RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB

ECONOMICS PROJECT

NAME: ANISH SINGH

ROLL NO.: 21091
SUBJECT: ECONOMICS
TOPIC: IMPACT OF GREAT RECESSION ON WORLD ECONOMY
SUBMITTED TO: DR. JASWINDER KAUR, ASSISTANT PROFESSOR OF
ECONOMICS, RGNUL, PUNJAB.
 BONAFIDE CERTIFICATE

This certificate is to declare that this project is based upon “IMPACT OF GREAT
RECESSION ON WORLD ECONOMY” and is an original work of Anish Singh, who is a
bonafide student of the Rajiv Gandhi National University of Law, Punjab.

Signature
Anish Singh
 ACKNOWLEDGEMENT

The acknowledgement of this project is owed to the constant support and guidance of people
whom I’d like to convey my sincerest regards and gratitude. Dr. Jasleen Kaur ma’am, our
Economics teacher whose constant guidance, meaningful insights and encouragement helped
me in the completion of this project. His valuable help and assistance were instrumental in
the realization of this project.

The library staff which aided me in my research for the project through the usage of the
online databases, blogs, articles and journal collection in the library.

Lastly, I would like to whole heartedly appreciate my parents and friends for their constant
encouragement and moral support which enabled me to complete my project.
 TABLE OF CONTENTS

A. COVER PAGE 1
B. BONAFIDE CERTIFICATE 2

C. ACKNOWLEDGEMENT 3
D. TABLE OF CONTENTS 4
1. INTRODUCTION 5

2. CAUSES OF THE GREAT RECESSION 6

2.1. HOUSEHOLDS 6-7
2.2. INVESTMENT BANKS 7-8

3. EFFECTS OF GREAT RECESSION

3.1. ECONOMIC EFFECTS 9
3.2. SOCIAL EFFECTS 10
3.3. HEALTH EFFECTS 10
3.4. TRADE EFFECTS 11

4. EFFECT OF GREAT RECESSION ON 12-13

COUNTRIES

5. CONCLUSION 14

E. BIBLIOGRAPHY 15
 1. INTRODUCTION

The Great Recession was a worldwide economic shutdown that wreaked havoc on the global
financial markets along with the banking and real estate industries. It originated from the
United States of America and spread to the world during late 2008. The Great Recession
began in December 2007 and ended in June 2009(18 months), making it the longest recession
after World War II. Beyond its duration, the Great Recession had severe impact on several
fronts. Real gross domestic product (GDP) fell 4.3 percent from its peak in 2007Q4 ($
15,689.5 billion) to its trough in 2009Q2 ($ 15,014.85 billion), the largest decline in the post-
war era. The unemployment rate rose by 4.5 percent as it increased from 5 percent in
December 2007 to 9.5 percent in June 2009, increasing further to reach 10 percent in October
2009.
The financial effects of the Great Recession had stark resemblance: There was a drop of
approximately 30 percent in the home prices, on average, from their mid-2006 peak to mid-
2009. This was mainly due to the secular drop in house price during 2007-2008.
The International Monetary Fund (IMF) described it as one of the worst recessions faced by
the world economy. But there was a point of difference in the term of this crisis between the
G-20 countries (around 85% of the world GDP) and the IMF. The IMF uses annual real-
world GDP per-capita value for comparing the extent of recession and decreased annual
activity, whereas the G-20 countries use the quarterly real-world GDP per-capita value for
estimating the extent of the recession.
Although the Great Recession began officially from December 2007, it showed signs from
2006 where the interest rates were reduced by US government in the real estate market.
 2. CAUSES OF THE GREAT RECESSION
There were a number of factors which caused the Great recession. According to a 2011 report
by a commission, the Great Recession was an “avoidable” disaster, caused by widespread
failures. In particular, emphasis will be laid on two sectors- households and banking.

2.1. HOUSEHOLDS

Preceding the Great Recession, there was an extraordinary housing boom in 2006 which
comprised of an extreme jump in house prices, residential building, and mortgage debt: all
were on the rise (this was because of the US government’s decision to significantly decreases
the home loan interest rates). In addition, increased securitization of mortgages allowed the
entry of shadow banks. Thereafter, these lightly regulated banks and non-banking financial
institutions, as the principal funders of mortgage-related securities, began to supplant
traditional banks. Because these shadow banks were not subject to the same limitations or
guidelines as commercial banks, the cost of mortgage financing fell.
Both the households and the banks became financially vulnerable due to the boom in housing
sector. Due to the increase in mortgage debt, the household debt-to-income increased roughly
by 16 per cent from 2004 Q1 to the start of the recession. Household asset values also
increased at almost a similar rate as the increase in mortgage debt as a result of the rapid,
significant increase in property values. The figure depicts the increase in mortgage debt
caused decrease in income levels and increase in prices of the assets. Due to the increase in
debts, the balance sheets of the household deteriorated, which in turn increased the influence
of the shadow banks. This is explained in the next section.

2.2. INVESTMENT BANKS

As a result of vulnerabilities that surfaced in the household balance sheets, analogous

vulnerabilities in the bank balance sheets surfaced as well. During the Great Recession,
shadow banks increased from intermediating less than 15% of credit in the early 1980s to
nearly 40% of credit. This increase was because these banks could do the task of providing
securitization for mortgages as well.

As highlighted by the solid line, which depicts the debt in billion $, there was a sharp
increase in the value between 2004 to the start of the Great Recession in 2008. The
investment banks, which make up a large part of the shadow banking sector boosted their real
debt levels by more than 50 percent.
This was done so as a result of borrowing in short-term credit markets to fund the rapid
growth of securitized assets. As these shadow banks were not bound by the same level of
restrictions, they did not face the capital requirements of commercial banks. In addition to
this, these banks were awarded high grades from the credit ratings organizations like
Standard & Poor’s, Moody’s and Fitch’s on the mortgage-related assets that they held and
therefore operated with much higher leverage ratios(debt/equity) than the commercial banks.
The debt level of these banks increased and the equity level was low. Due to this, during the
peak of the recession, the debt-to-asset ratio of these investment banks ranged from 20 and
25, approximately three times the level of traditional banks.
Another problem that occurred was that the increase in quantity of mortgages was
accompanied by a decline in quality. The mortgages that were issued in 2005 and 2006 at the
peak of the housing sector were highly risky. Mortgages which were labeled as risky were
divided into “sub-prime” (issued to borrowers/households with modest incomes) and “Alt-
A” (issued to people taking out second mortgages). The share of these risky mortgages
increased from 30 percent to 40 percent during the times of the Great Recession. It can be
said that these risky loans, known as sub-prime loans were the main cause behind the Great
Recession. The sub-prime loans were given to people with low-income level or dubious
streams of income. People under this category were mostly those who couldn’t get loans from
the commercial banks. This widened the market to a flood of new homebuyers.
Over the years, these investment banks began to default on the mortgages. The asset-backed
commercial paper market’s collapse resulted in the first serious leakage of financial distress
to the real sector. The decline in house prices weakened the balance sheets and subsequently
a drop in residential investment.
The commercial banking sector also came into distress as when they absorbed the investment
banks, they also absorbed the losses on securitized assets and mortgage-related assets, which
weakened their balance sheets, disrupting the flow of credit through these institutions.
 3. EFFECTS OF GREAT RECSSION

There were numerous effects of the Great Recession on the world economy, namely
economic, international trade, social, health, unemployment, travel and insurance markets.
We will emphasize on 4 factors: 1) ECONOMIC 2) SOCIAL 3) HEALTH 4) TRADE

3.1. ECONOMIC EFFECTS

 Slump in the market – Due to the bust in the housing sector, large number of
mortgage-backed securities lost significant value and there was a slump in the
market. Due to such a dip, goods and services are harder to sell as the power of the
people to make purchases is reduced by a great margin.
 Stock prices come down- During the times of Great Recession, the stock market
witnessed a significant drop in the duration of 18 months. Due to the default in
payment due to the subprime mortgage crisis and because of Congress rejecting
the Emergency Economic Stabilization Act of 2008, the crash was inevitable. As
the income and demand decreases, prices rise and debt piles up. The industrial
production takes a hit as investors defer from investing in companies which are
under the risk of facing small losses during the recession. Bigger companies are
able to hold their own but smaller companies have a rather difficult time and some
of them might even shut down during times like these.
 Increase in unemployment – The Great Recession which lasted 18 months,
pushed the unemployment rate to a peak of 10.6%. To minimize damage and keep
costs under control, people are removed from their jobs. They are unable to meet
both ends. Many goods and services, which were easily accessible earlier, are now
outside their reach. As the demand keeps plummeting, the unemployed are forced
to wait for a longer period to find new jobs.
 National debts rise– Due to increase in the housing sector, people took debts from
shadow banks. Due to these debts, government spending is affected as a large
amount of their spendings are diverted to get the companies out of their debts. The
Great Recession provided an example as banks had to depend on aid from the
State for their existence. The money collected by taxes was not being utilized for
development purposes, but rather to give these companies/ banks a boost.

3.2. SOCIAL EFFECTS

There is a profound effect on families and household. One of the most evident changes due to
the recession are the job losses and unemployment, which are linked to higher stress levels,
poorer health outcomes, a drop in children's academic achievements and educational
attainment, marriage age delays, divorces, and changes in home structure.
Another aspect of the Great Recession was that it led to a spike in the number of crimes
committed in the society. As people were removed from their jobs, they lost their sources of
income and slowly depleted all the resources. For sustenance, people are forced to throw they
hands in search of jobs. Thieves and criminals took advantage of this opportunity/ chaos and
started committing offences. The state was in tight waters as it was forced with a situation
where it had to reduce the costs and prison population. Due to this, many serious offenders
were released early and they took back to their old habits.

3.3. HEALTH EFFECTS

Economic well-being is linked to health in a variety of complex ways (Smith 1999). Much
like the time during Great Depression, Great Repression was analogous in the trend of health
effects. As people were forced to leave their jobs, an environment of stress and mental
tension crept in, where people were exposed go the risks of heart attack, stroke, high blood
pressure, diabetes, arthritis and psychiatric problems, great depression, anxiety, and loss of
sleep. People also take to habits like drinking alcohol(spurious) which is extremely
detrimental to the vital organs.
According to a study of 54 countries, there was a spike in suicide deaths as result of the
recession. There were as many as 5000 additional deaths resulting from suicide in the peak
years of the recession (2008-2009). This was mainly because as people lost their jobs, they
could not sustain their earlier lifestyles and some even went bankrupt. The stress and tension
that accumulated from these ultimately led to the cases of suicides.

3.4. TRADE EFFECTS

Impact of the Great Recession on international trade was profound. According to a report, the
total volume of trade decreased by 50% in the United States alone and the World Trade
Organization (WTO) estimated that the volume of trade fell by around 12 percent in 2009,
back to its 2006 levels. 1 As expected during a recession, the import sector took a big hit as
during 2009, the G-20 member countries-imposed import restrictions. Although the
developed countries were not impacted much, rather it was the undeveloped countries which
were hit pretty bad by the recession. The emerging economies didn’t suffer a recession,
rather, growth slowed markedly. Exception
For e.g., China, for example, saw its recorded growth slide to the 1-2 percent range over the
last half of 2008 and the first quarter of 2009, down from approaching 10 percent. 2

1
Michael Hart, Bill Dymond, The great recession and international trade, Policy Option Politiques. Available at-
https://policyoptions.irpp.org/magazines/g8g20/the-great-recession-and-international-trade/ (last accessed
on 12th April, 2022).
2
ibid.
 4. EFFECT OF GREAT RECESSION ON COUNTRIES

Although the Great Recession originated from the United States of America, it left an impact
on almost all countries. Countries like Jamaica, Argentina and Ukraine were affected
adversely.
1) JAMAICA

The impact of the 2008 Great Recession on the Caribbean (Dominica, Bahamas, Cuba, Puerto
Rico, Jamaica etc.), and specifically on the English-speaking Caribbean nations (Jamaica,
Barbados, Bahamas etc.), was graver than in the rest of Latin America. Except a few nations
like the Dominican Republic etc. which witnessed a mild slowdown from their pre-recession
growth levels, other Caribbean nations showed a strong contraction during 2009. This
profound impact on these Caribbean nations was due to the presence of United States (and
the United Kingdom to a lesser extent) as trading partner or source of FDI, tourism etc.
Factual data on economic cycles bring to light, that nations like Jamaica are likely to
reciprocate the economic activities (boon/ contraction) that occur in the US. Due to the
recession, there was a slump in demand for commodities from the Jamaica and this
significantly affected employment levels in Jamaica. Consequently, poverty levels
deteriorated. While the non-English Speaking Caribbean nations like Saint Martin,
Martinique etc. are likely to recover along with the rest of Latin American countries
(Argentina and Brazil). Recovery in Jamaica has been languid till now and will probably lag
behind. An explanation of the languid recovery in the Jamaica is attributable to the fact that
their economic cycles are not lined up with large emerging market economies like China,
India or Brazil.
Recovery could happen in the Jamaica only if it integrated its economic system with these
countries.

2) ARGENTINA

For much of the 19th and 20th century, Argentina’s economy was dominated by agribusiness
and ranching. It is still the largest grain producing country in Latin America. During the early
years of the 21st century, Argentina much like the world economy (USA, Euro Area, Japan
and Brazil) was experiencing a period of prosperity/ increased economic activity. Much like
the other regions, Argentina, after witnessing a period of boom (2003-2008), by the end of
2008 had fallen into recession. Similar effect was witnessed in another Latin American
country, Brazil. The effect of the Great Recession on the performance of Argentina and
Brazil was very profound: in 2009 Gross Domestic Product (GDP) growth in Argentina was
negative ( -5.9%), and the economic activity had dropped significantly as compared with
2008. Moreover, according to data released by ECLAC (2018), the trade balance and current
account in Argentina and Brazil had deteriorated between 2008 and 2009 due to the fact that
their most important trade partners, such as the United States and the countries of the Euro
Area, had fallen into recession. Another factor contributing to the current account deficit was
the steep reduction in commodity prices towards the end of 2008 – compared to the prices of
the 2004-2008 period– due to the Great Recession. In Argentina, exports and imports sector
were hit hard, thus, to avoid worsening of the country’s economic situation, exports were
reduced drastically while the imports suffered heavy government restrictions.

3) UNITED KINGDOM

In the United Kingdom, in the third quarter of 2008, the economy plunged into recession, as
GDP decreased for two successive quarters in a row. At the height of the recession, GDP fell
by 2.6% in a single quarter (Q1 2009) – the same percentage by which the economy
expanded during the whole of 2007. The Great Recession, in terms of lost output, was the
greatest recession since the initial publishment of quarterly data in 1955. Excluding the
recession following the Second World War, the Great Recession saw the biggest dip in actual
growth (-5.0%). The Great Recession left a deep impact on all sectors of the economy,
manufacturing and construction suffering the most. Similar dip in economic activity was seen
across the world, with numerous countries, including all of the G7 economies, falling into
recession during 2008. The G7 countries have still not been able to return to pre-recession
levels (GDP wise). The UK was in recession for a longer period than the other G7 economies
and was the last to emerge from it. However, the GDP kickbacks in Japan (8.7%), Italy
(6.9%) and Germany (6.8%) were higher than the UK’s 6.4%.

Apart from the countries mentioned above, several other countries like Ukraine, Ireland,
Japan also were adversely affected by the recession.
 5. CONCLUSION

The concluding point from the Great Recession is that such instances are a lost for the
economy of not just a particular country, but to the world as a whole in many aspects such as
high unemployment, burst in housing bubble. It leads to decrease in economy and increase in
poverty. The Great Recession also taught us that high levels of debt, borrowers' dubious
ability to repay loans, and the idea that housing prices will constantly rise fostered a false
sense of security.
For protection from further such instances, the government should introduce robust plans and
frameworks like Dodd-Frank Wall Street Reform and Consumer Protection Act and the
Emergency Economic Stabilization Act.
 BIBLIOGRAPHY

 Michael Hart, Bill Dymond, The great recession and international trade, Policy Option
Politiques. Available at- https://policyoptions.irpp.org/magazines/g8g20/the-great-
recession-and-international-trade/ (last accessed on 12th April, 2022).
 Amitabh Shukla, Top 5 major Economic Effects of Recession on Economy. Available at-
https://www.paggu.com/business/world-economy/top-5-major-economic-effects-of-
recession-on-economy/ (last accessed on 13th April, 2022).
 The Great Recession- Federal Reserve History, Federal Reserve History. Available at-
https://www.federalreservehistory.org/essays/great-recession-of-200709 (last accessed on
10th April, 2022)
 What major Financial Sector Laws followed the 2008 crisis? , Investopedia. Available at-
https://www.investopedia.com/ask/answers/063015/what-are-major-laws-acts-regulating-
financial-institutions-were-created-response-2008-financial.asp ( last accessed on 12th April,
2022).
 Grahame Allen, Recession and Recovery.