CRISIS AND RECOVERY IN THE WORLD ECONOMY

t he financial crisis and recession have affected economies around the globe. the impact on the U.S. economy has been severe, but many areas of the world have fared even worse. the average growth rate of real gross domestic product (GDP) around the world was -6.2 percent at an annual rate in the fourth quarter of 2008 and -7.5 percent in the first quarter of 2009. All told, the world economy is expected to have contracted 1.1 percent in 2009 from the year before—the first annual decline in world output in more than half a century.1 Although economic dislocations have been severe in one region or another at various times over the past 50 years, never in that time span has the annual output of the entire global economy contracted. But, as bad as the outcome has been, the decline would likely have been far larger if policymakers in the world's key economies had not acted forcefully to limit the impact of the crisis. the global economic crisis started as a financial crisis, generally beginning in housing-related asset markets, and accelerated in the fall of 2008. After September 2008, interbank interest rates spiked, exchange rates shifted quickly, and the flows of capital across borders slowed dramatically. trade flows also plummeted, falling even more dramatically than GDP. As a result, trade flows became a key transmission mechanism in the crisis, spreading macroeconomic distress to countries that were not primarily exposed to the financial shocks. Policymakers around the world responded quickly, sometimes taking coordinated action, sometimes acting independently. Many central banks cut interest rates nearly to zero and expanded their balance sheets to try to stimulate lending and keep their economies going. they also lent large sums to one another to prevent dislocations caused by a lack of foreign currency in some markets. Beyond the central bank actions, governments intervened more broadly in banks and financial markets as well. Governments also spent large sums in fiscal stimulus to avoid massive drop-offs in aggregate demand. In a welcome development, they did not, however, restrict trade in an attempt to turn away imports. the global economy is now seeing the beginnings of recovery. Financial markets have rebounded, trade is recovering, and GDP growth rates are again positive. Recovery is far from complete or certain, and some risks remain: lending is still constrained, and unemployment is painfully high. But, at the start of 2010, the world economy is no longer at the edge of collapse, and the elements of a sound recovery seem to be coming into place download