This lecture focuses on part 1 of Recent Global Economic Crisis.

1. B416: The Evolution of Global
Economies
Lecture 9: Recent Global Economic
Crisis Part 1

2. Learning Outcomes
By the end of this lecture, you should understand the following:
• Analyzes the origins, extent, and duration of the Global
Economic Crisis, which started in 2008 and took the world
virtually by complete surprise, for different parts of the world
in terms of collapsing trade flows and production levels,
declining market value, and government response.
• Analyze various sources of the Global Economic Crisis and
how global connections transferred problems from one part
of the world to another.
• Analyze the response of governments to the Global Economic
Crisis at the initial stages and the problems this created,
particularly within Europe, at later stages.
2

3. Page 3
Collapsing trade flows
• Since 1950 real world trade flows contracted year-
on-year only four times:
• 1974 to 1975 by 2.8% during the 1st oil crisis
• 1981 to 1982 by 0.3% during the 2nd oil crisis
• Nov 2000 to Dec 2001 by 7.4% during the internet
bubble
• Apr 2008 to May 2009 by 20.0% during the Global
Economic Crisis
• The Global Economic Crisis is thus by far the most
severe since the Second World War

4. Page 4
Global Economic Crisis
Real world trade flows; constant 2000 US dollar, index (2000 = 100)
0
40
80
120
160
1970 1975 1980 1985 1990 1995 2000 2005 2010
annual
data
monthly
data
21 3 4
Global Economic Crisis
2.8%
decline
0.3%
decline
7.4%
decline
20.0%
decline

5. Page 5
Duration, extent, and speed of decline
• To calculate the duration, extent, and speed of the
trade decline during the Global Economic Crisis we:
• Calculate 5-month centered moving averages (the
trade index for May 2009, say, is thus the average for
the period March 2009 – July 2009).
• Determine the pre-2009 trade volume peak (=
maximum) in the moving average.
• Rescale each series with the pre-2009 peak as base
period (=100).
• Determine the post-2007 trough (= minimum) in the
new series.
• Calculate the extent, speed (steepness), and duration
of the decline in trade volume.
• Illustrated for import volume Euro area on next slide

6. Page 6
Duration, extent, and speed of decline
Import volume Euro area
5-month moving av. (ind indices; pre-2009 peak=100)
70
80
90
100
110
2004 2005 2006 2007 2008 2009 2010 2011
peak
2008-3
2009-6
trough
duration
extent speed

7. Page 7
Timing trade volume peaks and troughs
Table 2.1 Timing of trade volume peaks and troughs in Global Economic Crisis
Pre-2009 peak Post-2007 trough
Month Import volume Export volume Month Import volume Export volume
Feb-07 USA Feb-09 Asia Asia
: : : Mar-09 Africa & ME USA
Japan
Africa & ME
Feb-08 Africa & ME Apr-09 USA
Japan
Latin America
Euro area
Mar-08 Euro area
Asia
Euro area
Japan
C&E Europe
May-09 C&E Europe
Apr-08 Jun-09 Euro area
C&E Europe
May-08 Jul-09 Latin America
Jun-08 C&E Europe
Africa & ME
USA
Asia
Jul-08
Aug-08 Latin America
Sep-08 Latin America
Oct-08 Japan

8. Page 8
USA has the first peak, real decline starts later
a. Import volume advanced economies
5-month moving av. (ind indices; pre-2009 peak=100)
60
80
100
120
2004 2005 2006 2007 2008 2009 2010 2011
2007-2
USA
Euro area
2008-3
2008-10
Japan

9. Page 9
Emerging market volume rises fast
b. Import volume emerging markets
5-month moving av. (ind indices; pre-2009 peak=100)
60
80
100
120
2004 2005 2006 2007 2008 2009 2010 2011
Asia
Africa +
Middle East
Latin America
Central
+ East
Europe2008-3
2008-8

10. Page 10
Export decline of Japan is formidable
c. Export volume advanced economies
5-month moving av. (ind indices; pre-2009 peak=100)
60
80
100
120
2004 2005 2006 2007 2008 2009 2010 2011
USA
Euro area
2008-3
2008-6
Japan

11. Page 11
Asia export rises fast and recovers quickly
d. Export volume emerging markets
5-month moving av. (ind indices; pre-2009 peak=100)
60
80
100
120
2004 2005 2006 2007 2008 2009 2010 2011
Asia
Africa +
Middle
East
Latin
America
Central
+ East
Europe
2008-2
2008-9

12. Page 12
a. Extent, duration, and speed of import volume decline during GEC
0
5
10
15
20
25
30
35
40
USA Japan Euro area Asia C&E
Europe
Latin
America
Africa & M
Eastextent duration speed
Long import decline USA, rapid decline Japan

13. Page 13
Large export decline Japan, fast decline Japan+USA
b. Extent, duration, and speed of exort volume decline during GEC
0
5
10
15
20
25
30
35
40
USA Japan Euro area Asia C&E
Europe
Latin
America
Africa & M
Eastextent duration speed

14. Page 14
2009 trade decline took OECD by surprise
OECD world trade growth projections for 2009 (% increase)
8.1 8.2 8.2 8.2
6.6 6.9 7.0 7.1
1.3 1.9 2.5
3.8
-9.2
-3.9
1.1
-32.1
-35
-30
-25
-20
-15
-10
-5
0
5
10
Quarter 1 Quarter 2 Quarter 3 Quarter 4
WEO 2007/2
WEO 2008/1
WEO 2008/2
WEO 2009/1
December 2007 forecast
June 2008 forecast
November 2008 forecast
June 2009 forecast

15. Page 15
Seeds of the Global Economic Crisis
• Housing bubble in the USA; real house prices
peaked in 2006; capital gains lead to large loans
and high spending
• Financial innovation; makes high risk subprime
mortgage loans possible; internationally traded
through bundling (securitization); rising
complexity (many firms, rebundling) leads to
incorrectly priced risk; no adequate bank
supervision
• Global imbalances of capital flows; year after year
countries are accumulating more and more assets
or more and more debt at increasing speed

16. Page 16
American houses expensive in 2005-6
USA house prices, 1975 - 2010
0
50,000
100,000
150,000
200,000
250,000
300,000
1975 1980 1985 1990 1995 2000 2005 2010
3.0
3.5
4.0
4.5
5.0
5.5
6.0
median house price (left scale)
median house price divided by median
household income (right scale)

17. Page 17
Growing global imbalances in 2004-8
Current account balance; selected countries / regions (US $ bn), 1970-2009
-161
-803
436
-900
-750
-600
-450
-300
-150
0
150
300
450
1970 1975 1980 1985 1990 1995 2000 2005 2010
USA
China
Japan
Arab world
EU

18. Page 18
From US to global problems
• Stock markets collapsed June 2007; house
prices declined; interest rates rose; people
unable to refinance their loans; further decline
house prices, etc.
• Financial innovation leads to leaks to other
parts of the world; Banks in trouble worldwide;
massive government intervention
• Financial problems affect real economy;
production falls, trade collapses, 2008-9

19. Page 19
Stock market peaked in June 2007
Dow Jones EURO STOXX broad index
0
1
1987 1992 1997 2002 2007 2012
March2000
March2003
June2007
March2009
Internet bubble
60% decline
Global
Economic
Crisis
57% decline

20. Page 20
Enormous rescue packages from FED in 2008-9
0 20 40 60 80 100
Morgan Stanley
Citigroup
Bank of America
Royal Bank of Scotland
State Street Corp
UBS
Goldman Sachs
JP Morgan Chase
Deutsche Bank
Barclays
0 20 40 60 80 100
Morgan Stanley
Citigroup
Bank of America
Royal Bank of Scotland
State Street Corp
UBS
Goldman Sachs
JP Morgan Chase
Deutsche Bank
Barclays
$bn

21. Page 21
Global industrial production and world trade volume
(centred 5-month moving average index, 2000=100)
0
50
100
150
1991 1994 1997 2000 2003 2006 2009 2012
world trade volume
global
industrial
production
2000-10
2001-10
2008-3
2009-3
Industrial production cycle coincides with trade cycle

22. Page 22
Production decline large in Japan, small in Asia
Extent, duration, and speed of industrial production decline during GEC
0
5
10
15
20
25
30
USA Japan Euro area Asia C&E
Europe
Latin
America
Africa & M
East
extent duration speed

23. Page 23
Consequences of Government response
• Governments massively support banking sector
in 2008-9
• Governments use large stimulus packages to
keep the economy going (Keynesian spending)
2009-11
• Leads to large government budget deficits
• Leads to larger government debt levels
• Governments unable to continue these spending
levels
• US depends on emerging markets for financing

24. Page 24
Small budget deficits in SE Asia, large in USA+EU
Government budget deficit (% of GDP), 2011
9.8
9.1
9.0
8.4
6.5
5.8
4.7
4.2
3.8
3.8
3.8
3.7
3.4
2.6
2.0
1.7
1.7
1.2
0 1 2 3 4 5 6 7 8 9 10
Greece
UK
USA
Japan
Spain
France
India
Euro area
Canada
Belgium
Netherlands
Italy
Austria
Australia
Philippines
China
Germany
Indonesia

25. Page 25
Large debt Japan USA+part of EU, small in SE Asia
General government gross debt (% of GDP), 2011
234
139
120
103
99
88
82
80
77
72
71
70
69
67
46
26
24
19
0 50 100 150 200 250
Japan
Greece
Italy
Belgium
USA
France
UK
Canada
Germany
Austria
India
Spain
Netherlands
Brazil
Philippines
Indonesia
Australia
China

26. Page 26
Enormous foreign reserves in China
Emerging markets; 20 largest foreign exchange reserves, mid 2011 (US $ bn)
46
49
54
63
78
94
101
119
129
134
179
249
279
288
311
334
484
508
3198
401
0 500 1000 1500 2000 2500 3000 3500
Peru
Argentina
Hungary
Philippines
Israel
Turkey
Poland
Indonesia
Mexico
Malaysia
Thailand
Singapore
Hong Kong
India
S Korea
Brazil
Taiwan
Russia
Saudi Arabia
China

27. Page 27
Most US debt held in China, Japan, and Europe
Foreign-held US government debt (US $ billion), 2011
1160
912
791
230 211
153 148 122 115
670
0
200
400
600
800
1000
1200
China Japan Europe Oil exp nat Brazil Taiw an Carribean Hong Kong Russia Other

28. Page 28
Global supply chains responsible for trade collapse?
• Baldwin & Evenett (2009, collapse global trade ..G20
report): “the two leading explanations of the sharp
contraction in trade are the widespread use of supply
chains and …”
• World Trade Organization (2009, world trade report):
“A second reason for the magnitude of recent declines
relates to the increasing presence of global supply chains
in total trade. … – goods cross many frontiers during the
production process and components in the final product
are counted every time they cross a frontier. … this effect,
whose magnitude can only be guessed at in the absence of
systematic information...”

29. Page 29
Supply chain example: hard disk drive in Thailand
Thailand
Filter Cap
Hong Kong
PCBA, Carriage, HGA,
Base, Head, Suspension
China
Singapore
Cover,
Screw,
Pivot, PC
ADP, Disc
Top Clamp
Taiwan
Cover, Disk, Screw, Seal, Ramp,
Top Clamp, Latch, Plate Case,
Label, Filter PCBA, Suspension
Japan
Base, Pivot, Spacer, VCM,
Base Card, Top Clamp, Disk
Malaysia
Damping
Plate, Coil
Support,
PCBA
Philippines
Head
Mexico
Disk, Head,
SuspensionUSA
Suspension,
VCM, PCBA
Indonesia

30. Page 30
Big euro area differences in current account balance
EU imbalances; current account balance (% of GDP)
-2.5
-3.7
-8.1
-4.2
2.7
5.1
7.2
-15 -10 -5 0 5 10
2011
2009
2008
2007
2006
2005
2004
Greece
Spain
Italy
France
Finland
Netherlands
Germany

31. Page 31
Big euro area differences in growth + unemployment
Euro area economic conditions; selected countries, 2011
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
0 5 10 15 20 25
unemployment (% of labour force)
growthrate(%)
Netherlands
Germany
Finland
France
Italy
Greece
Spain

32. Page 32
Government bond yields (%)
0
2
4
6
8
10
12
2006 2007 2008 2009 2010 2011 2012
Germany
France
Italy
Spain
Ireland
Greece
Large risk premium for fragile countries

33. Page 33
Concluding remarks on Global Economic Crisis
• Global Economic Crisis is by far largest trade collapse since
World War II
• Start in 2006-7 in US housing market; related to housing
bubble, financial innovation, global imbalances
• Massive intervention banking sector; but real sector
affected
• Production and trade decline 2008-9
• Extent and speed of decline not related to supply chains
• Stimulus packages lead to large deficits and debts
• Rapid recovery in emerging markets, slowly in ‘old world’
• New problems for old world cannot be solved in same way
• Internal tensions in Euro area (deficit, debt, growth,
unemployment) lead to continued problems in 2011-12

34. And Now…Work Outside the Lecture
Preparation
For
Padagogic
Style
Preparation
Time Budget
Individual
Task
Group Task Output Week 9 PreparationActivity
ReadChapters 30 &31 fromInternational
Econimics - 2ndEditionby Charles Van
Marrewijk,Oxford,ISBN 978-0-19-956709-6
Seminar9 30 Minutes Readabove Material + Seminarmaterial
Workshop9 1 Hour
Online CollaborationActivities relatingFinal
Assignment
2 HourLecture 9

35. End of presentation
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