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Synchronized Dive into Recession: Focus on Damage Limitation

Briefing Paper
Vanessa Rossi, October 2008

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• The global financial system has suffered a once-in-a-century meltdown that almost brought the world economy to a halt in late September. Confidence and trust have been shattered. In spite of concerted and extraordinary efforts on the part of central banks and political leaders, including recapitalizing the banks, it is not yet certain that the waves of panic and destruction have been halted. Many of the repercussions have yet to emerge, including possible legal action as well as economic damage.
• Even before this latest explosion, the leading OECD economies were plunging into an unusually synchronized recession, driven by the simultaneous collapse in consumer and business spending. This will now get worse.
• Will a severe OECD recession engulf the rest of the world? Up to mid-2008, the emerging markets remained strong - 'decoupling' did work. Now the crisis has deepened, no region will remain immune to shock waves.
• This time round, the outcome for China will be much more important because it has doubled its share of world GDP over the last decade and is now the single largest contributor to global growth. China will fight to avoid recession, but can it win? If it can keep up growth, bolstered by its enormous pool of savings pent up in the banking system, this will provide important sustenance for the global economy.
• Without doubt, this crisis will require substantial, persistent and coordinated global efforts to turn around - possibly including yet more extraordinary 'out of the box' measures. The US and EU are now getting to grips with the immensity of the task. The message has become 'whatever it takes' to halt further widespread destruction.