Recession of 2009

Downturns in economic growth rates in the United States and the United Kingdom were apparent in the early Autumn of 2008, and the intensification of the financial crash of 2008 led to a general expectation of worse to come. The resulting loss of confidence by investors and consumers was forecast to contribute further to the severity of the expected reduction in world economic growth. Subsequent news of falls in output in the United States and the United Kingdom have generated a confident expectation that the conventional criterion for a recession (output falls in two consecutive quarters) will be met in both countries. Against that background, the topic of this article is tentatively referred to as "the recession of 2008".

(for an explanation of the term "recession" see the article on recession (economics); for forecast and actual growth rates, and a summary of recent economic developments see the Addendum subpage; and for a sequential list of statistical reports and announcements see the Timelines subpage)

Background

There has been a downturn in world economic growth. In the nine months to the middle of 2008, the advanced economies have grown at an annual rate of only one per cent (compared with two and a half per cent in the previous nine months) and the growth rate of the developing economies has eased from eight per cent to seven and a half per cent. The downturn is generally attributed to a malfunctioning of the financial, housing, and commodity markets that had resulted in imbalances between supply and demand that are now in the course of correction. The sharpness of the corrections - particularly that of the financial markets, - has created shocks that have damaged the confidence of consumers and investors, and has prompted responses on their parts that seem likely to increase the severity of the downturn to the point that it is almost certain to develop into a recession.

Policy responses

A meeting of the world leaders (of the G20 group of countries) took place in Washington on 15th November. An ebook was published in advance, with the recommendations of an international group of leading financial economists.They were unanimous on the need for Governments to take urgent action to recapitalise their banks, guarantee cross-border bank claims, restructure nonperforming assets, and extend financial support for crisis countries. They need to coordinate their initiatives. They were also agreed on the need for immediate, substantial, internationally coordinated fiscal stimulus, tailored to the circumstances of each country and taken with a view toward the impact on the rest of the world. There was also unanimity on the need to augment IMF resources immediately so that the institution has adequate firepower, and on the need to strengthen existing arrangements for global governance. Several of them also argued for new approaches to the regulation of large cross-border financial institutions.

Developments

The principal developments in the Autumn of 2008 were a reduction in the availability of credit, corresponding falls in business and consumer confidence, and a sharp reduction in oil prices. In the latter half of October, stock prices recovered partially from the precipitous falls of the previous month, but there was still widespread uncertainty about the effectiveness of government measures to tackle the financial crisis. News of output falls in the United States and the United Kingdom has been accompanied in October by reports of falling consumer confidence.

Forecasts

Autumn 2008

In October 2008, the International Monetary Fund forecast that world growth would begin a slow recovery at the end of 2009, after falling from its 2007 growth rate of 5.0 per cent to 3.9 per cent in 2008 and 3.0 per cent in 2009 (the lowesr rate since 2002). .

The forecast was based on three main assumptions:

• that commodity and oil prices would stabilize, relieving pressure on inflation and giving more room for expansionary policies;

• that U.S. housing prices and activity would hit bottom next year, leading to a recovery of residential investment; and

• that the measures then being taken would prevent further deterioration of conditions in the financial system.

The "emerging and developing countries" were expected to be the main source of world growth, with a 2009 growth rate of 6.1 per cent, compared with 0.1 per cent for the United States and 0.2 per cent for Europe.

The authors added that the uncertainties were unusually great and that there were considerable downside risks.