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A growing number of developed economies have fallen into a double-dip recession. Those with severe sovereign debt burdens sank even deeper into recession, with high unemployment, weak aggregate demand as well as fiscal austerity, high public debt burdens, and fragility of financial sector. All combined pushed them into a downward spiraling dynamics.
Growth of high-income economies contracted to 1.9 percent in 2014, only half the rate in the previous years. Europe continued to grow at 1.3 percent, roughly lower than that in 2010. While a more announced slowdown was recorded in Japan’s growth was 0.9 percent, continued to be in recession as a consequence of the damage caused by the earthquake, tsunami and recently of reorganizations in new policy issued by their Prime Minister Shinzo Abe. In contrast, US and UK were the only two economies which had highlighted the breakout. While US economic growth increased at 2.2 percent, UK hit the top in terms of developing rate with the highest 3.2 percent.
Meanwhile, developing economies registered stronger growth, albeit slow compared to the last 6 years. Slow growth in several major developing countries was partly due to policy tightening designed in order to curb inflationary pressure. For the developing world in general, growth decelerated from 6.0 to 5.6 percent in 2014. Developing economies in the East Asia and Pacific region achieved a rapid growth of 8.2 percent, or 7.5% excluding China (which is lower than 10.4% in 2010).
World trade rebounded strongly in 2010 after plunging by more than 10 per cent in the Great Recession of 2009. Since 2011, however, momentum of the recovery of the volume of world exports has faded out. Growth of world trade declined sharply in 2012, mainly due to weak import demand in Europe, when the region was coping with its second recession during three years, and declining aggregate demand in Japan and the United State. Consequently, developing countries and transition economies have seen demand for their exports weaken. Shrinking import demand in Europe decelerated world trade growth in 2012. ožn the grounds of the monthly trade data of different regions and countries, it could be seen that the weakening demand originating in the euro area transmitted to the rest of the world. Import demand of Greece, Italy, Portugal and Spain started to decelerate in late 2011 and decreased further during 2012, but the stagnation in trade activity has expanded further to the rest of Europe, even to France and Germany. Similarly, imports of the United States and Japan also dropped significantly in the second half of 2012. East Asian economies which are significant trade partners with the major developed countries have experienced a considerable contraction in exports. For example, the Republic of Korea, and Taiwan registered substantial drops in exports in 2012. China’s exports also declined notably. Economies, further down the global value chain, have seen demand for their energy and other primary exports weaken as well. For instance, Brazil and the Russian Federation, also registered export declines at varying degrees in the second half of 2012. Lower revenue from exports, compounded by sluggish domestic demand have also slashed GDP growth sharply in many developing countries and transition economies during 2012. This resulted in drooping import demand from these economies, intensifying slow trade of developed countries. International trade flows, at the same time, received another adverse pressure from rising international protectionism, as well as the protracted impasse in the world multilateral trade negotiations.
When the financial crisis erupted, Asian economies were perceived to be insulated from financial turmoil because their financial institutions are not exposed to much distressed markets with credit products and asset-backed securities. However, when the crisis intensified, the notion of “decoupling” for Asian economies evaporated because there are multiple transmission channels originating from globalization as well as economic integration, which can be called contagion or “domino effect”. Asian economies were also hit by the crisis when foreign demand for imports decelerated and capital fled away. Their economic growth contracted, but the magnitude of the shock that struck economies at varying degrees.
The global financial crisis in 2008 caused sharp fluctuations in GDP growth of Asian countries during the period of 2007 – 2011. Few countries in the region might keep their stability during this period. As for China and India, they have recently headed for economic slowdown. From the double –digit growth rate around 10%, China recorded 7.8% growth rate in 2012, the lowest since 2009. For India, GDP growth fell to 5.6% in 2012, down from 6.5% in 2011. This decline was largely due to lower demand for investment.
Asian economic growth, according to the International Monetary Fund (IMF), reached 6.9% in 2012. In particular, the growth rate of GDP is about 6.5% in Indonesia, Malaysia by 5.2 %, Philippines about 5.0%, Thailand 4.5%. Most stable in the case of Asia is Indonesia’s growth rate in recent 3 years 6.1% in 2010, 6.2% in 2011 and around 6.5% in 2012. Before that, even in the worst of the global economy as 2009, Indonesia’s GDP growth fell to just 4.6%. Besides, the stock market is also flourishing in recent years (the shares of the Philippines and Thailand have increased by over 25% in 2013. Securities of Indonesia raised up to 13%, higher than the 9% growth rate of MSCI Asia – Pacific). This is considered to be due to regional strong, stable growth and development.
What is more, growth in major developing economies where domestic demand is particularly important decreased much less in 2011 in comparison with growth in a number of more open economies. There are several of these major economies nevertheless experiencing a slowdown in 2011 stemming in significant part from the influences of tighter monetary policies. China and India grew by 9.2 per cent and 6.9 per cent, respectively, in 2011, compared to 10.3 per cent and 9.6 per cent in 2010. The global environment also affected sales from the large export sector of China and financing from abroad for Indian enterprises. Indonesia maintained its strong growth performance, with the economy expanding by 6.5 per cent in 2011 compared to 6.2 per cent in the previous year. The table below indicates the slowdown in growth in 2011 particularly affected the sub-regions where exports play a key role.
However, despite the deceleration in growth in 2011, Asia and the Pacific remained by far the most dynamic area in the world in terms of economic growth. As in 2013, the region was the engine of global development, growing nearly 30 per cent faster than the next-fastest-growing developing territory in the world, that is, Latin America and the Caribbean. This brought into concentration the role of Asia as the engine for global recovery.
In terms of GDP scale and domains located in Asian region, Japan, China and South Korea are the three major economies. Among them, Japan is the typical developed nation in the territory while China is the representative of the emerging markets. South Korea on the other hand is the largest economy among the Four Asian Tigers because its trading structure is 90% similar to that of Taiwan, making it our major competitor in export. As the three major economies fully represent the different types of economies in Asia, in this context, the Asian economies will be analyzed to introduce the special economic background, the effects of the global economic crisis on the three major economies, and the response measures taken.
According to the International Monetary Fund (IMP) and Economist Information Unit (EIU), a comparison of the speculative data released in April 2009 shows that Japan, China and South Korea have been subject to different levels of impacts from the global economic downturn and the speculated rebound strength also varied. It shows that Japan has sustained negative growth since 2008. Therefore, the so-called decoupling took place between Japan and European/American economy the time the subprime mortgage crises broke out. The IMF and EIU have forecasted that the economic cycle of Japan would reach the bottom in 2009 and sustain positive growth by 2010. However, the extent of economic growth will remain rather limited. The emerging markets including China will maintain positive growth in spite of the crisis. As for the “in-between” developed and developing economy of South Korea, its market is expected to reach the bottom and recover in 2009. Nevertheless, according to the latest prediction of EIU, the level of rebound is limited. The individual economic conditions, impacts of the economic crisis, and responses taken by the four major economies are described as follows:
Impact movements of 2008 Global Economic Crisis on China’s economy
The international financial recession has already left its mark on several aspects of China’s economy even though according to the official figures the negative impact is not fully reflected in the year-on-year comparison. The most visible damage so far has been inflicted on China’s export-oriented light industry in southern China. Thousands of companies have gone bankrupt, tens of thousands of employees have been laid-off and even the official statistics reveal that 10 million migrant workers have returned to their hometown.
However, despite all the consequences relating to the global economic crisis, China remains the only nation among the world’s five major economies to sustain growth in 2008 and 2009. Thus, there have been speculations internationally regarding China’s role following the outbreak of the crisis. When the U.S and Europe fell into the credit crisis earlier that year, they were forced to cut back on consumption, which fueled a massive decrease in demand for Chinese imports. China was already experiencing a economic downturn, and the lack in demand from abroad meant factory closures, resulting in high job losses all over China.
At the same time, China also still seems poised to “rescue” the West. With $1.9 trillion in foreign reserves, a $29.3 billion trade surplus, and potentially undervalued yuan, China still seems to be one of the most influential players in the world – at least from a fiscal perspective. But China became leery. Having been burned by previous sour investments, the country is cautious in handling its $200 billion of sovereign wealth funds abroad. For example, many thought the China Investment Corporation (CIC) would use some of these funds to purchase an additional stake in Morgan Stanley earlier this year; however, Japanese bank Mitsubishi UFJ Financial Group ended up financing the investment. The West is asking China for help, but representatives from China continually answer that the best strategy for China is to focus on its own internal growth.
The Chinese government is working on this in a variety of ways. In the beginning of 2008, the CIC invested money directly into Chinese banks, giving $20 billion to China Development Bank, and $47 to Agricultural Bank of China. The latter held $100 billion of bad loans and was the country’s fourth largest state-owned lender to have to be funded by the government. Then in mid-September, China’s Central Bank cut interest rates for the first time in six years; China wanted to keep inflation levels low, but it also needed to encourage lending. The Central Bank continued to cut rates throughout the remainder of the year. Just a few weeks later, the government introduced a series of tax cuts for new homeowners, lowering the property contract tax from three percent to one percent and decreasing the down payment on certain-sized homes. Perhaps the most well known “stimulus” for China was the $586 billion stimulus package unveiled in November; the package received plenty of speculation in terms of how much “good” it would do the real economy, but many find it difficult to argue with China’s desire to invest in infrastructure.
No wonder why China holds so much power in its hand, the nation’s economic strength originated from the economic reform in the 1970s. The socialistic structure of the planned economy transformed into trade and market oriented structures. In 2005, China lifted ban on foreign investors’ purchase of bank shares and adopted the liberalization policy to regulate the bond market and exchange rates particularly for Renminbi and U.S. dollar exchanges. China changed its fixed exchange rate system that has been implemented for years in July, 2005 and adopted the basket of currency method to calculate the exchange rate. With a substantial trade surplus, China relaxed control on Renminbi appreciation under pressure from other developed nations and the Renminbi appreciated 20% against the U.S. dollar at the end of 2008.
Since the economic reform, China’s GDP has tripled the reform expenditures. In terms of purchasing power parity (PPP), China is second only to the United States and its foreign reserve of US$2 trillion ranks first in the world. However, the foreign demand greatly reduced due to global economic crisis since 2008 and China’s export growth diminished. In the first quarter of 2009, China’s total exports further shrank by 20% as compared to the same period in 2008. Therefore, the economic crisis has impacted China’s economic growth through trade and the EIU has forecasted that China’s substantial GDP growth rate will be 6% for 2009. This trend of slow growth is apparent as compared to previous years.
In response to the crisis, China not only has been adopting more relaxed monetary policies, it has also engaged in fiscal expansions. In November 2008, Chinese Premier Wen Jiabao announced a stimulus plan of 4-trilion Renminbi would be mobilized to boost the economy and expand domestic demand in order to lessen China’s reliance on foreign markets.
Apparently, the global economic crisis has significantly enhanced China’s economic status in the world. In September 2008, the Central Bank of China and the Fed discussed the feasibility of offering aid to the United States to save the market. By ožctober 2008, China granted US$500 million to resolve the fiscal deficit in response to Pakistan’s demand. Meanwhile, China and Russia signed agreement to aid the Russian economy in the amount of 25 billion U.S. dollars provided that Russia supplies petroleum in the next 20 years. In November 2008 and April 2009, the G-20 Summit meeting was held in Washington DC and London and China received much international attention before and after the summit where China challenged the United States’ role as the economic superpower in the world and expressed worries for the U.S. dollar as the reserve currency. Finally, China has agreed to grant 40 billion U.S. dollars to the IMF, showing China’s desire to lead following the crisis. In other words, the meeting made it clear that China’s main contribution to international financial stability would be ensuring “steady and relatively fast growth” of its own economy.
Impact movements of 2008 Global Economic Crisis on Japan’s economy
Japan has long suffered deflation; unfortunately, just when it was slowly sustaining recovery, the global economic crisis broke out. The Central Bank of Japan’s cooling the stock market and housing in the late 80s triggered the potential risk of inflation. Since May, 1988, the tightened-monetary policy was implemented for a period of over a year; however, the government’s tightening policy caused Japan’s stock market and housing to never recover after the setback. Japan’s economic downturn since 1991 is commonly known as the economic bubble in Japan.
The financial institutions in Japan suffered the most serious setbacks when the economic bubble burst and many of them had to deal with the black hole of bad debts. From 1991 to ožctober, 1998, the total non-performing loans amounted to over US$800 billion. Moreover, Japan, the largest debtor nation in Southeast Asia, was subject to indirect impacts such as increased non-performing loans and greatly diminished export to neighboring nations in East Asia. The series of events that broke out forced Japan to implement the zero-interest-rate policy as the last resort to resuscitate the economy. It is an extreme measure adopted to cope with deflation and economic recession. As interest rate is the cost of capital, when the cost is reduced to zero, but is still unable to effectively elicit consumption or investment, the speculated yield ratio is said to be lower than the interest rate, the consumption and investment intent will remain low, and this vicious cycle will lead to an even more depressed economy.
Having experienced the dot-com bubble in 2001, the Central Government of Japan continued to implement the zero-interest-rate policy. After 2002, the export oriented Japanese economy slowly sustained recovery following economic resuscitation in Europe and Japan and the prosperous development of the emerging markets. Although the zero-interest-rate policy remained the central bank’s monetary policy, the basic loan rate and interbank call loan rate without collateral were slightly adjusted to test the market acceptance.
From 1999~2008, the low-interest Japanese ofen became investors’ asset in spread transactions. Since the third quarter of 2008, the Japanese ofen strengthened as it became a redeemable asset from spread transactions and Japan’s competitiveness in export diminished as a result. By the fourth quarter of 2008, the already low basic loan rate and call loan rate without collateral were further lowered to 0.3% and 0.103%. It was the first time in seven years for the Central Government of Japan to reduce interest rates. In terms of financial policy, the Japanese government announced the 11.7 trillion-yen economic recovery plan in August, 2008 and passed the bill on supplementary budget in December the same year. ožn March 12th, 2009, the Cabinet of Japan announced the economic growth rate for the fourth quarter of 2008 to be -4.3% as compared to the fourth quarter of 2007, making it the nation that suffered the worst economic decline in a quarter among the world’s major economies. As a large trading nation, Japan could not escape economic recession when foreign demand dropped drastically. Also, the appreciation of the Japanese ofen from short-term hedge further struck a blow on Japan’s export. In terms of domestic demand, the consumption for the fourth quarter of 2008 reduced by 0.3% as compared to the same period in 2007 and private investments shrank by 11.8%. Domestic demand expansion therefore remains the major issue at hand. The Cabinet ožffice announced that since the economic downturn posed negative impacts on the Japanese economy, Japan’s export and industrial productions significantly dropped, and greatly reduced company profits caused low investment intent, unemployment due to reduced production, and weakened consumption strength. In addition, the worsened global financial crisis, retarded economic growth globally, and stock market/foreign exchange market instability will continue to hinder Japan’s economic recovery.
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