The 2008 Crisis (Great Recession)
Widening shadow of recession, government stimulus, plunging stock markets, and Fed interest cuts, all these activities around the world are beginning to feel a lot like 2008 again. The financial crises of 2008-2009 were the worst of its kind since the 1930’s great depression.
It started in September 2008, when many large financial firms in the US collapsed, went under conservatorship, or merged. There are a number of reasons resulting in these crises. The primary reason was deregulation in the Financial Industry. That permitted banks to engage themselves in hedge fund trading with derivatives. Then, the bank started to demand more mortgages to support the profitable sale of these derivatives. They created interest-only loans that were affordable to subprime borrowers.
Back then, economies declined in half of all countries in the world. Banks across the globe incurred huge losses; key businesses failed, millions lost their jobs, and consumer wealth declined. According to the US National Bureau of Economic Research, the recession extended over 18 months, i.e., from December 2007 and ended in June 2009.
The 2020 Crisis Due To COVID-19
The Coronavirus outbreak has raised questions that the world could end up in a much-dreaded recession. With the global economy already on the back foot due to US-China trade wars, all-around sluggishness, and more since the last couple of years, The Pandemic now has ensured big tumble this year. The UN Conference on Trade and Development said that the global growth could fall below 2% this year while Moody’s revised its global GDP project to 2.1%. A Dutch Multinational Banking and Financing Company, Rabobank, put it at 1.6%. “A global recession is now all but certain,” Rabobank declared on Tuesday.
But, as most of us would be thinking that India is already in choke-hold of a recession, the fact is we are wrong. An economy is told to be in recession only if it has two-quarters of decline, i.e., growth rate below 0%. So far, India has only been in ‘Slowdown’ mode. Our growth rate, which was as high as 7-8%, is slowing down to 4%. But, are we prepared enough for the virus aftermath like we were back then in 2008?
India In 2008
The impact of the great recession on the Indian economy was less severe because of lower dependency on export markets and the fact that a considerable contribution to GDP was from domestic contribution. Since 1991, India’s trade reforms have moved towards a neutral regime for imports and exports, eschewing tax and the other incentives for exports.
The input of crises in the financial sector was primarily because of exposure to the toxic financial assets and the linkages with the money and foreign exchange markets. Indian banks had minimal exposure to the US mortgage market, and the failed and stressed international financial institutions. While export was robust until 2008 August, it declined in September and became negative from October 2008 to July 2009. The rupee also depreciated by 21.2% against the US dollar. Credit and Money markets were affected indirectly through the dynamic linkages.
Despite these developments, the macro-economical impact of the GDP, in particular, was relatively muted because of the overall strength of domestic demand in India and the predominantly domestic nature of investment financing.
India In 2020
Hospitality, Aviation, Restaurant, Tourism, and Transport Businesses are in trouble as India braces up for the third stage of the intense corona outbreak. While Indian aviation sectors projected to report losses in excess of Rs. 8200 crore, hospitality will indicate damage of around Rs. 30,000 crores in revenue in the coming quarter. The NRAI (National Restaurants Association of India) has notified that even 10-20% of job losses among its 7.3 million employees would mean up to 15 lakh unemployed.
Amidst all this, Apex Industry association CII has sought Rs. 2 lakh crore to be pumped into the Indian economy as a stimulus to ride over the COVID-19 crises. The pandemic has come at an inconvenient time for the Indian economy as our quarterly GDP growth rate is at 4.7%, a multi-year low. RBI Governor Shaktikanta Das, in a press conference, admitted that India is not immune to the pandemic and could face slowdowns. The pandemic has even raised questions on the economic health of the coming financial year.
The Crux
The impacts of the Coronavirus outbreak on the global economy are reviving memories of the 2008 crises, The Great Recession. While the number of cases around the world is not precise, the economic upheaval due to the outbreak will likely not be as long-lasting or damaging as the historical downturn of 2008-09.
Gus Faucher, Chief Economist of PNC Financial Services Group, said: ” A recession is not inevitable.”
He added, “If we do get a recession, it is likely to be brief and much less severe than the great recession.” To support this statement, one thing is evident that the 2008 crisis resulted from years of deeply rooted weak pillars in the economy but, that’s not the case now. What we are experiencing right now is caused by something external to the economy.”It’s more like a natural disaster,” said Kathy Bostjancic, Director of US Macro Investor Services.