The scale of the credit crunch and the global recession it has created is striking: 2009 has, so far, been the worst year for the world economy in the post-war era.
A synchronised global recession means that gross domestic product (GDP) in the advanced economies will fall by some 4% this year, with few escaping the difficult consequences and no country of any size avoiding its deepest downturn in living memory. Emerging economies have escaped more lightly but they too have been hard hit by the collapse in world trade, again a post-war record – world trade, which has typically grown by an average of between 6 and 8% a year in recent decades, will contract by 8 to 10% this year.
The recession has demonstrated the powerful economic and financial linkages that exist in a globalised world. When the bankruptcy of Lehman Brothers sent the world’s financial markets into meltdown in September 2008, and brought the global banking system close to collapse, the effects on the ‘real’ economy was almost instantaneous. The abrupt withdrawal of credit and an associated plunge in business and consumer confidence produced what some economists described as a ‘falling off a cliff’ moment for the world economy. Business came to a halt, either because people were reluctant to order, recruit, trade and invest, or because they were unable to do so. The suddenness of the dive in activity was breathtaking; in many economies there were record drops in GDP.
However, there are signs that this record fall is over and that economies have begun to stabilise, if not recover. In truth, the pace of decline from autumn 2008 probably could not have been sustained. But if the news on that score is more encouraging, the world still has to deal with another significant problem – a fiscal hangover of enormous proportions.
Governments in many countries have stepped in with taxpayer-funded support to rescue or assist their banking systems. The recession has also had a devastating effect on tax revenues in many economies. But even allowing for this the extent of the revenue collapse has been surprising.
Explosions of debt
The credit crunch has also had a dramatic impact on public finances. Countries with previously sound fiscal positions have found themselves facing budget deficits that would have been unthinkable even 12 months ago. Fiscal rules, where they existed, have been abandoned or quietly forgotten. The prevention of a re-run of the Great Depression has been given a greater priority by many governments than restraining borrowing. According to figures prepared for the April G20 summit in London by the International Monetary Fund (IMF), the swing into deficit over the period 2008-2010 will be a collective $5 trillion, not far short of a tenth of the size of the global economy. In some cases this reflects deliberate policy actions by governments. In others, however, it is the operation of the so-called ‘automatic stabilisers’ (the tendency of tax revenues to fall and government spending on social security to rise during a recession) and other non-discretionary measures.
The IMF’s projections, contained in its spring 2009 World Economic Outlook, underlined the extent of this fiscal shift. Advanced economies will run budget deficits averaging 9% of GDP in 2009, it said, with the picture only improving gradually in subsequent years.
