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EMERGING FROM THE
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G3 Exit the Steepest Post-war Recession

In 2009, the G3 economies experienced their steepest postwar recession as GDP fell by 3.5%. The impact of the financial crisis was felt most strongly in Q1 2009 as credit constraints and heightened uncertainty following the deterioration in the labour market caused a crisis of confidence, resulting in a sharp contraction in household and business spending. Governments then rapidly implemented extraordinary fiscal and monetary policies to stabilise the financial system, ease credit conditions and support final demand.

Funding conditions improved as central bank support facilities helped mitigate counterparty credit risk concerns. The US$ 3-month LIBOR-OIS spread narrowed to 9 bps from more than 100 bps by end-March 2010, while the US commercial paper market stopped contracting. This paved the way for a turnaround in the US, the epicenter of the financial crisis, and other developed economies.

In the US, GDP has expanded by an average of 3.5% on a quarter-on-quarter seasonally-adjusted annualised rate (q-o-q SAAR) from Q3 2009 to Q1 2010. Personal consumption rose strongly over the same period, stimulated by increasing household net worth, government spending, and, as of Q1 2010, an improving labour market. Since demand seems to be stabilising, businesses have begun to replenish inventories and invest in equipment and software.

In Japan, GDP has risen at an average of 4.2% q-o-q SAAR since the economy first reverted to a positive growth path in Q2 2009. Export growth, bolstered by robust regional demand, led the recovery. Consumer spending has also held up given fiscal support, boosting business confidence in the strength of final demand. As a result, firms have begun investing after six quarters of declining investment.

The Eurozone economies have likewise benefited from the global recovery via the export channel, expanding 1.6% q-o-q SAAR in Q3 2009. Domestic demand remained tepid given high unemployment, and growth faltered in Q4 2009 and Q1 2010. Moreover, concerns over the potential default of sovereign and quasi sovereign debt began to surface towards the end of 2009 and escalated in May this year. As a result, risk premiums rose and remain elevated for the most fiscally fragile industrialised countries. In order to calm markets, a package of measures was introduced by the European governments, the European Central Bank (ECB) and the International Monetary Fund (IMF), whilst at the same time the affected countries committed themselves to fiscal consolidation plans.

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