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Confidence shredded by talk of crisis

Confidence shredded by talk of crisis
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First Published: Fri, Oct 03 2008. 11 27 PM IST

Updated: Fri, Oct 03 2008. 11 27 PM IST
In the first year of the credit crisis, the world economy didn’t fare too badly. But companies and individuals increasingly can’t find the money to borrow, and are too frightened to spend it even if they could.
It has been a long time coming. In the year before subprime mortgages started going wrong, world gross domestic product (GDP) increased by 4.7%, according to Goldman Sachs Group Inc.
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In the next 12 months, through the second quarter of 2008, growth slowed, but only to 3.9%. In the US, growth actually picked up, from 1.8% to 2.2%. The problems in the financial sector stayed there.
But US car sales fell by a shocking 27% in September. Unemployment is rising in both the US and Europe. Chinese businessmen expect much slower growth. The Barclays Capital world index of new orders is at its lowest level since 1980, pointing firmly to recessions and sharp drops in corporate profits.
What has finally gone wrong? Basically, the credit crunch has crossed the financial-real economy barrier. Banks are now pulling back on credit, and not just to other banks and investors. The latest Bank of England survey shows less lending to consumers and companies. It’s the same story almost everywhere.
Also, confidence, vital for strong growth, has been eviscerated by talk of a looming abyss. It’s hard to think about big purchases when you’re worried that bank accounts could be frozen. It’s not just credit-funded big ticket items such as cars and furniture. Fear, along with lingering high inflation has encouraged tight wallets at the supermarket and clothing stores.
So far the slowdown is probably a healthy correction after years of unbalanced growth. And the downturn still looks modest, at least by depression standards. The recession in most forecasters’ models will only last a few quarters. GDP is expected to be higher in 2009 than this year, by 1.5% in the advanced economies, according to Goldman.
Such relative economic optimism assumes a controlled contraction of credit. If the government bailout machines were to stop working, then a long and painful global recession would be hard to avoid.
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First Published: Fri, Oct 03 2008. 11 27 PM IST