Iceland’s economy was severely affected by the financial crisis as the banks expanded aggressively overseas following financial deregulation. The banks acquired investments that were greater in value than that of the country’s GDP and therefore were highly vulnerable if there was a run on the bank. Sure enough all three major commercial banks, Landsbanki, Kaupþing Bank and Glitnir went into administration in early October 2008. In fact there was a joke doing the rounds – “What is the capital of Iceland? 30 Krona” However, with easing inflationary pressures (has declined from 7.5% to 5.7% since May) and a stabilising currency (appreciated 4.6% against the US$) Iceland’s central bank cut its key interest rate by 1% to 7%. The interest rate had previously peaked at 18% in late 2008. Relative to the other major economies this key rate is still very high – see graphic below. However the Icelandic economy is still in a serious position. Credit rating agencies have indicated that the Icelandic government needs to settle a $5.5 billion dispute with the Netherlands and the U.K. over collapsed Internet bank Icesave or a $5 billion IMF funded aid programme might be withdrawn .
I picked this up from the New York Times website. Quite a quirky/country type song about the likelihood of a double-dip recession.
The New York Times had a great article on how the German economy has defied criciticism to record in the last two quarters economic growth of 2.2 percent, Germany’s best performance since reunification 20 years ago. In the aftermath of the financial crisis Germany was criticised for pursuing its own policy to combat the recession rather than the homogeneous financial stimulus of the US and other major economies. Their policy involved keeping workers in employment rather than having to deal with the economic and social issues of when they were out of work. Furthermore, by keeping wage inflation under control German industry could remain competitive with cars, engineering components etc being sold to the world economy. Part of this policy was the “short work” program to encourage companies to temporarily layoff workers or give them fewer hours instead of firing them. Workers would then be compensated for these lower wages by increments when the company books improved during good times. Click here to see the full article from the New York Times.
Great graphic that looks that the different economic cycles. L = once a recession bottoms out, a return to pre-recession output and activity will take a long time. U = the rebound will be a gradual process of expanding economic activity. V = a very rapid rebound. W = downturn followed by a sharpe recovery which then leads to a rapid downturn again – often referred to as a double-dip recession. Click here to download the image below.
A lot of media commentators think that the US is heading this way. Ben Bernanke (Chairman of the Federal Reserve Bank – equivalent to Alan Bollard at the RBNZ) is worried about this as bank credit is drying up, 10m jobs have been lost in the last 3 years, and there are a huge number of foreclosures on properties. Furthermore, it is usual that labour markets recover quickly when then is an upturn in the economy. Bernanke admitted that there wasn’t sufficient growth to rectify the labour market – unemployment is now 9.5%. Paul Krugman (Nobel prizewinning economist) said “we’ve been here before – 1937 when a return to growth in the US economy was stifled by premature increases in interest rates”. See the image below.