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Business News/ Opinion / Online Views/  5 years after Lehman: Crash averted, but effects of crisis linger
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5 years after Lehman: Crash averted, but effects of crisis linger

The crisis that began in September 2008 continues to cast its long shadow over the global economy

September 2008 was the month when the financial system in the developed world seized up in terror after the collapse of investment bank Lehman Brothers. Photo: Bloomberg (Bloomberg)Premium
September 2008 was the month when the financial system in the developed world seized up in terror after the collapse of investment bank Lehman Brothers. Photo: Bloomberg
(Bloomberg)

Mumbai: The world has not yet fully recovered from the earthquake that ripped through the global economy five years ago.

September 2008 was the month when the financial system in the developed world seized up in terror after the collapse of investment bank Lehman Brothers. A problem that had begun during the previous summer in a small part of the US mortgage market malignantly grew to engulf the entire Western financial system.

The crisis inevitably spread to the real economy. Most developed countries slipped into a deep recession while the emerging markets battled severe slowdowns. Unemployment shot up. The global economy was saved from utter destruction, thanks to massive stimulus policies by governments across the world. Public spending was increased to cover the shortfall in private sector demand. Interest rates were slashed—and some central banks later began to increase the monetary base after interest rates could go down no further.

A collapse was averted, but no major economy has as yet fully recovered from the effects of the crisis. The value of output in many large economies such as Germany, France and the UK is below their 2008 peaks, which means that these economies are producing less than they were five years ago in terms of US dollars, according to data from the International Monetary Fund. The US and Japan economies are only marginally larger than they were before the crisis.

The data on comparative growth rates tells us the same story. The US is now growing slightly more rapidly than it was in 2007. Japan is almost there. European countries are still expanding more slowly than they did then. It is perhaps worth pointing out that Europe has embraced premature austerity while the other two have continued to pursue stimulus policies.

The emerging markets initially seemed to have recovered quickly from the crisis. Their economies have continued to grow over the past five years. The value of output in countries such as China, India, Brazil and Russia—the original four members of the BRIC grouping—is far more than what it was in 2008. The size of the Indian economy has grown from $1.26 trillion in 2008 to $1.82 trillion in 2012, for example. It was a third of the German economy in 2008; it is now close to a half of it. The Chinese economy grew from $4.52 trillion to $8.23 trillion in the same period.

However, the rapid recovery in the emerging markets eventually lost steam for a host of reasons. China, India, Brazil and Russia are now each growing at around five-six percentage points slower compared with their respective peak growth rates before the crisis. Each of these countries is now struggling. It is significant that this could be the first year since 2007 when the developed countries will contribute more to global output growth than the developing countries will. The anticipated shift of economic power to the developing world may not have come to an end, but this is perhaps a useful reminder that economic growth is not an entitlement.

The massive global fiscal stimulus of 2009 has meant that most countries have bigger gaps in their public finances than before. The rich countries have seen their public debt shoot up as a percentage of their gross domestic product (GDP). This sharp increase in public debt has been only partially balanced by a fall in private debt. The debt data deserves attention. The roots of the financial crisis lay in the wave of leveraging that was seen in developed countries thanks to low interest rates. There has been only limited deleveraging over the past five years, with a decline in private sector leverage, but an increase in government leverage.

The debt burden in the developing world seems more tolerable in comparison. India has managed to keep its public debt burden down despite a rise in fiscal deficit because its nominal output has expanded since 2008. High inflation also helped keep debt-GDP ratios down though it led to other problems. The Chinese situation is more complicated. Its official levels of public debt are low. It provided its economy with a massive fiscal stimulus, but there are now growing fears that China has a dangerous debt pile if the borrowings of local governments as well as various special purpose vehicles are considered.

Weak public finances mean that there is not enough space for fiscal stimulus in most countries should there be another downturn. The monetary situation is more complicated. The US has signalled that it will begin to roll back its extraordinary monetary stimulus, aka quantitative easing, as its economy improves. Many developing countries such as India are under pressure to actually raise rates—tighten monetary policy—given their high inflation as well as weak currencies. Europe and Japan seem committed to further monetary stimulus.

Five years after the global economy unravelled, the situation on the ground is still worrisome despite occasional moments of euphoria in the financial markets. Economic growth is sluggish. Many rich countries have not yet recovered the ground they lost in the brutal recession after 2009. The emerging markets are currently losing economic momentum. Public finances are weak. Deleveraging is not yet complete. And then there is a toxic brew of other problems— ranging from high inflation in some countries to weak labour markets in others to unsustainable current account deficits in yet others.

The crisis that began in September 2008 continues to cast its long shadow over the global economy.

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Published: 10 Sep 2013, 11:44 PM IST
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