By Mustafa Ankleshwaria (Queen of Angels Convent School)
Currently, the world is in a recession state. A recession triggered by stagnant economies. But the previous time the world went into recession can be dated back to 2008. In 2008, probably every major country felt the domino effect of the downside of globalization. Banks in the USA started to default leading to rising investor-fear and falling of the stock market and the economy.
The 2008 Financial crisis began with the real-estate bubble which was considered impenetrable. So banks started to make bonds upon the loans people had bought the loans. The people here took the advantage of the liberal loan policies and took loans for properties higher in quality and also quantity. These people who by the way were incapable of paying back their loans, defaulted. About the bonds, reputed rating agencies which are lagging indicators rated the bonds ‘AAA’ in the case of S&P or the apex one in the case of other agencies.
The financial institutions that had provided these loans started to default and some were eventually saved by massive bailout packages some shut their doors. As I said this had a domino effect because of Globalization, major markets across the globe plummeted and economies went into recession. The least affected countries were Australia, China and India. China and India were developing countries. Developing at a great pace and hence easily recovered. Australia, I believe, has a better financial structure where the government easily provides nationals with disposable money. That’s why Australia didn’t experience a recession for 28 years until 2020.
So why is 2020 so different where major economies are having negative GDP in unbelievable percentages?
Apart from this, currently the disposable income of people has also taken a hit, where consumer spending has been reduced to essential items. Demand for non-essential items/ luxury items has been deferred in most cases. So as and when demand will increase, the economy will catch on along with it. As an example of leading indicators, when agencies/ financial institutions try to predict the GDP of a country in a Fiscal Year. The majority of those after the first-quarter results have narrowed it down to negative 9-10%. Which improves from 23.9% but is not a satiating position for an economy. We can also infer that consumer spending is expected to catch on along with an increase in expenditure on non-core items. Ben Bernanke is conversant in the US Financial system. He said we could compare this situation at most to the 2008 Financial crisis not to the Great Depression of 1930’s. But if we do now, can we say that markets have become more volatile than they were in 2008. I am talking about it on a global scale. Or if stretching it can we even compare two events in different timelines as supposed to changing economic conditions?