Aftermath of 2008 Recession

In this blog we are going to see the aftermath of 2008 recession. We are mainly concerned about the global situation in 2009 and early 2010. The recession of 2008 left approximately 1.5 million people unemployed directly and indirectly. After the recession of 2008, the global economy has been struggling to regain a sound footing to support vigorous growth. The recession lead to reduction of oil prices around the world. There were signs of recovery from various parts of the world but they were rather slow. There were no immediate signs of employment for all those who lost their job during the recession. In fact economists predicted that it will last another two years after the recession. GDP of most countries dropped a little and started increasing from mid2009.

The residential construction which bottomed out in 2008 recession did not show any major signs of growth in 2009.   In the meantime GDP increased slightly in America and other European countries. All parts of the GDP such as consumption, business investment, exports with the exception of building sector. The recession also had an impact on the lifestyle of citizens of developed nations also. People started spending less and saving more but the recession left them with no means of profitable investments. Governments of America and Europe tried to bail out big companies and banks at the cost of public sector money in the aftermath of recession. This lead to a huge opposition amongst the public.  Economists such as Paul Krugman felt that these countries instead of being rightist should be more labour friendly. He also felt that instead of slashing various welfare schemes, the government must increase the welfare schemes given to the people.

In America and several countries, the recession has forced the youngsters to take up jobs. They were not able to pursue higher educations as they did not have sound financial status and the cost of Higher Education also increased. These factors may affect the overall growth of these students in longer run. In the aftermath of recession Governments of America and European countries felt that bailing out the big fishes by implementing cuts on spending for public will strengthen the financial sector which would eventually create more jobs for the unemployed. But many economists were not convinced. They gave the example of Britain where such measures taken by the British Government was not fruitful and lead Britain into an economic slump. While most developed countries of the world tried to bail out their banks at the cost of public expenditure, there was an exception in the case of Iceland. It made the banks take the brunt of the recession and didn’t reduce the public expenditure. It also prevented foreign investments to protect the local interests. As a result, the percentage of unemployed people started decreasing and the country did not suffered from any major economic slump after that.

Aftermath of recession in Asia:

The outcome of Asia’s financial sector in 2009 was relatively better compared to other countries in West and also compared to its own experience in 1997-1998.  Even then there were GDP contractions as a result of volatile external environment and faltering domestic demand. Since most Asian countries had adequate exposure to exports and global liquidity, they were not the first of countries to recover from the recession. The recession also showed strong interconnections between the Western and Asian economies and how the impact on one affects the other.

The Asian countries that were exporting goods to West were mainly affected by the recession since the purchasing power of many people in West came down after the recession. One of the main reasons for such a decline in trade volumes is due to the uncertainty that prevailed during that time. Industries and households put off purchases of big-ticket items such as consumer durables and investment goods fearing another slump. Since durable goods figured predominately in trade and commerce, countries exporting these goods were much affected in the aftermath of the recession.

Most Asian countries enter the crisis with strong economic fundamentals, including low inflation and fiscal positions. These good fundamentals in turn provided scope for strong economic fightbacks in the aftermath of recession. China, Japan , Korea , and Singapore employed relatively aggressive policy strategies, in particular, China undertook a sizable fiscal program, which was supplemented by accommodative monetary and bank lending policies.

Not all Asian nations responded so aggressively to the crisis. Some countries with weaker fiscal positions were not able to respond like China. Countries with low inflation such as China, Japan, and Thailand were able to implement strong policies without concerns about increasing inflation. On the other hand inflation was a major concern for Indonesia, Philippines and Korea and hence they had to take policies keeping in mind that inflation should not increase. The policies taken by these countries also depended on the severity of crisis across these countries.  Generally speaking, the Asian response to the crisis appeared effective. It can also be said that the revival of Asian economy aided in global economic growth.

AFTERMATH OF RECESSION ON INDIA:

In the aftermath of the recession, there were sudden sales of stocks and the Stock markets crashed often.  There was also a decrease in exports by India. Though the recession did not result in that much unemployment as in US, there was a reduction in wages to the employees mainly in IT companies and BPOs. There has not been a significant increase in wages even now. The hiring of workers had decreased and the employees were forced to work for longer hours for lesser salary. There was also depreciation of Rupees versus dollars and banks were on severe cash crunch. The major challenge faced by the government to control the inflation since it had started increasing after the recession. Government was also entitled to spread the benefits of growth equitably. Unlike other Western countries, India did not try to take drastic steps and policy changes. Instead it continued to concentrate on investment projects which will lead to the development of the country. Since there was a global uncertainty Indian exports did not recover as it was expected. There were some plus points which came as a result of 2008 recession. The land prices came down after recession. Some export goods were sold in local market and it resulted in reduction of prices of these commodities. All these factors helped the common man. There were also some minus points. There was wide spread job scarcity after recession especially in IT sector. This situation has improved in recent times but the wages continue to remain low. There was low liquidity after recession and it also lead to reduction in exports. There was also significant reduction in production after the recession. The automobile sector was the most affected one. The sales of most automobile majors came down and many new models to be released were put on hold.

The official estimates of GDP growth for the first two quarters of 2008/9 stayed above 7.5percentage.  There was a decline in output of automobiles, commercial vehicles, steel, textiles, petrochemicals, construction, real estate, finance, retail activity and many other sectors also. The exports also fell by 12percent in term of dollars. The GDP of the second part of 2008/9 came down.

There were they mixed opinions on what policy reform should India undertake for recovery. There were also questions whether Indian should deploy monetary, fiscal and exchange rate policies to insulate our growth momentum from adverse conditions. The Monetary policy was aggressively loosened. On the fiscal front, the government pretty much exhausted the available fiscal space through its record Rs 237,000 crore (4.5 percent of GDP) supplementary demand in October 2008. Some economists expressed their concern that given it economic policies and status before recession, it should have recovered stronger than other Asian powers which did not happen. They blame the lack of strong policies taken by the government and the inefficiency in regulation of various sectors by the Government as main reasons for it

Conclusion:

The United States has benefited significantly from Asia’s rapid development and integration into the global economy, and the payoffs to the Asian economics from global economic integration have been substantial as well. Indeed, the financial crisis has widely demonstrated the extent to which the fortunes of the United States, Asia, and the rest of the global economy are intertwined. These powerful economic linkages, as well as the importance of both the United States and Asia in the global economy, underscore the need for consultation and cooperation in addressing common issues and concerns. Economists are optimistic that the United States and Asia will rise to the challenge and address in a mutually beneficial fashion the range of issues confronting the global economy.

KAVIN KARTHIK
CS10B013