Introduction
Economic crises not only influence the level of economic activity, but they
can also induce financial panic, which reduces the effectiveness of
monetary policy and has more negative consequences for the economy.
During a crisis, the major goal of a central bank is to contain the damage
and reduce the impact of the crisis on the current economy.
This can be accomplished in a variety of ways, including increasing market
confidence and calming the market, guaranteeing continuous credit flow,
minimising uncertainty, and ensuring that short-term credit markets
function effectively, among others.
Furthermore, central banks play a vital role in minimising the likelihood of
a crisis by taking proactive actions that reduce systemic risks, among
other things.
It is a significant drop in the country's economic performance, as seen by
decreased production and demand, increased unemployment, and
corporate failure. This will inevitably result in a high level of poverty in the
country.
A dramatic worsening in the country's economic situation, as evidenced
by a large drop in production, violations of current production
agreements, business failures, and rising unemployment.
The economic crisis has resulted in a drop in the population's living
standards as well as a drop in the current gross national product.
In 2024, the United States faces a complex economic landscape marked
by challenges including inflationary pressures, supply chain disruptions,
and the lingering impacts of the COVID-19 pandemic. Despite these
hurdles, there are indications of resilience in consumer spending and
economic fundamentals, with cautious optimism amidst ongoing
uncertainties. Prices went up, and it was hard to get things because of
problems with how items were made and delivered. In 2022, inflation
surged to multi-decade highs due to supply chain disruptions, the Ukraine
war, high energy costs, and excessive stimulus measures, eroding
consumer purchasing power and straining businesses. Central banks
responded hiking interest rates to curb inflation, which led to heightened
borrowing costs, potentially choking off economic growth. The US labour
market remains strong with most economists predict continuous economic
expansion in 2024, despite signs of a potential growth slowdown.
Causes of Economic Crisis
The economic crisis in 2024 can be attributed to several intertwined
factors. Monetary policy decisions, including aggressive interest rate hikes
by the Federal Reserve to combat inflation, have increased borrowing
costs and potentially slowed economic growth. Fiscal policy responses,
such as stimulus measures and infrastructure investments, aim to bolster
economic activity but also pose risks of fiscal imbalance. The aftermath of
the COVID-19 pandemic continues to reverberate through global supply
chains, impacting manufacturing outputs and consumer access to goods.
Geopolitical tensions, including trade disputes and regional conflicts,
further exacerbate economic uncertainties by disrupting international
trade flows and investor confidence.
The following are some of the causes of economic collapse:
1. Hyperinflation
Hyperinflation occurs when the government allows inflationary pressure to
build up in the economy by printing excessive money, which leads to a
gradual rise in the prices of commodities and services. Governments
resort to creating excess money and credit with the goal of managing an
economic slowdown. Hyperinflation occurs when the government loses
control of the price increases and raises the interest rates as a way of
managing the accelerating inflation.
2. Stagflation
Stagflation refers to a situation in which the economy is growing at a slow
rate while simultaneously experiencing high rates of inflation. Such an
economic situation causes a dilemma among policymakers since the
measures implemented to reduce the rise in inflation may increase
unemployment levels to abnormally high levels. Stagflation and its effects
on the economy may last for several years or decades.
For example, the United States experienced stagflation from the 1960s to
the 1970s. During said period, economic growth was stagnant, and the
inflation peaked at 13% per annum while the inflation rate in the United
Kingdom was at 20% per annum. Once stagflation occurs, it is usually
difficult to manage, and governments must incur huge costs to bring
balance to the economy.
3. Stock market crash
A stock market crash occurs when there is a loss of investor confidence in
the market, and there is a dramatic decline in stock prices across different
stocks trading in the stock market. When a stock market crash occurs, it
creates a bear market (when prices drop 20% or more from their highs to
hit new lows), and it drains capital out of businesses.
Crashes occur when there is a prolonged period of rising stock prices,
price earning ratios exceed long-term averages, and there is excessive
use of margin debt by market participants.
Impact on Different Sectors
The crisis has manifested differently across sectors:
Financial Sector "Heightened volatility" refers to rapid and
unpredictable changes in stock prices and other financial assets.
"Increased regulatory scrutiny" indicates stricter oversight by government
agencies to ensure compliance with rules aimed at protecting investors
and the economy. These factors together can lead to reduced investor
confidence, increased costs for financial services, and potentially slower
economic growth if businesses are hesitant to invest or expand.
The financial crisis of 2008 had significant short- and long-term effects on
the banking sector. In the short term, banks faced losses from mortgage
defaults, froze interbank lending, and saw credit to consumers and
businesses dry up. In the longer term, the crisis prompted new regulatory
measures internationally through Basel III and domestically in the United
States with the Dodd-Frank Wall Street Reform and Consumer Protection
Act. Passed in 2010, Dodd-Frank mandates that bank-holding companies
with consolidated assets above a specified threshold adhere to stringent
capital and liquidity standards. The act also imposes new constraints on
incentive compensation.
After the 2008 crisis, the banking sector underwent substantial reforms
that fortified its resilience. Despite recent economic uncertainties such as
high inflation, the COVID-19 pandemic, and geopolitical tensions like
Russia's invasion of Ukraine, reports from the American Bankers
Association affirm the strength and safety of the U.S. banking sector.
Capital levels remain robust, and liquidity levels are positive.
Real Estate: "Rising interest rates" can significantly impact the housing
market by increasing the cost of borrowing money for home purchases
and construction projects. Concurrently, "supply chain disruptions"
introduce delays and higher costs for building materials, which can further
elevate home prices and constrain new construction. These combined
factors pose challenges for both prospective homebuyers seeking
affordability and developers striving to meet demand, thereby influencing
the broader dynamics of the housing market.
The economic crisis that followed was closely tied to the boom in the US
housing sector, which saw significant increases in construction, home
prices, and mortgage borrowing from the late 1990s to the mid-2000s.
During this period, average home prices more than doubled, reaching
unprecedented highs in certain regions. Homeownership also saw a
substantial rise, climbing from 64% in 1994 to 69% in 2005, while
residential investment grew from approximately 4.5% to 6.5% of US GDP.
A key driver of this housing boom was the surge in mortgage debt relative
to GDP, which soared from 61% in 1998 to 97% by 2006. The Federal
Reserve's policies, which maintained low interest rates post-2001 and
gradually raised them thereafter, played a pivotal role in stimulating
housing market activity. This environment fueled extensive mortgage
lending, including risky "subprime" mortgages bundled into securities,
which widened access to housing credit.
However, the rapid expansion in housing and mortgage borrowing
exposed vulnerabilities in the financial system. As housing prices began
declining in 2006 and mortgage defaults surged, especially among
subprime borrowers, it triggered a chain reaction that culminated in the
broader financial crisis of 2008. The collapse of mortgage-backed
securities and ensuing credit crunch severely impacted financial
institutions worldwide, precipitating a sharp economic downturn.
In summary, while the initial growth in the US housing sector bolstered
economic expansion and employment, the subsequent crisis underscored
the dangers of excessive borrowing, relaxed lending standards, and the
interconnected nature of financial markets. These lessons prompted
significant regulatory reforms aimed at fortifying financial stability and
averting future crises.
Manufacturing: "Supply shortages" indicate that factories lack enough
parts and materials to produce goods efficiently. "Increased production
costs" indicate higher expenses incurred in manufacturing processes,
such as for labor and raw materials. These challenges can lead to higher
prices for consumers, reduced profitability for manufacturers, and
decreased competitiveness in the global market, potentially affecting jobs
and economic growth in the manufacturing sector.
Looking back to 2007-2009, the housing mortgage crisis, poor regulations,
risky borrowing, and Lehman Brothers' collapse led to the Great Recession
of 2008. The U.S. economy shrank by 4.3% by fall 2008, the worst since
World War II.
The manufacturing sector suffered greatly during this recession. Over 2
million manufacturing jobs were lost, 15% of its workforce, in the 18-
month period from December 2007 to June 2009.
Services: "Changing consumer behaviors" refer to shifts in how people
spend money and interact with businesses, such as preferring online
shopping over visiting physical stores. "Operational challenges" include
difficulties businesses face in adapting to new health regulations and
ensuring customer safety. These factors can impact revenue for
hospitality and retail sectors, making it harder for businesses to thrive and
potentially leading to closures or reduced job opportunities.
In the technology sector, various companies globally have announced
significant layoffs between 2022 and 2023. For instance, startups and
established firms in India alone terminated over 36,000 employees during
this period.
Zoom, a leading video communication platform, is reducing its workforce
by approximately 150 employees, which constitutes less than 2% of its
total employees. Similarly, Okta, a cloud software vendor, plans to lay off
about 400 employees, equating to around 7% of its workforce.
PayPal initiated layoffs affecting at least 9% of its workforce,
approximately 2,500 employees. iRobot, known for consumer robots, is
cutting around 350 jobs, representing about 31% of its workforce, while its
CEO Colin Angle is stepping down.
Salesforce, a major enterprise software company, has also announced
layoffs affecting around 700 employees. Meanwhile, Swiggy, an online
food delivery platform, is reducing its workforce by nearly 7%, impacting
about 350-400 jobs.
eBay is cutting around 1,000 full-time employees, equivalent to 9% of its
workforce, and plans additional layoffs among contractors in the coming
months. YouTube, owned by Google, is laying off at least 100 employees
from its creator management and operations teams.
Google itself has undertaken significant layoffs, including nearly 1,000
employees and reportedly planning further cuts in its advertising sales
team. CEO Sundar Pichai has indicated the possibility of more job
reductions throughout the year.
Veeam Software, a global data management solutions provider, has
reportedly laid off 300 employees. Additionally, Polygon Labs, a team
focused on building blockchain solutions, has reduced its workforce by
approximately 19%, affecting 60 employees.
Despite these challenges, the technology industry has shown resilience in
certain sectors. For example, while some areas experienced layoffs,
others such as software services continued to add jobs during this period,
contributing positively to employment in the U.S. tech sector.
Government and Federal Reserve Response
In response to the crisis, the government and the Federal Reserve have
implemented coordinated measures:
Monetary Policy: The Federal Reserve's actions include interest rate
adjustments aimed at balancing inflation control with economic growth
stimulation. The U.S. Congress has established three key objectives for
monetary policy in the Federal Reserve Act: maximizing employment,
stabilizing prices, and moderating long-term interest rates. Because long-
term interest rates remain moderate in a stable economy with low
expected inflation, the last objective will be fulfilled automatically
together with the first two ones, so that the objectives are often referred
to as a dual mandate of promoting maximum employment and stable
prices. The Fed operationalizes its objective of stable prices as following
an inflation target of 2% annual inflation on average.
The Federal Reserve's main monetary policy instrument is its Federal
funds rate target. By adjusting this target, the Fed affects a wide range of
market interest rates and in turn indirectly affects stock prices, wealth and
currency exchange rates. Through these variables, monetary policy
influences spending, investment, production, employment and inflation in
the United States. These channels are collectively known as the monetary
transmission mechanism. Effective monetary policy complements fiscal
policy to support economic stability, dampening the impact of business
cycles.
Besides conducting monetary policy, the Fed is tasked to promote the
stability of the financial system and regulate financial institutions, and to
act as lender of last resort.[2][3] In addition, the Fed should foster safety
and efficiency in the payment and settlement system and promote
consumer protection and community development.
Fiscal Policy: Government initiatives such as stimulus packages
and infrastructure investments aim to support businesses and
households, mitigate unemployment, and stimulate demand. Fiscal
policy is the use of government spending and taxation to influence
the economy. Governments typically use fiscal policy to promote
strong and sustainable growth and reduce poverty. The role and
objectives of fiscal policy gained prominence during the recent
global economic crisis, when governments stepped in to support
financial systems, jump-start growth, and mitigate the impact of the
crisis on vulnerable groupsThe global crisis that had its roots in the
2007 meltdown in the U.S. mortgage market is a good case study in
fiscal policy. The crisis hurt economies around the globe, with
financial sector difficulties and flagging confidence hitting private
consumption, investment, and international trade (all of which affect
output, GDP). Governments responded by trying to boost activity
through two channels: automatic stabilizers and fiscal stimulus—
that is, new discretionary spending or tax cuts. Stabilizers go into
effect as tax revenues and expenditure levels change and do not
depend on specific actions by the government. They operate in
relation to the business cycle. For instance, as output slows or falls,
the amount of taxes collected declines because corporate profits
and taxpayers’ incomes fall, particularly under progressive tax
structures where higher-income earners fall into higher-tax-rate
brackets. Unemployment benefits and other social spending are also
designed to rise during a downturn. These cyclical changes make
fiscal policy automatically expansionary during downturns and
contractionary during upturns.
Regulatory Changes Government regulation of the U.S. economy has
expanded significantly over the past century, eliciting concerns that
interventions may stifle growth and efficiency. However, proponents
argue that such regulations are essential to address the negative
consequences of unregulated commerce, which can include
environmental degradation and labor exploitation. Moreover, regulations
can also benefit businesses by providing financial assistance or ensuring
intellectual property protection through patents.
In response to economic crises, including the financial downturns
exacerbated by inadequate regulation, the government and the Federal
Reserve have implemented coordinated measures. These actions typically
involve tightening or loosening regulatory frameworks to stabilize financial
markets, enhance consumer protections, and prevent systemic risks. For
instance, during periods of economic instability such as the Great
Recession of 2008, regulatory interventions aimed to strengthen oversight
of financial institutions, promote responsible lending practices, and
safeguard investor interests.
The regulatory response to crises underscores the pivotal role of
government oversight in managing economic risks and promoting
sustainable growth. While critics may argue that excessive regulation
hampers innovation and competitiveness, advocates emphasize that well-
crafted regulations are essential for maintaining market integrity,
protecting public welfare, and fostering long-term economic stability.
Thus, the evolution of regulatory policies continues to be shaped by the
imperative to balance economic freedoms with prudent safeguards
against potential harm.
Comparison with Previous Crises
Comparisons with the 2008 financial crisis reveal lessons learned and
applied strategies:
The financial crisis of 2007–08 was a severe downturn in global financial
markets triggered by the collapse of the U.S. housing market. It led to the
Great Recession, the worst economic downturn since the Great
Depression. Here’s a simplified overview of its causes, key events, and
aftermath:
Causes:
1. Federal Reserve Policies: After a mild recession in 2001, the Fed
lowered interest rates significantly, making credit cheap and
encouraging risky lending practices, particularly in the housing
market.
2. Subprime Lending: Banks offered high-risk mortgage loans to
borrowers with poor credit, often with adjustable rates or balloon
payments, fueled by rising home prices and speculative investing.
3. Securitization: Banks bundled these risky mortgages into complex
financial products called mortgage-backed securities (MBSs), which
were sold to investors worldwide as safe investments.
4. Deregulation: Repeal of the Glass-Steagall Act in 1999 and
weakened regulations by the SEC allowed banks to engage in risky
investments and excessive leveraging, contributing to the crisis.
5. Overconfidence: A period of economic stability led many to
underestimate the risks, promoting excessive borrowing and risky
financial practices.
Key Events:
1. Housing Market Decline: Starting in 2005, home prices fell,
causing many subprime borrowers to default on their loans.
2. Financial Institution Failures: Major institutions like Lehman
Brothers and AIG faced collapse due to their heavy exposure to
MBSs.
3. Government Response: The U.S. government intervened with
measures like the Troubled Asset Relief Program (TARP) and
quantitative easing (QE) to stabilize the financial system.
4. Economic Impact: The crisis led to massive job losses, a decline in
household wealth, and a prolonged recession with lasting effects on
the global economy.
Aftermath:
1. Economic Fallout: Millions lost homes, jobs, and savings, with
long-lasting effects on household wealth and job security.
2. Inequality and Resentment: Public anger grew over perceived
bailouts of financial elites while ordinary Americans suffered,
leading to movements like Occupy Wall Street.
3. Regulatory Changes: The Dodd-Frank Act was passed in 2010 to
prevent future crises, though subsequent rollbacks weakened some
provisions.
In conclusion, the financial crisis of 2007–08 was a complex event driven
by a combination of factors including regulatory failures, risky lending
practices, and overconfidence in economic stability. Its profound impact
reshaped financial regulations and sparked widespread public debate
about economic inequality and financial responsibility.
REPORT OF CURRENT CRISIS
Analysis of the Current Crisis: Economic Outlook for 2024
Introduction
The economic landscape heading into 2024 presents a nuanced picture
marked by both optimism and caution. Various economic indicators
suggest divergent paths, with some signals pointing towards sustained
growth while others hint at potential downturns. This report aims to delve
into the underlying factors influencing the current economic crisis
narrative, particularly focusing on the United States and its global
ramifications.
Key Economic Indicators
1. Labor Market Strength: The robust start to the U.S. labor market
in early 2023 was initially hailed as a harbinger of consumer
spending resilience. However, recent developments indicate a
tightening labor market and mixed job sentiment, suggesting
potential headwinds ahead.
2. Sectoral Growth and Dependency: Notably, the surge in
spending on computer and electronic manufacturing, peaking at
over 900% from December 2020 to October 2023, underscored
efforts to reduce reliance on Asian semiconductor supplies.
Legislative support via the IRA and CHIP acts bolstered this growth,
signaling a shift towards domestic production but also heightened
vulnerability to supply chain disruptions.
3. Global Economic Interdependence: China's reopening in late
2022 initially buoyed global economic prospects for 2023 despite
internal challenges such as a property market downturn. This
underscores the interconnectedness of global markets and the
ripple effects of regional economic shifts on broader international
financial stability.
4. Inflation Dynamics: Following a peak around mid-2022, U.S.
inflation showed signs of moderation heading into 2023. This
reduction was a critical factor in restoring consumer confidence and
supporting continued economic activity throughout the year.
Risks and Challenges Ahead
Despite the optimistic outlook painted for 2023, several emerging trends
and economic signals indicate a looming crisis in 2024:
1. Monetary Policy and Economic Growth: A concerning trend
emerged with the recent M2 growth outpacing nominal GDP growth,
suggesting a potential overheating scenario. Historically, such
imbalances have preceded economic slowdowns or recessions,
hinting at policy challenges for the Federal Reserve in managing a
soft landing.
2. Savings and Economic Stability: The contraction in net savings
as a percentage of Gross National Income (GNI), dipping into
negative territory in 2023, historically precedes severe economic
downturns like those observed in 2008-09 and during the COVID-19
pandemic. This indicator serves as a red flag for fiscal policymakers
monitoring economic resilience.
3. High Base Effect and Growth Expectations: The elevated
growth rates witnessed in preceding quarters of 2023 set a high
baseline for consumer and business spending entering 2024.
However, projections suggest a slowdown in growth momentum by
mid-2024, posing challenges to sustaining economic momentum
throughout the year.
4. Fiscal and Monetary Policy Tightening: The lagged impact of
Federal Reserve rate hikes implemented throughout 2022 and 2023
is anticipated to materialize by the second half of 2024, potentially
exerting additional pressure on economic activities and investment
sentiments.
5. Global Market Implications: The anticipated hard landing for the
U.S. economy in 2024 could reverberate across global financial
markets. Projections include significant declines in U.S. equities and
adverse impacts on emerging markets, such as Indian equities,
which may experience substantial corrections from their early 2024
highs.
Conclusion
In conclusion, while the U.S. economy showcased resilience and growth
prospects throughout 2023, underlying economic indicators and emerging
trends suggest a cautious outlook for 2024. The convergence of tightening
monetary policies, fiscal constraints, and global economic
interdependencies underscores the need for proactive measures to
navigate potential downturns effectively. Stakeholders across sectors
must remain vigilant, adapt strategies to mitigate risks, and foster
economic resilience amidst evolving market dynamics.
This report provides a comprehensive overview of the current economic
crisis narrative, integrating macroeconomic analyses with sector-specific
insights to inform strategic decision-making and policy formulation in the
coming quarters.
Future Outlook
Looking ahead, the economic outlook hinges on several factors:
Future recessions: the outlook for the U.S. economy suggests a cautious path forward
amidst ongoing challenges. Despite a modest GDP growth rate of 1.3% in the first quarter of
2024, there are concerns about potential economic headwinds that could lead to a recession.
Key indicators such as consumer spending, while resilient in certain sectors like healthcare
and financial services, showed signs of slowing overall. This deceleration, coupled with
reduced federal government spending and rising imports, contributed to the tempered
economic expansion.
The Federal Reserve's efforts to combat inflation through interest rate hikes have had mixed
results, with inflation persisting above 3% for a sustained period. Although the Fed has hinted
at potential rate cuts, uncertainty remains regarding their timing and effectiveness in
stabilizing the economy.
Financial markets have displayed strength, with major indices surpassing pre-bear market
highs, indicating investor optimism despite economic challenges. However, the broader
economic environment remains dynamic, with implications for business investment and
overall growth expectations.
In conclusion, while the U.S. economy continues to grow, the risk of a recession looms as
consumer spending moderates and inflation persists. Monitoring future economic data and
Fed policy decisions will be crucial in assessing whether the economy can navigate these
challenges without entering a downturn.
Recovering from current recession: As of the latest economic data, the U.S.
economy is showing signs of recovery from the challenges posed by recent economic
slowdowns. Here’s how we are recovering from the current economic conditions:
1. Growth Resilience: Despite facing headwinds, the U.S. economy has demonstrated
resilience with a GDP growth rate of 1.3% annualized in the first quarter of 2024.
This growth, albeit slower compared to previous quarters, indicates that the economy
is still expanding.
2. Consumer Spending: Consumer spending remains a critical driver of economic
recovery. While there was a decline in spending on goods, sectors like healthcare,
financial services, and insurance saw growth. This diversification in spending patterns
suggests that consumers are adapting to economic conditions.
3. Labor Market Strength: The labor market continues to be robust, with a low
unemployment rate of 3.9% as of April 2024. Solid job growth and wage increases
have bolstered consumer confidence and spending power, contributing positively to
economic recovery.
4. Federal Reserve Policy: The Federal Reserve's actions, including interest rate hikes
to curb inflation, have been pivotal in stabilizing the economy. While inflation
remains above target levels, the Fed’s policies are aimed at achieving a “soft landing,”
balancing growth and price stability.
5. Financial Market Performance: Despite economic challenges, financial markets
have shown resilience. Major indices like the S&P 500 and NASDAQ Composite
have surpassed previous highs, reflecting investor confidence in the economy’s ability
to recover.
6. Policy Adjustments: Ongoing adjustments in fiscal and monetary policies are aimed
at supporting economic recovery. Potential future rate cuts by the Federal Reserve
could provide further stimulus to economic growth if inflationary pressures ease.
7. Business and Investor Confidence: Improved economic conditions have bolstered
business and investor confidence. This confidence is crucial for capital investment
and expansion, driving broader economic activity.
In summary, the U.S. economy is on a path to recovery from recent economic challenges.
Continued monitoring of key indicators such as consumer spending, inflation trends, and Fed
policy decisions will be essential in sustaining and accelerating this recovery in the months
ahead.
