Wednesday, April 1, 2009

Hello Anthony! Welcome to my blog! /Sofia Gustafsson

Tuesday, September 2, 2008

"The Crystal Ball"

Recession occurs when there is a fall in economic growth for two consecutive quarters.
This can be seen in stock markets, employment, consumer behaviour which are evidence for a gentle recession.

In previous recessions when consumer spending have decreased the recession have been more serious.
This is easily presented in today’s recession looking at US consumer spending. US has a tradition of high spending amongst the population but today consumers tend to spend less.
Another evidence for recession is that the state and government also starts to cut back on costs and spending which is an effect of declining tax revenue. This is important to consider because state and local government represents 11 % of the GDP.

US is one of the developed economies that has and will suffer most. This is because of its particularly change of behaviour in consumer spending because they have a tradition of spending which in the crisis has decreased.
Also you can see a trend of foreign investors cutting back their investments in the dollar and other US assets.
This will of course have an impact on the economy of US which is affecting stock prices, bond are rising which would increase mortgage rates and effect the already trying housing market.

UK is also one of the developed economies that will suffer most of the crisis. Sources says UK will enter recession during the second half of this year.
Organisation for Economic Co-operation and Development (OECD) has predicted that the economy will be shrink by 0.3 % in the third quarter, and by 0.4% in the fourth.

Other developed economies that are likely to be affected are Japan, Germany, France, Italy and Canada.
The reason why these developed economies will suffer the most is because of international trade and therefore they are affected noticeable.
The financial condition has a negative impact on these developed economies because of lower supply of credit and increases in prices.

A developed economy that will suffer least I think is Australia.
Evan tough Australia’s annual economic growth has slowed they are more safe than UK, US, Japan, Germany, France, Italy and Canada are from suffering from the crisis.

This is because of lately the Australian dollar has fallen from being parity with US dollar now Australian dollar can buy US dollar for about US80c-US85.4c.
Australia is gaining on travellers visiting their country. Also exporters benefits from the currency’s fall.
Of course there are always two sides of the story. Australia is not totally immune to entering recession, I don’t think any body is completely safe.
But in comparison to other developed economies they are in better place thanks to its currency and will therefore suffer less.

Most economists believe the recession will have a short downturn and only lasting two or three quarters more but of course you never know.
If looking at unemployment for example it is higher than during previous recessions. Economists prevents that unemployment might increase to 7.5% by the beginning of 2009.
This is because during the recession in 1980`s and during the depression social help like unemployment benefit funds were not existing in the same extent like today. People doesn’t suffer too much from unemployment today.
Another reasons to believe the recession is here to stay is the reports of the world’s banks are presenting on the economic pullback.
Because of the losses in the sub prime loans they are not able to provide companies and consumers with large loans.
So buy lowering the interest rates which was one of the resolutions of recovery from 1980`s recession may not work in this case because in today’s recession it is hard to get a loan to help the business or consumer to start spending again.
So how this recession will end have to be in another way.

I believe the recession has to have an end in 2009, as the US dollar is getting stronger the economical situation will become stronger too.
Also I think there is an psychological factor that plays a part in the recession.
People had less confidence in the banks which and consumption fell.
The media played its part by constantly informing about the recession it might have been drawn out of proportion. The banks need to regain the confidence of the people and consumption will increase and recession will end.
Other reasons for ending the recession can be the change of president in US that can cause changes in the economic situation.

Tuesday, August 26, 2008

Week 3

The US subprime loan crisis has without doubt effected the global economic situation and I think emerging economics will not be excluded.
Just looking the past of emerging economical crisis in connection with developed economies. For instant the Washington Consensus has been blamed for Argentina’s economic crisis (1999-2002) and also other economic crisis in South America.
Weather they want it or not developed economics crisis cant avoid influence emerging economies.
As US is the world largest importer this has a great impact on worlds exporter which most of them are in emerging countries The US subprime loan crisis reduced the famous American habit to consume.
The consumers became more aware of what they wanted and valued so the market for products with a multi-task function increased. So demand for these types of products increased and this means that in the future emerging economies that export goods to US will have a bigger challenge to fulfil the needs and demand of the Americans. This of course costs money and can be difficult for example an Mexican exporter meet these needs of the consumer.

Positive effects for emerging economies can be the manufactures cost. In a period of economical crisis cost is highly emphasized and to keep these cost down is number one for a manufactory. Manufactories located in countries with developed economies can change their destination for producing to an emerging a country with less costs and a win-win situation for both countries is created.

Looking at over-all impact of sub-prime crisis it is effecting developed economies but emerging economies are particularly sensible. This can be seen if capital flows goes down future investments in emerging countries will be effected.
When developed countries invests in emerging countries investments they get financial help to achieve a certain project. But after the US subprime crisis had an huge effect on the worlds banks there are no money to finance the emerging economies. This can have a negative effect to these countries economies. If they once used to import goods no they might not be able to.

In other hand Americas importance as an global engine can be seen as exaggerated. They have dropped from 19% to 14% in share of worlds imports since 2000. Studies shows that demand within the emerging economies has increased and in China and India added to more to global GDP growth than in America.
The recovery for developed economies I think can be these new giants in the emerged economies that not only will boost growth but also shift relative prices like in oil and the price of the dollar for example. This could mean less desirable consequences for developed economies like US.
I think because emerging economies has the capacity to grow faster and therefore are gaining on Americas recession.
Looking at the stock markets of emerging economics showing that they have climbed steeply.
There is always two sides to a story but in the overall picture I believe the emerging countries gains on the recession of developed economies which keeps the recession alive.

Sofia Gustafsson

Tuesday, August 19, 2008

Macro Economics week 2

The U.S real estate crisis had a huge global effect, there is no doubt about it. But the question is how this could happen?
The crisis hit stock markets and stocks around the world started to sink. The president of ECB Jean-Claude Trichet urged investors to keep cool to prevent world’s banks running out of cash.
This was easier said than done. ECB, the U.S Federal Reserve and Japan´s central bank injected billions of euros to help banks from bankruptcy. This was the largest amount of money injected since the terrorist attacks of September 11, 2001.
This caused more nervousness on the markets and cash suddenly turn scarce. Evan tough Jean-Claude Trichet tried to keep investors calm and was speaking about normalization of the market.

Stock prices started to fall and investors found out that some of its assets was invested in the U.S real estate market. Because of the globalization of today where investments are made in international markets led the crisis going global.

This led to a shortage in cash and the central banks had to do something. The money market where banks lend money from each other was threaded and its departments became nervous. A system that had been working for years was now questioned if they could really trust each other and pay back the funds they were borrowing.
Central banks tried to prevent the system from breaking down but changing the real reason for the collapse the fact that U.S crisis had made money cheap was hard to adjust.
By injecting cash into the money market worked as a quick help but I think in the long run it made damage by running out of liquidity.

/Sofia Gustafsson

Tuesday, August 12, 2008

The causes of the economic crisis (Sofia Gustafsson)

The present economical crisis has been caused by sub-prime mortgages. In the U.S a financial crisis started to accelerate in the late 2006 which caused the crisis going global through 2007 and 2008.
Through the US Housing Bubble house prices peaked in 2005 and in 2006 the prices decreased. The housing bubble causes decreasing in house prices which resulted in many owners holding negative equity which made the mortgage debts higher than the value of the property.
The crisis began with a burst of housing bubble and high default rates on subprime mortgages. Loan incentives and the high prices of housing made Americans take subprime loans.
Subprime loans has a higher rate than a prime rate which can be taken by people with poor credit ratings or limited credit histories. The subprime loaners took these subprime loans in the belief of refinance more profitable items later on.

This gave the American banks the opportunity to use the borrowers money to invest globally. This is extraordinary desirable in the U.S because not many Americans has the habit of saving money which effects the banks.
Once the prices of housing went down in 2006-2007 refinancing became harder. The rates went up and houses were subject to foreclosure activity. The borrowers did not pay and caused a global effect and banks all around made enormous losses because the American banks could not pay back the investments they had made.
From the real estate sector in the U.S the crisis spread internationally with declining stock markets in many countries. The Northern Rock, a English bank had trouble raising liquidity, The Bank of China had $ 9.7 million in debt and the Korean market fell.
In other words the American crisis became a global crisis is a fact.

To avoid a crisis like this I think lending money to people without credit should be closely controlled. Also the public that lend money should be provided with education and information of how to barrow money in a wise way.


Sofia Gustafsson