Sunday, April 19, 2009

How world economy develops as global financial crisis deepens


BEIJING, March 27 (Xinhua) -- As the crucial Group of 20 (G20) financial summit in London on April 2 approaches, the world economy is still struggling with its worst downturn since the 1930s.

The deepening financial crisis is biting the real economy, dragging western nations into severe slumps, and choking world trade.

TRAUMATIZED FINANCIAL INDUSTRY

Standing in the breach is the financial industry in western countries, which was blamed for triggering the crisis. Many corporations are either cutting branches, waiting for government bailout money, or preparing to announce bankruptcy. The crisis also severely hit world stock markets, with banks becoming more reluctant to lend.

Being in the center of the storm, the American financial industry witnessed a grave loss.

The American Federal Deposit Insurance Corporation said last week that the nation's banks and thrifts lost 32.1 billion U.S. dollars in the final quarter of last year. That was the first quarterly deficit in 18 years, compared with the 575 million-dollar profit in the fourth quarter of 2007.

The industry's net income for 2008 plunged from 16.1 billion dollars to 10.2 billion.

Eighteen federally insured banks already have failed in the United States this year. Last year the number was 25, more than the total number of the previous five years, and up from only three in 2007.


Shares of Citigroup Inc., once the most powerful U.S. bank, have fallen below 1 dollar this month. Pummeled by the financial crisis, the group has lost more than 98 percent of its value from its peak in October 2007, and is down more than 95 percent from a year ago.

The American International Group reported this month that it lost 61.7 billion dollars in the fourth quarter of last year, the largest corporate loss in history. AIG has benefited since from more than 170 billion dollars in a federal rescue.

HSBC Holdings PLC, the largest bank in Europe, early this month reported a 70-percent drop in its 2008 profit and said it would cut 6,100 jobs as it closes its consumer loan business in the United States. It also said it would cut its dividend and not pay bonuses to top executives.

The stock market remains volatile on uncertainties concerning the global economy. In the United States, the Dow Jones industrial average dived below 6,800 on March 3, its lowest close since May 1997, losing more than 50 percent from its highest level in October 2007.

However, U.S. stocks staged their strongest rally this year on March 23 when the market was boosted by the government's latest plan on clearing bad bank assets and a larger-than-expected rise in existing home sales. The three main indexes all surged more than 6.5 percent.

In London, the FTSE index 100 slipped to a six-year-low on March 2, and a week later, Tokyo's Nikkei index closed at its lowest level in more than 26 years on renewed worries about the Japanese and global economy.

  SLIPPING REAL ECONOMY LEADS TO CONTAGIOUS RECESSION

The financial industry took a hard hit but so did the real economy.

The world economy was expected to shrink between 0.5 percent and 1 percent in 2009, the first contraction in 60 years, the International Monetary Fund said this month.

According to statistics from the U.S. Commerce Department, the American economy contracted at a staggering 6.2 percent pace at the end of 2008. It was the worst showing in a quarter-century and also the second consecutive quarterly contraction.

Japan's economy shrank at a 12.1 percent annual rate in the October-December quarter, the sharpest contraction in 35 years, and the third consecutive quarterly decline.

In Europe, the euro-zone economy contracted by a record 1.5 percent in the last three months of 2008, figures showed last month. It was also the third quarterly fall in a row.

Facing sharply falling exports, retreating investments and credit crunch, eastern European nations are also becoming volatile.

Amid the deepening recession, the unemployment rate in the main western economies keeps soaring.

A report from the U.S. Labor Department showed the number of workers collecting state unemployment benefits surged 122,000 during the week ending March 14, from 5.44 million the prior week. That pushed the insured unemployment rate to 4.2 percent from 4.1 percent the prior week, the highest since May 1983.

Japan, Asia's largest economy, is facing its worst recession since World War II, and the country's major auto, electronics and other companies have slashed tens of thousands of jobs. Statistics showed that the unemployment population has continued to grow since last November.

A European Union report last month forecast employment growth in the region will turn negative in 2009, with the overall employment rate contracting by 1.6 percent, or some 3.5 million jobs lost. The average EU unemployment rate was set to increase by about 2.5 percent in the coming two years. The figure might hit 10percent by the end of 2010 from 7 percent predicted for 2008, the report said.

FALLING WORLD TRADE AND GROWING PROTECTIONISM

The prolonged financial crisis and economic recession also dragged down world trade with emerging protectionism gnawing at the global economies.

Global trade will decline by about 9 percent in volume terms this year, the biggest contraction since World War II, the World Trade Organization said in a report Monday.

The contraction in developed countries will be particularly severe with exports falling by 10 percent this year, according to the WTO's annual global trade assessment report.

In developing countries, which are far more dependent on trade for growth, exports will shrink by about 2 percent to 3 percent in2009, WTO economists said in the report.

Although world trade grew by 2 percent in volume terms for the whole of 2008, it tapered off in the last six months and was well down from the 6-percent volume increase posted in 2007.

The World Bank said last week that since the beginning of the financial crisis, officials have proposed or implemented roughly 78 trade measures, according to the bank's monitoring list of trade and trade-related measures.

Of these, 66 involved trade restrictions, and 47 trade-restricting measures eventually took effect, it said.

"Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse," World Bank President Robert Zoellick said in a statement.

WTO head Pascal Lamy on Thursday also warned that increasing restrictive trade measures could undermine efforts to revive the global economy.

"There have been increases in tariffs, new non-tariff measures and more resort to trade defense measures such as anti-dumping actions," Lamy said.

Economists said the financial crisis has yet to bottom out, and the real economy continues to slip as the global economic situation deteriorates.

Therefore, stimulus spending, market confidence, financial regulation and free trade will be key issues at the G20 summit of the world's leading developing and developed economies next week in London.

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