The Impacts of Recent Recession on Markets

 

The Impacts of Recent Recession on Markets

Introduction

The major financial crisis that hit the world at the start of 2007 originated from the US housing markets. This effect later spread to other countries leading to the greatest recession since the one of the 1930s. The overall effect resulted from the imbalances in the macroeconomic factors and weakness in the prevailing financial regulatory framework in the global financial markets. The Recent Recession led to low interest rates and complete disruption of the normal flow of the financial systems. This effect further slowed down the demand and supply of various goods and services.

This paper seeks to contribute to the understanding of the effects of the Recent Recession on the global markets. It will reflect on the various dimensions such as finance, labor, trading, and even the changes in the economic perspectives created soon after the Recession.

The Recent Recession: the outbreak

The Recent Recession took place in several phases. The first phase was the outbreak, which resulted from the acute crisis in the US housing markets from mid 2007 to late 2008. The poor regulatory framework allowed most borrowers to access credit for the acquisition of mortgages (Berg, 2011). However, the fall in the housing prices led to problems in the mortgage industry since the various financial institutions suffered from the liquidity problems. The interest rates grew even for interbank financial transactions. The second phase involved the systematic panic that followed the collapse of the Lehman Brothers Investment. This bank had global networks, and therefore, severe global crisis started which lasted up to the end of the year 2009. The third phase of the crisis involved systematic recovery from the various global financial players such as Asia and Europe. The several measures taken by governments to cushion their economies from global financial shock were taking effect.

The last phase was the recovery period. From the onset of 2010, most world economies were recovering from the recession. The overall situation was decreasing and the measures taken by the various governments were taking effect. However, most developed economies were growing lowly compared to the emerging ones (Berg, 2011). There were several budgetary deficits in various countries such as Portugal, Greece, and Ireland among others.

The causes of the Recession

Most economists agree that no single factor or apportioning of blame can best explain the systematic occurrence of the recession. Even if the origin of the effect was clearly in countries such as US, UK, and other advanced economies, the global recession was because of several macroeconomic and microeconomic factors that reinforced each other. The chief macroeconomic factor is the apparent good growth of GDP in the 1970s and 1980s (Berg, 2011). This made most economists to believe that the world economy was performing well despite the various glaring imbalances. The microeconomic factor rests on the poor regulatory framework that allowed the various financial institutions to transact without supervision, and proper credit evaluation mechanisms. What follows is the analysis of these factors:

Monetary Policy

Most experts agree that the true precursor to the crisis of 2008-2009 was the relatively lower interest rates of the 2000s. This happened for several reasons. Firstly, there was favorable macroeconomic environment compared to the 1980s. This is due to the rapid spread of globalization, the decreasing trade barrier between the nations, the opening of free markets, and the emerging independence of the central banks (Berg, 2011). All theses factors contributed to better growth, more competition, and expansion of markets. This forced the Federal Reserve to be lower than was possible, given the level of resource utilization, and prevailing inflation rates.

Global Imbalances

Most economists argue that there was an imbalance between the savings and the investments in the overall world economy. In this regard, there was a surplus in the world savings. Partly, this resulted from limited investment opportunities, particularly in the Asian markets. This led to low global interest rates (Daniel & Conklin, 2010). There were notable savings in Asia, and many oil producing countries. However, realization of similar savings was not possible in countries like US. Thus, the savings from these countries diffused to the US economy. The subsequent disruption of the US housing caused a great shock in the world financial market causing great global economic imbalance.

Microeconomic Factors

A number of microeconomic factors contributed to the systematic occurrence of the recession. Firstly, the existence of poor regulatory framework coupled with weak supervision, and poor credit evaluation criteria led to excessive lending (Acharya, Cooley, Richardson & Walter, 2011). These lending institutions never factored the long-term risks of the lending cultures. The excessive borrowing and investments led to the ultimate downturn as house prices soared. The US political system favored lending to individuals with poor credit ratings with the view of turning them into homeowners (Glick & Kevin, 2011). The banks tailored most products without assessing the risks involved. Lack of basic understanding of the risks and absence of complex mathematical models to deal with rising complexities in the markets made the risks worse. Moreover, most banks turned to funding long-term lending with short-term deposits creating a mismatch between the short-term deposits and the long-term loans.

 

 

The Effects of the Recent Recession on Markets

The effects of the Recent Recession of the world economy take several dimensions. However, the crisis deepened the financial crisis, yet the availability of finances boosts growth in nearly all the dimensions of the world economy. The effects of the crisis include unemployment, low industrial production, and low trading volumes, poor performance of financial markets, and low small business lending rates. What follows is the illustration of these factors:

Labor Market

As the global financial crisis deepened, most firms that offered employment greater portion of workforce in the world were laying off workers. This is because less labor is required when the demand for goods and services falls. This further leads to reduction in hours worked and fewer people being employed. Most of the lay-offs took place in the construction, banking sector, and in the line of automobiles. The International Labour Organization (ILO) predicted about 20 million-job loss by the end of the crisis (Islam & Verick, 2011). The number of people unemployed globally reached a record 200 million for the first time in history. However, this figure will nearly reach 250 million, ILO predicts.

The most visible effect of the recent recession on labor market was the fewer number of hours worked beginning the year 2008. Both number of hours people work and the hours payable considerably reduce, creating serious losses in the income of individuals (Gareth, 2009). Other than the hours paid or worked, the usual hours represents the conditions of any labor market. The reduction in hours worked directly affects the earning power of individuals and consequently, their purchasing power. Reduction in the purchasing power reduces the demand for goods and thus lower production levels for firms. This effects still compounds the unemployment scenario. Additionally, the number of jobs available also reduced greatly during the 2008-2009 period.

In New Zealand, the number of jobs available reduced during the 2008-2009 period with unemployment rate hitting the historic 6.8% (Ministry of Business, Innovation, and Employment, 2014). However, the jobs available rose in 2010, but did not reach the peak during the periods before the recession. In the US, the unemployment rate stood at 4.9% around December 2007. However, by late 2009, the unemployment rate had reached a record 10.1%. The tendency in US resembles the ones in the European nations. Most of these nations also felt the ripple effect of the recession. In Spain, the unemployment rate reached about 18.37 % by mid 2009. In the UK, the youths were the first to bear the consequences of the recession.

Several events results from the present economic downturn. Firstly, as severe economic times bite, unemployment rises. The declining job opportunities force most people to migrate seeking job opportunities abroad. However, when the severe economic challenges spread globally, most citizens abroad may choose to return home, leading to net increase in the migration levels. Secondly, there is labor participation rate. When people are experiencing hard economic times, most people choose to resort to further studies or routine childcare, thereby leaving the active labor force participation. Lastly, poor economic performance affects the wage rate in most countries and even the world as a whole. The recent recession led to the lowering of wages paid to workers (Berg, 2011). Partly, this reduction in wages is dependent on supply-demand factor, where many unemployed workers seek limited job opportunities, thus the employers lower wages payable in the face of surplus workforce. Further, the lowered production levels of most firms decrease their labor force requirements, therefore leading to wage cuts or lay-offs.

Financial Markets

Banks usually rely on lending and deposits. With the economic downturn that is facing most households, there is less money for investment. There is reduction in gross household incomes due to the decreasing hours of work. Similarly, the widespread job losses do not favor the banking sector (Berg, 2011). This would mean that their disposable assets would continue to loose value. Around 2008, there was a sharp decrease in the value of stocks in major stock markets in the world, particularly in the US. Some of the effects also penetrated to other markets, including the China’s famous Shanghai Composite Index, which experienced a reduction of about 5.14 percent. Most Chinese major investors such as China Life, and Ping Insurance lost nearly ten percent of their share price values.

The interconnectedness between the economy of China and that of the US indicates that a one percent drop in the economic growth of the US leads to almost 1.3 percent drop in the economic growth in China. Such a connection implies that US being the origin of the recession, China suffered most. Around late 2008, the values of stocks had fallen by about 30% in various stock markets. This occurred in the major world economies such as North America, Asia, and the larger part of Europe (Berg, 2011). The famous Dow Jones Industrial had reduced by almost thirty seven percent. In a similar trend, there was a fall in the oil prices in the Russian markets. This followed the rising tension in the US, which ultimately led to the suspension of trading.

Conclusion

Despite the deepening effects of the 2008-2009 financial crises, most world economies have recovered, but certainly not to the level of the pre-recession days. This created so many lessons that have led to significant shifts in the way economists analyze financial situations (Almunia, Bénetrix, Eichengreen & Rua, 2009). Some of the key changes include the adoption of the revolutionary Keynesian model. These models provide demand pressures for both goods and the finances. There are beliefs that even the teaching of economic theory will undergo a radical shift to accommodate the new economic models that will avert future market imbalances.

 

References

Acharya, V., Cooley, T., Richardson, M. & Walter, I. (2011). “Market Failures and Regulatory Failures: Lessons from Past and Present Financial Crisis”. Asian Development Bank Institute. Washington, DC: Tokyo and Brookings Institution Press.

Almunia, M., Bénetrix, A., Eichengreen, B. & Rua, G. (2009). From great depression to great credit crisis: similarities, differences, and lessons learnt. Stencil: University of Tilburg.

Berg C. (2011). The global financial crisis and the great recession: causes, effects, measures and consequences for economic analysis and policy. Retrieved from http://www.bankofengland.co.uk/publications/Documents/events/ccbs_cew2011/paper_berg.pdf.

Daniel, C. & Conklin, D. (2010). The great recession, 2007-2010: causes and consequences. Canada, Ivey Publishing.

Gareth, C. (2009). ‘The Impact of the recession on the labor market’. Office for national statistics. Retrieved from http://www.ons.gov.uk.

Glick, R., & Kevin, L. (2011). “Consumers and the Economy, Part I: Household Credit and Personal Saving.” FRBSF Economic Letter.

Islam, I. & Verick, S. (2011). From the great recession to labor market recovery: issues, evidence, and policy options. Geneva: International Labour Organization.

Ministry of Business, Innovation and Employment. (2014). ‘How bad is the current recession? Labor market downturns since the 1960s’. Labor Information, New Zealand. Retrieved from http://www.dol.govt.nz/publications/discussion-papers/current-recession/.

 

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