In 2008, we see US$ 17 trillion (i.e. $17,000,000,000,000) wiped out from the stock markets worldwide as reported by Standard & Poor (S&P). Many investors saw their equity investments reduced by more than half in just one year.
There were extreme fears when the liquidity seized up after the Lehman Brothers Inc. collapse in September 15. Banks were not lending to businesses since they were busy trying to prevent a run on banks because of poor balance sheets. Governments had to come in to bail out their own domestic banks or nationalise some to prevent a collapse. Some took the unprecedented measures of guaranteeing customer deposits placed with banks so as to maintain confidence.
The lending of money to facilitate commerce and trade also took a hit. Banks did not want to lend or issue letter of credits on fear that these may lead to bad debts. Because international trade still relies on US dollars and the sudden reduction of US dollars in circulation worldwide, the trade was curtailed in the fourth quarter. This reduced demand for goods and services worldwide. The real economy of major economies including Singapore then headed south.
The central governments started to cut their borrowing rates and pump liquidity into the financial systems in order to keep money moving in the system in 2008. Federal Reserve Board (FED) cut its overnight federal funds rate to virtually zero (at range of zero to 0.25%) on 16 December 2008.
This was 2008. How will it be like this year?
The world has moved from denial to realisation that their economies are in recession. There is no doubt about it. US President-elect Barack Obama is working to win Congress’ approval to pump US$800 billion by way of tax-cuts and fiscal spending after he gets sworn in on 20 January. This stimulus package comes at a price – budget deficit for the US government, which future generations of US will have to bear.
Singapore had a poor showing in GDP number in 2008, growing at 1.5% over 2007. GDP growth was forecasted to be in the range of -2.0% to 1.0% for 2009. The Ministry of Manpower and the labour union had warned of employee layoffs after the Chinese New Year. This is grim.
The optimist will say that the recession will bite deeper during the first half of the year before we can see light at the end of the tunnel. It will also depend on how the US, the world’s largest economy, will perform after the stimulus package. The pessimist on the other hand does not see a recovery in 2009.
The good news is that the world is more co-ordinated in their response to this global crisis. The severe liquidity problem of 2008 was being tackled in the first phase of the financial crisis. The excesses of major banks and investment banks were dealt with by US Treasury and by lost of values of these institutions, though there could still be unknowns in the financial markets. As governments turned towards tackling the real economies in this second phase of crisis, we can only look towards hope that the economies have to bottom out first before growing again. The question is how prolonged is this recession. Could it be before 2009 ends?
Written on 1/7/2009 4:01 PM
Copyright © 2009, the author known as LKT in Singapore.
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