Causes and Consequences of Globally

Financial Recession

Presented by:
Mairaj Muhammad
Uziar Akber soomro
Hajra
Haseeb Ahmed
 Executive Summary
The world economy is entering into a
recession
☒ The world economy is mired in the worst financial crisis
since the Great Depression.
☒ What first appeared as a sub-prime mortgage crack in the
United States housing market during the summer of 2007
began widening during 2008 into deeper fissures across
the global financial landscape and ended with the
collapse of major banking institutions, precipitous falls
on stock markets across the world and a credit freeze.
 What is an Economic Recession?
☒ This occurs when there is a significant decline in
the economy which usually lasts for months.
☒ This is visible in terms of consumer spending,
employment, industrial production, real income
and wholesale trade.
☒ Experts say that an economic recession is normal
because it is part of the business cycle and things
usually improve within 16 to 18 months.
 Understanding the Causes of
Economic Recession:

☒ Itcan be difficult to predict the causes of

economic recession.

☒ economists believe the Index of Leading

Indicators may be a useful tool for determining
Recession.
These are

Weekly hours worked by manufacturing workers on average



Average number of initial applications for unemployment



insurance claims

S&P 500-stock index



Spread between long and short interest rates




Amount of manufacturer orders for consumer goods and
materials

Speed of delivery of new merchandise to vendors from
suppliers

New orders for capital goods unrelated to defense

Number of new building permits for residential buildings


Few of the significant symptoms of
an economic recession are
 The rate of job loss becomes far too alarming.
 Many businesses across all sectors suffer a serious decline in
sales turnover and their profits shrink.
 Borrowers default on repayment of loans and credit card
liabilities.
 Banking system breaks down as borrowers are not in a position
to repay loans.
 Prices of food, fuel and other essential commodities shoot up .
 Companies offer voluntary retirement programs to reduce their
workforce and cut wages
 People foreclose their fixed-term deposits, and sell off other
assets to meet their day-to-day expenses.
 Economic Recession History
There were three periods considered to
be recessions:
☒ January- July 1980 and July 1981- November
1982: two years in total

☒ July 1990- March 1991: eight months

☒ November 2001- November 2002: twelve

months
 Early 1980s Recession

☒ The Iranian Revolution sharply increased the

price of oil around the world in 1979, causing
the 1979 energy crisis.
 Early 1990s Recession

☒ Industrialproduction and manufacturing-trade

sales decreased in early 1991. .
 Early 2000s Recession

☒ Thecollapse of the dot-com bubble, the

September 11th attacks, and accounting scandals
contributed to a relatively mild contraction in
the North American economy.
 Current Global Financial Crisis
☒ The World Economy is Mired in the Worst
Financial Crisis Since the Great Depression.
It All Start in U.S:-
☒ Boom in Housing Sector.
☒ Collapse of banks & financial institutions
☒ Freezing of Liquidity
☒ Ripple Effect in all over the world
 IMF Expectations
☒ World Economy is shrinking after WW-II
☒ Economic Growth is expected to be 0.5%
☒ Advanced Economies are expected to contract by
2%.
☒ Recession is likely to continue throughout 2009
and 2010.
 How this started
☒ Housing Sector of America
A combination of Low Interest Rates & Large
Inflows of Foreign Funds Created Easy Credit
Conditions for People to Take Home Loans
☒ Created a BOOM in Housing Sector
☒ ThisIn turn Created Demand for Property &
Fueled the Home Prices
☒ The
Greed Factor to Earn More & More Profit
Was Driving Every one During Period of
Housing Market.

☒ Lending to Sub-Prime Market

☒ NINJA (No Income, No Job, No Assets)

☒ Housing Bubble Was Burst Eventually.
☒ Over Building of Houses During The Boom
Period Finally Led to Surplus Inventory of
Homes.
☒ Caused Decline in The Prices of Houses

From Summer 2006

☒ As a Result People Began to Default.

☒ Provided an Incentive to Walkway Then to Pay

the Mortgage.
☒ Foreclosures Increased and During 2007 1.3
Million of U.S Housing Properties were Subject
to Foreclosures.
• Supply of Housing
Inventor Further
increased to such
Extent Nearly 4
Million Unsold Homes
were for Sale Including
2.9 Million That Were
Vacant.
 How Housing Crash Caused Global
Economic Depression?
☒ MBS (Mortgage Based Securities)
☒ CDOS (Collateralized Debt Obligations).
☒ Big
American & European Banks Bought These
Sub-Prime loan Portfolios From Original
Lenders.
☒ TheProblem Which Was to Remain Within The
Confines of U.S.A Propagated into Worlds
Financial Market.
☒ The Problem et Worsened as MBS, Which by
that Time Had Become Part of CDOS of Major
American & European Banks Lost their Value.

☒ Falling Prices of CDOS dented the Banks

Investment Portfolios and Destroyed Banks
Capital.

☒ Inter bank Lending was Stopped

☒ Estimated Loss was $512Billion in Sub-Prime
☒ Largest Hits Take By CITI GROUP(($55.1
Billion)
☒ Merrill Lynch ($52.2
( Billion))
☒ U.S Based Firms Suffered an Over all $260
billion.
☒ While European Firms Suffered ($227
( Billion))
☒ ($24 Million)) By Asian Banks.

☒ Lehman Brothers-File Bankruptcy.

☒ Freddie Mac & Fannie Mae Were Nationalized

By U.S
☒ Banks Stopped Capital Finance

☒ 160,000 People Lost There Jobs In U.S

☒ It Results Declining in Spending.

☒ Thus American Imports are Decline.

 How it Effected China
☒ Depends upon Exports to United States.

☒ TheEffect on China Will be Felt by Number of

Neighboring Countries Which are Major
Suppliers of Parts and Components.
 Effected Other Countries
☒ Europe's Biggest Economy Shrinking by 2.5%

☒ Britain Suffer With G.D.P Contracting 2.8%

☒ Ice land Which Won the UN’s “Best Country to Live

in” Award Just Last Year Witnessed The Collapse and
Nationalized Major banks.
☒ Unemployment is expected to reach 11% This Year. As
Compared to 0.8% last year .
 Decreased in the Demand of Oil
☒ Oil
Prices are considered as a Barometer of the
World Economy.
☒ OilPrices Which Peaked at $147.30 Barrel in
July2008 Fell below $35 at the End of 2008.
☒ ThisSlow Down the Economies of Middle
Eastern Countries Especially
☒ U.A.E,QATAR,BAHRAIN,KUWAIT & SAUDI
ARABIA
 How it Effected Pakistan
☒ TheIndustrial Sector of Pakistan Especially
Textile and Leather Goods Largely Affected.
☒ Remittances

☒ Pakistani
economy is Facing some other
Problems That are Peculiar to it and not Part of
Global Financial Melt down. These Include
☒ Terrorism,Law & Order Situation ,Energy Crisis
and Political Instability.
Thank You