Downfall of Seven Largest Economies in 2008
by Alesya Parshina
In 2008, a global economic crisis was suggested by several important indicators of economic downturn worldwide: high commodity prices, inflation and unemployment.
HIGH COMMODITY PRICES - high oil prices, which led to both high food prices (due to a dependence of food production on petroleum, as well as using food crop products such as ethanol and biodiesel as an alternative to petroleum) and global inflation. In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. By July the price of oil reached as high as $147 a barrel.
INFLATION - In February 2008, Reuters reported that global inflation was at historic levels: “Excess money supply around the globe, monetary easing by the Fed , easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets,” have been named as possible reasons for the inflation.
UNEMPLOYMENT - The International Labor Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in “construction and real estate, financial services, and auto sector” - bringing world unemployment above 200 million for the first time.
See some country figures:
Canada
In 2008 Canada’s GDP decreased by 0.1% due to decline in:
1. mining oil and gas industry - 1.2%
2. automobile production - 3.6%
3. Construction output in Canada - 0.4%
4. Utilities - 1.3 %
5. Farms production - 0.9 % less.
In the first quarter of 2008 Canada’s economy shrank by 0.3% and the Bank of Canada said second quarter growth would likely be less than 0.8% projected.
European Union
In the euro zone as a whole, industrial production fell 1.9% the sharpest decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8% compared with a year earlier. Retail sales fell by 0.6% in June from the May level and by 3.1% from June in the previous year. Germany was the only country out of the four biggest economies in the euro zone to register an increase of activity in July though the increase was sharply down. Economic analysts said the decline would raise the risk of the euro zone entering a recession in 2008. In the second quarter, the euro zone’s economy was reported to have declined by 0.2 %. The economy declined again in the third quarter putting the euro zone in a recession.
China
If all other countries of the 7 largest economies in the world by GDP stay in recession, only China would avoid a recession in 2008. In the year to the third quarter of 2008 China grew by 9.7% but experts say it will drop to 8.5% in 2009. On November 9, 2008 China announced a package of capital spending plus income and consumption support measures. 4 trillion Yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.
Market downturn Fall 2008
As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year. The Dow Jones Industrial Average had fallen about 37% since January 2008.
Countries which experienced recession in 2008
- First quarter of 2008 - Denmark and Iceland went into recession but came out again in the second quarter.
- Second quarter of 2008 - Estonia, Latvia, Ireland and New Zealand
- Third quarter of 2008 - Japan, Hong Kong, Singapore, Italy and Germany. Also the fifteen nations in the European Union that use the euro went into recession in the third quarter.
- Fourth quarter of 2008 - United States, Britain, France and Sweden all are expected to go into recession.
When all seven largest countries in the world by GDP stay in recession, only China avoided a recession in 2008. In the year to the third quarter of 2008 China grew by 9%.
What about Georgia?
January 4th, 2009 at 1:59 pm
Two major factros have influenced on the financial stability of Georgia - Global financial crisis and Russian aggression.
- Global financial crisis. Quick economic development of the past years was attributed to the growth of foreign investment. The investment was coming mainly from the countries which suffered downfall as a result of the crisis. Accordingly, it is presumed that the amount of investment will be decreased in 2009 that will hinder the economic development of Georgia.
- Russian aggression. The aggression undoubtedly have negative effect on economy. It has decreased the trust of investors. And as I have mentioned above, foreign investment was the primary reason for the economic progress, which is seriously diminished now.
However, we should not forget the financial aid (almost EUR 5 billion) and political support that was given by EU and the USA. It is to support the sustainable development of the country and reduce the negative effects of the war.
Georgia’s economy is not strong enough to reach independently the results that was done by China (9% growth) during the global financial crisis. However, I consider that the foreign support and wise economic policy can reduce the negative effects of the global crisis in Georgia.
January 6th, 2009 at 2:06 pm
Well, the major problems in Georgian economy has been caused not by the world economic crizes but by the war. I agree with Giorgi that Georgian economic growth was lead by foriegn investment, however I believe that after the war, as Georgia become very unstable country in the eyes of investors, the investment would be still reduced. Stability is the corner stone for the investment and after the war Georgia become very unstable. It has lost the trust among the investors and as various researches showed, many investmetors left the country due to the war. about 75% of Georgian companies have been very badly impacted because of the war and their profit shranked by 33%. World bank predicted that for 2009 as a result of war, Georgia will lose hundred thousand jobs.
I belive that if the war would not happen Georgian economy would be in better shape than it is right now. Georgia is not a oil rich country and oil prices dropped which is good for Georgian buisnesses and ordinary consumers. Also, constractive material prices dropped by 3 times, which would also be good as most of the materials Georgian companies use are imported. If we would use the money spent for war and armament, we could cut more taxes which means more incentives to buisnnesses to grow…
As a conclusion I think that does not matter the crizes would happen or not, Georgian economy would still have problems because of the devastatening war. The crizes only worstened the situation a little.
January 10th, 2009 at 9:37 pm
You might be interested to see Business Optimism Study performed by IFC Georgia Business Enabling Environment Project after the August events. They interviewed managers and owners of around 400 companies in Georgia and studied immediate impact of the conflict on businesses as well as their expectations. They argue that the impact was much lighter than is believed, and businesses are much more optimistic than expected. If anyone is interested to read the survey, please write me and I will send it to you.
January 14th, 2009 at 11:39 am
I agree with Andria, Russian aggression has more devastating affect on Georgian economy than the current crisis, our country’s reputation damaged seriously, foreign investors drop their businesses, several projects which costs millions, were reserved. Another “unwillingly” fact was dramatically increasing of US dollar exchange rate, this king of fluctuations in one day is a sign of instability…so in 2009 Georgia will not be attractive country for foreign investors…
Strong recession will continue, but if our government makes appropriate correct steps to improve the economic situation, if foreign millions are spent correctly and more incentives create for businessmen the economic downturn will be eased.
January 15th, 2009 at 11:14 am
I agree with dato, by letting lari to decrese so fast in exchange with dollar last year when lexchange rate changed by about 20 tetri in a day, was a big mistake in Georgian monetary policy as it caused many unplanned and unforeseable changes for buisnesses and even for ussual consumers…
I think that lari decline was unavoidable and the first reason of this is import and export data in Georgia. Last year Georgian export was $1424,8 million and import was $ 5596,3 milllion, which means. When looking at this kind of data you don’t have to be an economist to understand that the country has a “trade deficit” which means that theere is a big chance the currency of that country will not be stabile. Actually one of the causeing factors of the economic crises is when import is higher than export but the crises may not occur if the country can find other ways of finance such as foriegn aid, investment and etc.
Before the war when lari value was increasing was caused by huge investment and foriegn aid which of course brought a lot of foriegn currencies in our country but after war there were two factors why lari has decreased, investment stoped because of unstability caused by the war and money spent for war (including for recover damages) also caused the lari real and nominal inflation.
January 16th, 2009 at 12:20 pm
I agree with George Sarajishvili who said that two major factors had influence on financial stability of Georgia, those are: (1) Global Financial Crisis and (2) Russia – Georgia Conflict.
Through 2003 – 2008 Georgia has been experiencing economic growth and prosperities opening in front of Georgia. Investment inflow into the country has been significantly growing from the year to year, however local production has not. The fact causes trade deficit that is unfortunately quite significant, Georgian export estimates approximately 25% of import.
Effect of financial crisis is felt worldwide and Georgia is not an exception. Due to lack of financial resources banks have started dropping their credit portfolios from summer 2008 and by July have refused to expend credits to construction development companies. Only some of construction development companies were able to get a credit from banks (case the company is VIP client of the bank). Since Russia – Georgia conflict very few credits are extended, banks analyze very attentively each project.
As construction development companies report they have been experiencing significant declines in sales even before the conflict, the conflict has just facilitated the decline. Construction developers think that even if the conflict would not happen still they would come to the point where they are now, but a bit later.
The US-Georgia Business Summit and Trade Mission that took place in Georgia in October 27, 2008 showed that Georgia has not completely lost the trust of foreign investors. OPIC announced $176 million in new project financing for Georgia. TBC and BOG have received $ 40 million each, Park Hyatt Tbilisi $30 million, GMT Real Estate $40 million, GMT Mtatsminda $10 million, Sante GMT Products $10 million and SB Iberia $6.3 million. This proves that Georgia has potential for further growth. The reforms that took place in Georgia through 2003 - 2008 make Georgia attractive for foreign investment.
I think that one of the essential pillars that would facilitate economic growth of Georgia is launch of local production that would facilitate employment and export growth.
January 16th, 2009 at 12:55 pm
It is hard not to agree with you. Of course the key to success lies in the local production for Georgia. The new trade agreement with USA and the EU is the great chance for us. It will attract foreign investors whose countries do not have such privileges’ with them. They will move their production to Georgia. All we need is just not to hamper their activity here, which is sometimes the most problematic thing for us. Besides, we have lots of unique agricultural and industrial products. Demand on them in western countries is growing year by year.
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