Global Economic Issues

Global Impact

One thing is certain; the global financial crisis of 2007-2009 did not affect all countries equally. We will look at some of the problems experienced by very small countries later in this section of the website. For now, we will consider the impact on just two: The USA and Australia.

The USA

The US economy suffered during the crisis The crisis started in the USA, and there is no doubt that the economic impact was dramatic in that country. In the last quarter of 2008, GDP declined by 6%. At first this might seem like a small number; the reality is that a 6% decline is devastating. Given the size of the US economy, this actually represents a fall of many billions of dollars. At the same time, the unemployment rate increased to 10.2%. This is the largest rate that has been recorded in the USA since the early 1980s; it suggests that the number of unemployed people doubled as a result of the economic crisis. The value of the sharemarket fell by nearly 45% during 2008, and the average American lost around 25% of their total wealth.

To overcome this problem, the US government decided that it would be necessary to try to stimulate the economy with extra spending by the government. According to CNN, the US government has committed to spend an extra $11 trillion to get the US economy going again. There were also a number of regulatory changes, and the Federal Reserve (which operates independently of the US government) acted to inject almost $4 trillion into the economy as well.

Despite this, many well known financial companies either failed, or were bailed out by the government during the crisis. The most well known failure was Lehman Brothers. This was the largest corporate collapse in history. When they filed for bankruptcy in September 2008, the bank had debts of over $768 billion. In an effort to avoid a repeat of this situation, the US government decided that it would be better to provide assistance to firms approaching similar situations. Combined, Fannie Mae and Freddie Mac cover almost 50% of existing US mortgages (around $12 trillion worth). When their stock values plummeted and confidence in the firms fell, the government effectively took control of these organisations through the Federal Housing Finance Agency.

With falling growth, an increase in the unemployment rate, a collapse in the sharemarket and terrible conditions for financial firms, it is fair to say that the crisis of 2007-2009 had a dramatic effect on living standards for people in the United States.

Australia

The Australian economy performed well during this period Via contagion the economic crisis quickly spread from the USA to the rest of the world. In the last quarter of 2008 the Australian economy contracted, and many expected that we would quickly move into recession as well. The sharemarket had peaked at around 6,700 (according to the S&P Index) during 2007, but by the end of 2008 the figure was below 4,000. By March 2009 this figure would fall to around 3,400. The government was warning us to brace for “the most challenging economic times since the great depression”, and quietly announced a budget deficit of almost $60 billion for 2009/10 (the largest budget deficit ever announced in Australia). At the same time, public debt increased in order to pay for the expected future deficits. In fact, the Australian government moved from being a net lender, to expecting a debt of almost $200 billion.

As it happens, things didn’t end up being quite as bad as we were all expecting. Economic growth returned in the first quarter of 2009, and although the figure was very small this still meant that we avoided a technical recession. Although both the IMF and the government had warned us to expect unemployment of between 8% and 10%, by the end of 2009 the figure had not reached 6%. Importantly, the sharemarket increased by over 30% during 2009, which suggests that at that time people expected companies to return to being profitable. Although the budget remained in deficit, it was not nearly as large as the government had predicted in May 2009.

Although it is rarely discussed, it is significant that the participation rate did not fall during the crisis. This suggests that in Australia people did not become discouraged enough to stop seeking work. As a result, the probability of an increase in the unemployment rate after the crisis was reduced.

In other words, the global financial crisis of 2007-2009 was not nearly as bad in Australia as it was in the rest of the world. There are many reasons for this, some of which will be explored in more detail later. The government responded quickly with a strong stimulus package, the Reserve Bank cut interest rates dramatically in a very short period of time, and close trading ties with China helped us to ensure that demand for our products remained strong even when demand from the USA declined. Combined, these factors helped to ensure that the Australian economy remained one of the most resilient during this period.

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