets
[edit] January 2008 stock market volatility
January 2008 was an especially volatile month in world stock markets, with a surge in implied volatility measurements of the US-based S&P 500 index,[200] and a sharp decrease in non-U.S. stock market prices on Monday, January 21, 2008 (continuing to a lesser extent in some markets on January 22). Some headline writers and a general news columnist called January 21 "Black Monday" and referred to a "global shares crash,"[201][202] though the effects were quite different in different markets.
American stock markets were closed on Monday, January 21 for Martin Luther King, Jr. Day. Seemingly in response to the fall in non-U.S. markets,[203] the U.S. Federal Reserve announced a surprise rate cut of 0.75% on Tuesday at 8 a.m. This rate cut is believed to have been influential in preventing large declines in the American stock markets, with the Dow Jones Industrial Average down only 1.1% for the day, never closing that week worse than a 1.6% decrease from the previous Friday, and indeed closed up for the week. Later it was announced that Société Générale, one of the largest banks in Europe, accused its employee Jérôme Kerviel of fraudulent trades costing it €4.9 billion, and causing it to sell approximately €50 billion in European equity derivatives from January 21–23.
The effects of these events were also felt on the Shanghai Composite Index in China which lost 5.14 percent, most of this on financial stocks such as Ping An Insurance and China Life which lost 10 and 8.76 percent respectively.[204] Investors worried about the effect of a recession in the US economy would have on the Chinese economy. Citigroup estimates due to the number of exports from China to America a one percent drop in US economic growth would lead to a 1.3 percent drop in China's growth rate.
[edit] Market downturn Fall 2008
Main article: Global financial crisis of 2008
As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year.[205] The Dow Jones Industrial Average had fallen about 37% since January 2008.[206]
There were several large Monday declines in stock markets world wide during 2008, including one in January, one in August, one in September, and another in early October.
The simultaneous multiple crises affecting the US financial system in mid-September 2008 caused large falls in markets both in the US and elsewhere. Numerous indicators of risk and of investor fear (the TED spread, Treasury yields, the dollar value of gold) set records.[207]
Russian markets, already falling due to declining oil prices and political tensions with the West, fell over 10% in one day, leading to a suspension of trading,[208] while other emerging markets also exhibited losses.[209]
On September 18, UK regulators announced a temporary ban on short-selling of financial stocks.[210] On September 19 the United States' SEC followed by placing a temporary ban of short-selling stocks of 799 specific financial institutions. In addition, the SEC made it easier for institutions to buy back shares of their institutions. The action is based on the view that short selling in a crisis market undermines confidence in financial institutions and erodes their stability.[211]
On September 22, the Australian Securities Exchange (ASX) delayed opening by an hour [212] after a decision was made by the Australian Securities and Investments Commission (ASIC) to ban all short selling on the ASX.[213] This was revised slightly a few days later.[214]
[edit] Causes of the contemporary economic crisis
On October 15, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote a lengthy article in the Washington Post titled, "What Went Wrong".[215] In their investigation, the authors claim that former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claim that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crises of 2008.
On October 17, 2008, attorney Timothy D. Naegele wrote an article in the American Banker entitled, "Greenspan's Fingerprints All Over Enduring Mess," which argues that Alan Greenspan's actions and inactions triggered the economic crises of 2008. The article discusses 'the economic tsunami that has been rolling worldwide with devastating effects'; and the author asserts that 'Greenspan is the architect of the enormous economic "bubble" that burst globally'. The author cites Giulio Tremonti, Italy's Minister of Economy and Finance, who said: "Greenspan was considered a master. Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most."[216]
While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of Federal funds rate at only 1% for more than a year which, according to the Austrian School of economics, allowed huge amounts of "easy" credit-based money to be injected into the financial system and thus create an unsustainable economic boom[217][218]), there is also the argument that Greenspan actions in the years 2002-2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of dot-com bubble - although by doing so he did not help avert the crisis, but only postpone it.[219][220]
Many libertarians, including Congressman and former 2008 Presidential candidate Ron Paul[221] and Peter Schiff in his book Crash Proof, predicted the crisis prior to its occurrence. They are critical of theories that the free market caused the crisis[222] and instead argue that the Federal Reserve's printing of money out of thin air and the Community Reinvestment Act are the primary causes of the crisis.[223] However Alan Greenspan himself has conceded he was partially wrong to oppose regulation of the markets, and expressed "shocked disbelief" at the failure of the self interest of the markets, which according to neo-liberal economic theory should have protected shareholder equity.[224]
It has also been argued that the root cause of the crisis is overproduction of goods caused by globalization.[225] Overproduction tends to cause deflation and signs of deflation were evident in October and November, as commodity prices tumbled and the Federal Reserve was lowering its target rate to an all-time-low 0.25%.[226] On the other hand, Professor Herman Daly suggests that it is not actually an economic crisis, but a crisis of overgrowth beyond sustainable ecological limits.[227]
[edit] Other countries in economic recession
Many countries experienced recession in 2008.[228] The countries currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy and Germany. Despite the contention that the United States of America has been in a recession since 2007, GDP growth has remained positive until the second quarter of 2008.
Denmark and Iceland went into recession in the first quarter of 2008, but came out again in the second quarter.[229]
The following countries went into recession in the second quarter of 2008: Estonia,[230] Latvia,[231] Ireland[232] and New Zealand.[233]
The following countries/territories went into recession in the third quarter of 2008: Japan,[234] Sweden,[235] Hong Kong,[236] Singapore,[237] Italy [238] and Germany.[239] As a whole the fifteen nations in the European Union that use the euro went into recession in the third quarter.[240]
The following countries experienced negative growth in the third quarter 2008 and all are expected to go into recession in the fourth: United States and Britain.
If all of those countries stay in recession, then of the seven largest economies in the world by GDP, only China and France would avoid a recession in 2008. In the year to the third quarter of 2008 China grew by 9%. This is interesting as China has until recently considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.[241] This figure may more accurately be considered to be 5-7% now that population growth is declining. Growth of between 5%-8% could well have the type of effect in China that a recession has elsewhere.
[edit] Official forecasts in parts of the world
On November 3, 2008, according to all newspapers, the European Commission in Brussels predicted for 2009 only an extremely low increase by 0.1% of the GDP, for the countries of the Euro zone (France, Germany, Italy, etc.).[242] They also predicted negative numbers for the UK (-1.0%), Ireland, Spain, and other countries of the EU. Three days later, the IMF at Washington, D.C., predicted for 2009 a worldwide decrease, -0.3%, of the same number, on average over the developed economies (-0.7% for the US, and -0.8% for Germany).[243] Economically, the car industry is especially concerned; as a consequence, several countries have already launched immediate help-packages, each involving several billions of dollars, euros or pounds.
According to new forecasts of the Deutsche Bank (end of November 2008), the economy of Germany will go down by more than 4% in 2009.[244]
[edit] Timeline of countries in recession
July 1, 2008: Denmark
Denmark becomes the first European economy to confirm it is in recession since the global credit crunch began. Its GDP shrinks 0.6 percent in the first quarter after an 0.2 percent contraction in the fourth quarter of 2007. In the third quarter, the economy again contracted. This time it was by 0.5 percent.
August 13, 2008: Estonia
The Baltic state slides into recession with a 0.9 percent fall in second-quarter GDP after a drop of 0.5 percent in the first quarter. It falls deeper into recession in the third quarter when the economy contracted 3.3 percent.
September 8, 2008: Latvia
Latvia joins its northern neighbor Estonia in recession as GDP falls 0.2 percent in the second quarter from the first quarter, when it fell 0.3 percent. Property markets and construction have suffered in both Baltic states.
September 25, 2008: Ireland
The "Celtic Tiger" becomes the first country in the euro zone to slide into recession, with a 0.5 percent fall in second quarter GDP, following a 0.3 percent decline in the first quarter. Its last recession in 1983 saw thousands of people leave Ireland to seek work overseas.[245]
September 26, 2008: New Zealand
New Zealand falls into a recession for the first time in more than a decade, with a 0.2 percent fall in seasonally adjusted GDP for the second quarter. First-quarter GDP dropped 0.3 percent.
October 10, 2008: Singapore
First Asian country to slip into a recession since the credit crisis began. Singapore's export-dependent economy shrinks annualized rate of 6.8 percent in the third quarter after a 6.0 percent contraction in the second quarter, its first recession since 2002.
November 13, 2008: Germany
Europe's largest economy contracted by 0.5 percent in the third quarter after GDP fell 0.4 percent in the second quarter, putting it in recession for the first time in five years.[246]
November 14, 2008: Italy, Hong Kong and the Eurozone.
Italy
Italy plunges into recession, its first since the start of 2005, after GDP contracts a steeper-than-expected 0.5 percent in the third quarter. Second quarter GDP dropped 0.3 percent.[247]
Hong Kong
Hong Kong becomes the second Asian economy to tip into recession, it's exports hit by weakening global demand. Third-quarter GDP drops a seasonally adjusted 0.5 percent after a 1.4 percent fall in the previous quarter.
The Eurozone
The 15-country euro zone officially slips under, pushed down by recessions in Germany and Italy for its first recession since its creation in 1999.[248][249] These 15 countries are:
Austria
Belgium
Cyprus
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Malta
Netherlands
Portugal
Slovenia
Spain
November 17, 2008: Japan
The world's second-biggest economy slides into recession, its first in seven years. Its GDP contracts 0.1 percent in the July-September quarter, as the financial crisis curbs demand for its exports. It shrank 0.9 percent in the previous quarter.[250]
November 28, 2008: Sweden
The Nordic nation announces it is in recession after GDP shrinks 0.1 percent in both the second and third quarters.
December 1, 2008: United States of America
The US economy has been in recession since December 2007, the National Bureau of Economic Research said. The bureau is a private research institute widely regarded as the official arbiter of US economic cycles. It said a 73-month economic expansion had come to an end.[251]
December 9, 2008: Canada
Bank of Canada officially announced that Canada's economy is currently in recession.
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