THE IMPACT OF THE FINANCIAL CRISIS

The Financial Crisis (aka Credit Crisis) has been one of the most severe since the Great Depression. Many economists compare the current economic conditions and the future outlook with that of the Great Depression and some even dare to imply that the economies of many developed nations is not only in recession but heading for depression as well. For clarification:

· A recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters

· A depression is a severe economic downturn that lasts several years.

If we take a look at the impact of financial crisis on the world stock markets (figure 1.1), we can clearly see that the year 2008 has been one of the worst for investors around the globe. Losses on stock markets range from 34% for Dow Jones (U.S.) to almost 52% for AEX (the Netherlands). This kind of huge stock markets meltdowns has not been reported since the Great Depression of 1929. Just by this figures it is not only reasonable but also rational to imply that the impact of financial crisis is very severe and can affect the long-term growth of the world economies

Another indicator to state the impact of the financial crisis is to look at the development of oil prices (figure 1.2). The oil price has risen in the past years due limited supply and growing demand. However, in the past months oil price has plummeted from almost 150 for a barrel to as low as 40 dollar for a barrel. This can be attributed to the sharp decline of demand for oil due to the bad economic condition in the world caused by the impact of financial crisis.

The full impact of the financial crisis can be felt by many citizens around the world. Not only those who work in the financial branch, but also other hard working people losses their jobs due to this crisis. On a single day, 27th of January 2009, 70.000 people lost their jobs at companies ranging from Construction equipment maker Caterpillar to drug manufacturer, Pfizer. Millions have already lost their jobs and the expectations are that many will follow.

In U.S., Where the crisis originates, in 2008, companies cut almost a staggering 2 million jobs. Things will get much worse when the troubling automakers go bankrupt due to the huge decline on their sales. This will be disastrous, because not only thousands of people will lose their jobs who work in one of the Detroit Big Three, but many are working indirectly for the automotive industry all around the globe. Once the Detroit Big three collapse it will have a domino effect on thousands of other companies. Therefore, the U.S. Congress is doing its best to save the automakers from their collapse and pumping liquidity in the industry.

Whether this crisis is soon over and many developed countries will recover from the recession they are in or head for depression is just a matter of time. Although, no economist can accurately predict the business cycle of a country or the outlook of the world GDP for the coming years, it is reasonable to suggest that the impact of the financial crisis is very severe and can have a long-lasting effect on the world economies. It is up to the world governments to work together and fight this crisis as efficient and effective as possible.

oil price

References:

1 http://australianetworknews.com/stories/200901/2474800.htm?desktop

2 http://business.smh.com.au/business/world-business/massive-job-losses-deepen-us-crisis-20081206-6smw.html

3 http://www2.journalnow.com/content/2008/nov/13/domino-effect-feared-if-big-3-automakers-should-co/c_0/