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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