A Global Issue - The Economic Recession

1 A Global Issue: Recession Introduction Recession is defined as a decline in economic performance over a given period of time. Generally, recession is a decline in economic performance for a period of more than two financial quarters (BBC News, 2008). There are different measures of economic recession such as decline in GDP, unemployment rate, business confidence among others. With the introduction of globalization countries exchange goods and services and this interaction causes spill over effects of poor economic policies from one country to another. Economic recession is a bad economic condition which should be discouraged by government leaders. In this paper I will discuss the most recent economic recession experienced by global economies. To narrow my discussion, I will focus my topic to the economy of New Zealand whereby I will explain the effects of the recession on the economy of New Zealand. Later I will explain measures put in place by the government to reduce the recession.

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2 Causes of the global economic recession of the 2008/2009 The global economic recession experienced in 2008 and 2009 was as a result of poor banking policies adopted in the United States. The federal government implemented a policy of deregulating sub-prime mortgages in the country leading to massive investment in the policies. Many investors borrowed money from banks to purchase sub-prime mortgage policies. By definition, sub-prime mortgage are policies with a high risk of default. The heavy investment in these policies caused an economic bubble which burst in 2007 leading to huge losses by the banking industry and the mortgage industry. As a result of the increasing rate of inflation as well as the rising oil prices in the global markets, many sub-prime borrowers were unable to repay their mortgage loans (Organization for Economic Cooperation and Development OECD, 2010).

Massive default in the mortgage policies caused bankruptcy in many banks and this led to a national crisis. All other sectors of the industry were affected and because the economy of the United States connects other world economies, spillover effects were experienced in other countries. Global trade reduced by great margins leading to a world economic recession (Organization for Economic Cooperation and Development OECD, 2010). After the recession, many international organizations such as the World Bank and WTO intervened to improve trade and help governments restore their economies. In 2009 most of countries in the world started to recover from the recession. It is expected that most countries will have recovered completely from the recession in 2011.

Impact of global economic recession in New Zealand The effect of the global economic recession started to be experienced in New Zealand in 2008 when the economy started to perform poorly. More than 5 percent

3 decline in the real GDP in the countries of the Organization for Economic Cooperation and Development (OECD) was experienced over the four quarters of the year 2008. In the OECD the economic recession of 2008 was the largest since the great depression. The recession was experienced in two consecutive years 2008/2009. In New Zealand the recession started in the March 2008 quarter.

Between the December 2007 quarter to March 2008 quarter, the economy declined by 3.3 percent and this was the greatest drop in economic performance in the history of New Zealand (The Treasury, 2010). However, the country never experienced the worst economic recession because there was a sound financial system which supported the economy during this turbulent period as compared to other OECD nations.

Source: The Treasury (2010) The banking industry was adversely affected by the economic recession of the 2008/2009 in New Zealand. The lending capacity of most banks was reduced such that there were no funds available to lend to the general public. Many banks collapsed while the remaining banks had no lending capacity. Credit availability was reduced and investors could not obtain loan from banks. As a result all other sectors of the economy were affected because the banking sector is a link to all other

4 sectors of the economy (Braddock, 2008). The profitability in the banking industry reduced by great margins during the recession and this caused low investor confidence. Investment levels, both domestic and direct foreign investment, reduced leading to retarded economic growth. It is well known that investor confidence reduces during recession therefore, during the 2008/2009 recession most of investors feared investing in most of the industries.

The labour market was the worst hit by the economic recession. Generally, in OECD countries unemployment was reported to have declined by from 5.7 percent to 8.6 percent from 2008 to 2009. This resulted to approximately 15 million people being unemployed in the OECD nations. New Zealand experienced an increase in unemployment rate from 3 percent to 6.5 percent by September 2009. Compared to other previous recessions of 1991 and 1998, the unemployment rate was the lowest (unemployment rate in 1991 was 11.2 percent and 7.9 percent in 1998) (The Treasury, 2010). The global recession caused reduction in trade leading to decline in the opportunities for employment in New Zealand. The overall effect was massive unemployment in most industries in the country. It is a general economic concept that when the rate of unemployment increases the income level of the people decline leading to high poverty levels.

High rates of inflation were experienced in New Zealand during the recession.

Inflation is the persistent and continuous increase in the prices of products over a given period of time. Inflation during an economic recession is a common happening and this reduces the purchasing power of consumers in the economy. The living standards of most people in New Zealand reduced during the 2008/2009 economic recession. The food prices in the country escalated and many people were affected by hunger making them economically unproductive (Braddock, 2008).

5 The economic recession affected trade in the country such that imports exceeded the imports. The government had to import a lot of food products to feed the large number of hungry citizens, poverty levels were high and there was need to increase production in the economy to create more opportunities for employment.

New Zealand experienced a trade deficit during the recession causing low GDP during this period. Production in almost all sectors of the economy was reduced leading to adverse effects on the level of output of industries in the country. The government had to intervene by establishing economic policies which would favour trade within the country and with other countries. To enhance trade the government had to use both fiscal and monetary tools to bring back the economy to normal (International Monetary Fund, 2010).

Possible responses to the changes caused by the recession In late 2009 the economy of New Zealand started to recover after the government employed both fiscal and monetary policies. However, the rate of unemployment was still high during this period and a lot of investment was required to reduce the rate to sustainable levels. To reduce the impacts of the economic recession, the government of New Zealand liaised with global organizations such as IMF and World Bank to fund projects which would improve the economy. To improve trade, the government has established partnerships with other countries to increase the amount of products traded in the international market. The WTO has also intervened by removing most of the barriers to trade which had been established by governments as a measure to curb the spill-over effects of the recession. The government has borrowed a lot of funds to recover from the recession. To finance the trade deficit the country had, the government had to borrow from IMF to finance

6 some projects which would improve the economic performance (International Monetary Fund, 2010).

Conclusion Economic recession is a period of reduced economic performance when all sectors are affected. New Zealand was adversely affected by the recession in 2008 and 2009 but by the beginning of 2010 the economy had started to regain. The banking industry was the worst hit by the recession which led to reduction in performance of all other sectors of the economy in the global scene. High rates of unemployment, inflation and other adverse effects of recession were experienced in New Zealand and other countries in the world. Sound financial policies should be developed by the government to enhance economic stability even during turbulent seasons.

7 References BBC News (2008). New Zealand falls into recession. Retrieved 22 October 2010 from; http://news.bbc.co.uk/2/hi/7637143.stm Braddock, J. (2008). New Zealand economy sliding into recession. Retrieved 22 Oct. 2010 from http://www.wsws.org/articles/2008/mar2008/newz-m24.shtml International Monetary Fund (2010). New Zealand: 2009 Article IV Consultation Organization for Economic Cooperation and Development OECD (2010). OECD Economic Surveys: United States 2010. OECD Publishing. ISBN 9264083286, 9789264083288.

The Treasury (2010). Special Topic: Recession and recovery in the OECD. Retrieved 22 Oct., 2010 from http://www.treasury.govt.nz/economy/mei/jan10/03.htm