Indicators of Impending Doom – A Study of The Great Recession of 2008

The Great Recession of 2008 was a significant worldwide economic downturn that continued into 2010 and beyond. The Financial Crisis of 2008 caused it, and it turned into the worst recession since the Great Depression of the 1930s. In December 2009, the global recession worsened. Though the American economy began showing signs of growth after 5 years, five million of the 8 million jobs lost did not return – despite an increase in the population of 10 million across the same time span covering President Barack Obama’s first term.

While European nations such as Greece, Portugal, and Ireland still face trouble, the emerging nations such as China and Brazil seem to have bounced back and had been growing rapidly. Concerning the United States economy, some proponents of free-market capitalism opined that the then Federal Reserve Chairman Ben Bernanke and the United States Congress should not have financially assisted the failing firms. Instead, they should have allowed free market capitalism to recover as it did in the 1920 depression without government intervention. The free market capitalists fear that such government intervention can unnecessarily prolong the recessions.

Here, after ten years of the 2008 recession, we studied the critical indicators of the ten largest economies, i.e., United States of America, China, Japan, Germany, United Kingdom, India, France, Brazil, Italy and Canada.

We looked at the representative equity indices, observed the tips and turns in the curve over the years, and tried to conclude their behavior. We then followed the same pattern of study with the GDP, where we looked at both purchasing power parity GDP and nominal GDP per capita. Following GDP, we looked at total external government debt levels as a percentage of GDP, which has been one of the most significant statistics, sufficient in itself to give an overview of the overall health of the economy. Lastly, we looked at the unemployment rate, which many economists consider as both a leading and a lagging indicator.

Here are the key indicators we observed:

1. Benchmark Indices

Indicators of Doom_Benchmark Indices

1.1 Data

Indicators of Doom_Price Levels

Indicators of Doom_Price Performance

Indicators of Doom_Graph

1.2 Observations and Analysis:

  • A clear view is that every economy showed a significant collapse in the year 2008. However, what’s noteworthy is not every economy recovered in the same time frame. While Brazil and India recovered almost immediately in the year 2009, Japan and Germany took nearly five years to recover. Barack Obama’s economic stimulus took nearly six years to nurse the economy back to health. China still hasn’t reached the high it did in 2007. What makes this noteworthy? Brazil and India are two of the three economies which took the biggest hit in the depression, second only to China.
  • Another notable point is the growth in the years leading up to the recessionary phase. In the three years before the downfall, the benchmark indices exhibited a CAGR of up to 45.38% (BSE). Except for the US, Japan, and Italy, all the indices showed growth in double digits. While China exhibited a YoY increase of whopping 130.43% in 2006 followed by a 96% YoY growth in 2007, India exhibited a 46% and 47% in the two years, so much for the active investors who seek to beat the benchmarks. If indeed they were able to, we can only imagine what portfolio returns were achieved in these years.
  • Certain economies exhibit more stability before, during and post-recessionary phase, while others are a lot more volatile. U.S. and Japan are among the stable ones, while China, Japan, and Brazil are among the most volatile ones.

2. Gross Domestic Product

2.1 Data:

Indicators of Doom_GDP PPP Current Prices Data

Indicators of Doom_GDP_Graph1

Indicators of Doom_GDP_Graph2

Indicators of Doom_GDP_Nominal GDP

Indicators of Doom_GDP_Graph

2.2 Observations and Analysis:

The purchasing power parity GDP shows some exciting trends. Raw numbers are often misleading, so let’s look at the YoY change. While every economy did take a hit in 2008, a significant hit at that too, the GDP showed a negative trend only in 2009. Every economy, even though diminished, managed to have a positive growth (even though of 0.85% in the case of Japan or 0.89% in the case of Italy). Another interesting fact, the two Asian giants didn’t budge much. China even managed to maintain a two-digit growth. We saw in the previous section, the stock market representative index, which hasn’t recovered a decade later, yet the GDP kept a stable growth.

Coming to the nominal GDP per capita, as expected, the economies slumped in 2008, but diminished only in 2009, well except the United Kingdom. Unlike PPP GDP, even China took a significant blow, coming to almost one-third of its 28% growth of 2007 to a 10% growth in 2008. One conclusion that can be drawn from this is that nominal GDP per capita is a lot more sensitive to economic downturns then PPP GDP. Also, PPP GDP tends to be a lot more stable, and more or less moves across the globe in sync. If we carefully observe the two graphs, in PPP GDP, even though the numbers might differ, the trend almost remains more or less the same for each economy; however, this is not the case for nominal GDP per capita.

Most of the economies showed abnormal growth patterns in 2007, in some cases doubling, even tripling to their normal growth. Germany was 1.6% in 2005, it went to almost 15% in 2007, and France was not even 3% in 2005 and reached 14% in 2007. India went up to 26% in 2007 from the 11% in 2006. This erratic growth pattern is not regular.

3. Debt Levels

3.1 Data:

Indicators of Doom_Debt_Total External

Indicators or Doom_Debt_Graph

3.2 Observations and Analysis:

As it’s very evident from the trends, the debt levels consistently rose in the three years leading to the depression for every economy except China, Brazil, and Canada. India maintained a debt level, but economies like the US and especially the UK worsened significantly. In hindsight, it should have become clear that the bubble would burst sooner or later. It’s also clear that the boom in the market was driven by debt, and was not possible to sustain for long.

4. Unemployment Rate

4.1 Data

Indicators of Doom_Unemployment data

Indicators of Doom_Unemployment_Graph

4.2 Observations and Analysis:

Though the unemployment rate is a lagging indicator, looking at its behavior before the recession can also give us some insights.

The unemployment rate decreased consistently in the years 2004-2007 except for India and the UK, where unemployment slightly grew. Jobs were created at the same pace the businesses grew, and the businesses’ growth was driven by debt, as we saw in the previous section. So in essence, the growth that never actually happened employed millions around the globe.

Conclusions and Today’s Outlook

In the hindsight, there was clear empirical data to suggest that something was going wrong at the time. The majority of the biggest economies exhibited abnormal growth patterns. Debt levels rose consistently and were used to finance the ‘pseudo-growth.’ Jobs were created all around the world at a rapid yet unsustainable pace. The erratic growth patterns in nominal GDP per capita, benchmark indices doubling investments in under a year are some, if not all, of the warning signs that should be paid attention to.

Whenever the economy takes an upturn, businesses, and investors get carried away, the market momentum also provides returns to an extent even if it goes beyond its intrinsic value, but it doesn’t sustain, and greater the momentum, the greater the fall. The same index that quadrupled investors wealth in under twenty-two months hasn’t recovered in almost a decade.

Today, based on the representative indices, the world economy has been on the growth path. In the last three years, the CAGR for every economy is positive. The returns are not large enough to qualify as a boom, so we can say that based on the benchmark representative indices, these economies seem stable for now or for the next year or two.

From GDP’s perspective, the economies have again, grown consistently, staying near at long-term average in the last three years, therefore, again signaling that the economy, is in a relatively stable state.

Coming to the debt level, one of the most important factors, we can see that they’re rising slowly but consistently, which, if continues, can be disastrous in the years to come.

Last but not the least; the unemployment rate has seen a steady drop in most of the economies in the last few years. Combining this with the rising debt levels, we know from our experience, does not have a happy ending.

Economy moves in wave-like motion. There are highs, and there are lows, there are crests, and there are troughs. As of today, the economies are not just stable they are stable on a growth path. However, if we put all the pieces together, it seems that another depression is on the horizon. Though it’s not possible to predict the exact time frame and intensity of this disaster, based on the study of previous scenarios, it is likely to hit in the next three to five years, and its magnitude will depend on the boom that precedes it.

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Ishan Dafaria
Ishan Dafaria
About the Author

Ishan Dafaria is Financial Analyst at SG Analytics.
He is an experienced Associate Financial Analyst with a demonstrated history of working in the research industry. He is a finance professional CFA L3 Candidate with a Bachelor's Degree focused in Electrical and Electronics Engineering from BITS Pilani.

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