Economic recap

This is an article I wrote to summarize a critical period in recent economic history.
An Economic Overview of 2008-09
The year 2008 was characterized by one of the most dramatic macroeconomic conditions on record. After initial expectations that the crisis would be contained to the financial sector of the leading economies of the West, its universal and global nature became evident as the year wore on. In spite of the widespread freeze of credit markets, the first half of the year was marked by a great deal of positive news for emerging markets and for key commodities, such as oil, which experienced substantial gains. The year began with signs of a modest slowdown in the US, triggered by the sub-prime woes and declining house prices as mortgage defaults soared. This depressed the dollar, which, in turn offered some prospect of improvement for the substantial US external deficit. Hopes were high that an effective policy response would serve to halt the emerging crisis; however, such expectations began to diminish as it became obvious that the original $168bn tax rebate in the US had a minimal impact beyond a short-lived stimulus. Furthermore, the all-around surge in commodity prices that saw crude oil hitting a record high in July 2008 and the subsequent inflationary pressures added to the economic pressure on the consumer.
The crisis soon entered a turbulent phase, reaching its peak in September, when increasing insolvency concerns led to emergency bailouts of several major financial institutions in the US and elsewhere. Of particular importance was the chaotic collapse of Lehman Brothers, which is now widely recognized as a major catalyst in the further deterioration of the situation. The policy responses by the US and European authorities ran into trillions of dollars of rescue packages, bank guarantees, and quantitative easing but did relatively little to boost liquidity or confidence in the world’s major economies. There was growing realization that the de-leveraging drive by financial institutions would be a long and far-reaching process; this was evident from the TED spreads (spread between a 3-month US T-bill rate and LIBOR).
The prospect of significant demand destruction ultimately reversed the prospects for commodities and the rising risk aversion changed market sentiment regarding emerging markets. Stock markets virtually across the emerging world crashed as they joined the global slide. The close of 2008 presented a grim picture of the key economies of the world in recession.
The Institute of International Finance (IIF) went as far as to predict a contraction of the global economy in 2009 by 0.4%. The US economy is expected to decline by 0.9% while the downturn will shave 2.9% off the UK GDP.
It would not be inappropriate to mention Mr. Madoff and his Ponzi scheme. Bernard Madoff was arrested on orchestrating the largest Ponzi scheme ever, potentially scoring $50 billion. The incident not only crippled Wall Street’s credibility but also showed potential leaks and inefficiencies in US regulation.
This year, 2009, is looked to with much hope and fear. Investors are asking, "Will the recession end, or will it continue?" I am certain that we will receive some positive surprises this year from the market, and perhaps the economy as a whole. The Bank of Canada lowered the overnight rate target by 0.5% to 0.5% and the Bank Rate is now 0.75%. "The Bank will continue to monitor carefully both economic and financial developments in judging to what extent further monetary stimulus will be required to achieve its 2 per cent inflation target over the medium term." (National Post) This should hopefully help the consumer find cheaper financing which should aid consumer spending.
Perhaps one of the most incredible events thus far in 2009 was the financial rally which started in early March. During the month of March, Citigroup Inc.’s share appreciated 127%, the financial sector appreciated 17% during the same period—something not entirely anticipated given how badly beaten up the stock was in 2008.
Consumer confidence in the US for the month of April so far has seen a tremendous improvement compared to the month of March. The final consumer confidence level is expected to be 30% higher than that of March (according to wwwdailycommercialnews.com), perhaps a good indicator that consumers may start spending again.