Fatigue of Global Economies

The financial crisis that emanated from the U.S. Housing Bubble in 2007 had spilled deep into the Debt Market of the U.S. by late 2007. It was not until the 2nd week of Jan 2008 when the BASEL II committee submitted its report on the lurking security fears in the International credit markets that the magnitude of the financial crisis came to light. Since then the Financial crisis has engulfed all the global economies and also resulted in an economic downturn worldwide. The article aims at giving a brief overview of the key factors that underlie the fatigue the Global economies have been facing since the onset of Economic slowdown.

It was in the 2nd and 3rd week of Jan 2008 when the Global Stock Markets witnessed a bloodbath. The credit quality had severely deteriorated and the call money rate zoomed to all time highs. Crude oil prices raced to $145 per barrel within weeks. The world’s reserve currency exhibited signs of weakness and fluctuated violently in a broad range.

The jitters could be felt across the globe in China’s, India’s, Russia’s and Japan’s economy. UK had officially declared a recessionary economy by mid 2008 followed by Japan. Indian economy too suffered a setback. India’s Fiscal deficit rose to 5.5% (Central excluding state), Inflation soared to 12.44% by Aug FY08, Govt. Of India had announced 3 fiscal stimulus packages by Dec FY08 to boost the declining trade and commerce sector. Infrastructure and real estate projects were the most severely hit because of costly credit, rise in factor cost and rise in crude oil prices. The rate of projected GDP growth of 8.5% had faltered with Credit rating agencies downgrading World economies growth rate. FII and FDI inflow had dried up completely. There was so much pessimism in the economy that people resorted to only bare minimum expenses which is clearly reflected in the CPI index. IIP numbers too were dismal throughout FY2008. The WPI skyrocketed with the prices of food articles topping the charts.

 On the commodity front the prices of Gold, Silver, Iron & Steel, Nickel, Copper etc. soared to all time highs because they were considered to be the safest investment bet as against investment in equity. Manufacturing firms were left with huge stocks of raw material bought when the world economy was booming. The fall in total factor productivity and a dampened investor sentiment had completely dried up the capital formation. Firms like Bear Sterns, Lehman Bros. in the financial domain sector which had defaulted on the payments of their Structured financial instruments like Mortgage Based Securities, Collateral Debt Obligations had to file for bankruptcy in the wake of revelation of Bernard Madoff’s multi-billion dollar scam which had jolted the American economy like an earthquake of 9.0 on Richter scale would do completely devastating the investor sentiments thus putting forth the need to revise and upgrade the financial sector regulations.

In the wake of such shocking developments the World leaders pledged to come out strong and work jointly to wade of the prevalent economic and financial crisis staring in the face of the World economies at the G8 summit, BRIC’s and SCO summit along with a quick solution to the impasse at WTO talks being held at Doha.