Global Financial Crisis - Is the Worst Yet to Come?

The global financial crisis which triggered by the fall of the investment bank Lehman brother has passed more than a year. However, the crisis was such a disaster that it’s shadow is still lurking in the dark and has not been completely extinguished. The worst thing it caused is the recession happened in 2008 and 2009 which dragged the global economy into a dreadful condition. However, after the terrifying recession, there is still a point of view in the market suggests that the worst of the global financial crisis is still to come. Is it a reasonable claim of it is a totally unfounded myth? This essay attempts to critical account for this point of view, by considering the condition of the labor, consumer and house markets, in order to show that another recession which is worse than the one occur in 2008- 2009 is not likely to happen.

Economists and Authorities suggested there could be another worse recession on the way which was likely to kick off in 2010.(Sampson, 2010; Constable 2010; Evans- Pritchard; 2010; Casey 2010) Generally, the major argument of this point of view are support by the bad economic data and the pessimistic forecast of the future economy base of the data. In summary, there are five reasons for this stance including: 1. Unemployment problem is serious. 2. Consumption is in a bad condition. 3. House price is low and it would be getting lower. Is it enough to support the claim? In the following part, I am going to evaluate the reasoning of the claim.

Economists’ opinion suggested the US job market is uncomfortably weak. (Izzo, 2010) The September employment data of the US recorded 95,000 drop in number of job, and the unemployment rate was keep unchanged at 9.6%. (Lahart 2010) As the data is from the labor department of the US, it is reasonable to assume that the data is reliable. Look at the number alone, the unemployment rate is high, and the US is still losing job after about two years after the global financial crisis occurred. However if you take closer look at the data, you can find that it is the government position brought the drop in the job number. The job number in the private sector is actually increased. Furthermore, the job loss in the private and manufacturing sector have reach their bottom and have been improving since the official end of the last recession period. (Lahart, 2010)This suggested that the private sector of the US job market is not declining as the number may imply. However, the gain in private sector position was from leisure & hospitality sector such as bar and restaurant, which is normally not good in salary and benefit or even may not be full time. (Izzo, 2010)It suggested that the employment market although is getting better, the market is still weak for the people who were employed as the economists point out. To conclude, the unemployment although is somehow serious and hindering the recovery, it is getting better and definitely better than in the recession period in 08-09.

The consumption is in a bad condition is another reason that support “the worse is coming” point of view. Consumer dominates 70 % of the US economy (Sampson, 2010), so this is reasonable to believe that if consumption market is not in a good condition, the US economy will also in bad condition as well. The logic behind is that when people are not have confident with the future economy, they are less likely to spend their income. As a result the index of consumer confident and price will drop and this may cause deflation. Deflation is referring to the fall in the consumer prices, it is a more serious problem than moderate inflation and it occur in the great depression. It is problematic because as the price fall, the businesses are harder to make profit as their profit margin decrease. Therefore it would induce a vicious cycle that affect the employment of the economy and further decreasing the price.(Casey, 2010). However, debate is drawn to the issue about whether deflation is going to happen in US in the near future. Economists hold different stances about this issue (What are the risk of Deflation). For the current state of affair, inflation is still being recorded in September in US (Cheng 2010). Considering mild inflation have been happening for a long time after the last recession and with the personal income seems to be in a upward trend (Ezrati 2010). I do believe it is likely that deflation would not a very likely case in the future as some economist suggested the inflation is somehow stable(Izzo, 2010)

Low house pricing and the pessimistic expectation about it is another reason for people believe another recession is on the way. Shiller (as cited in Constable, x2010) suggested that the house pricing could be declining for another five years as the environment of US could be similar with old time Japan which have a history of 15 consecutive year of decline in land prices. However, the recent statistic of home pricing in June recroded 1 % gain in S&P/Case-Shiller 20 city indx comparing to the 1 month before and a 4.2% gain from a year earlier. (Reddy 2010) But analysts tends to believe that such gain is due to the tax credit benefit applied in spring by the government, they expected another price drop in the near future.(Timiraos 2010) Even so, the data atleast showed the house market is start to gaining strength. There was 27% drop in the inventory of unsold homes in US in the last 12 months, which is a very different situation then the grim house market in the last recession. (Ezrati, 2010)Therefore, according to this trend, this is reasonable to believe that the house price is not likely to be in a long term decline, at least not as grim as the last recession. Therefore, housing data is not likely to be in a condition which is so bad that would cause a worse recession.

The reasons have no direct logical relation with the contention: a worse recession is coming. A underlying assumption have to be made in order for the argument to work:

If the US economy data such as: house price keep declining, consumer market get worse (thus deflation occur) and the job market keep declining, then a worse recession would occur.

The question is that: is it a reasonable assumption? Personally, I believe that this is not a suitable assumption. This is reasonable to believe that if the US economy in such a trouble, a recession will be on the way. However, it is hard to guarantee that a “worse” recession would occur. The serious recession of last time was triggered by disastrous events including collapse of Lehman brother, those event are relatively rare. Especially, when the global economy is in such a fragile state that the growth could turn in to contraction anytime, governments would by all mean avoid such incident. Therefore, the events which could trigger another serious recession is very unlikely to happen. Of course, my argument here is base on an assumption that the worst kind of recession must be triggered by serious irregular event. But according to the history, it is mostly the case. In addition, even if the US economy is bad, it is not sufficient to induce the global economy would be in deep recession, let alone the scale of recession in 2008 -2009. This is because although the US is the largest economy body in the world, the rest of the world does also play an important role. For example, in contrast with the US, china recorded an annualized 11.9% expansion in GDP in the first quarter of 2010(Ezrati, 2010), which show that the economy of some emerging market is not totally dependent on developed zone such as Europe and US. So this would be too bold to make this assumption saying that the US recession, if this is happening, would draw the whole world into it.

In conclusion, the argument that for the worst of global financial crisis is still to come is base on the support of the bad economy data and pessimistic forecast of the economic condition. Three main types of reasons including, job market, consumer market and house market in the US have been considered. Although the job market data look bad as the number of job in the market drop recently, the private sector is actually getting better, and it is a in a better employment condition than that of the recession. For the consumer market, deflation is not a very likely scenario, even if it happen, deflation alone could not cause the worst recession post GFC. Finally, the general forecasting of the house price is pessimistic, however, the recent data show that it is gaining some support and therefore in a better condition as in the last recession. In addition, the underlying assumption of the argument for the stance is not appropriate therefore the argument is flawed and need to be revised. Even if the argument is valid, for three of the markets are all in a conditions which is better than the recession in 08-09, it is very likely that the worst of GFC is already arrived.

Reference

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