The Differences of Economies of the U.S., UK and Germany in World Financial Crisis

Abstract

The world economy is in recession, the worst of its kind in the 21st century. Triggered by the United States subprime mortgage crisis that saw major defaults in mortgage repayments, the crisis quickly spread to Europe and other parts of the world. This has caused a rapid rise in the unemployment rates of economies such as the US, UK, and Germany which have been the hardest hit by the credit crunch. The crisis has seen the unemployment rates of these economies soar to unimaginable proportions as the economy registers reduced activity or recession. The US unemployment rate has already surpassed the 6.5% mark and it is largely feared that the worst is not over yet. The UK labor market has also suffered seriously from the credit crunch. Its unemployment rate has hit an 11 year high at 5.8%, the worst since 1987. In Germany, approximately 5.2 million people are out of work; the highest employment rate for the country since the 1930s. By September, the unemployment rate was estimated at 7.4% and it is feared that it could get worse.

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The Gross Domestic Product (GDP) of these countries has not been spared either. Recent GDP trends of the US government show that the third-quarter GDP for 2008 has shrunk by 0.3%, thus confirming a recession. The UK economy is also in danger of entering its first recession in two decades as the GDP falls. In the second quarter for 2008, it registered zero percent economic growth and in the third quarter, it shrank by 0.5%. Germany, Europe’s largest economy, has also been forced into recession as its third-quarter GDP contracted by 0.5%.

The three governments have put in place strategies to fight the recession. These rescue plans have been estimated at billions of dollars and are intended to protect the financial institutions of these countries by promoting liquidity and availability of credit in an effort to kick start the economies.

There are thus no immediate differences in the economies of these three countries in this financial crisis as they have all been adversely affected and launched similar strategies to fight the recession. However, investing in people can also equally kick-start the economy as opposed to just investing in financial institutions.

Introduction

The ongoing world financial crisis is the first of the 21st century and the worst of its kind since the great depression of the 1930s. It was triggered by a significant decline in housing prices and high default rates on mortgages which had a ripple effect on the performance of key financial institutions. Starting with failures of large financial institutions in the US, the crisis quickly spread to a number of European banks and by the end of September, it had generated a global crisis. Each country reacted differently to the ongoing events with some drafting bailout plans for their respective economies. This report analyzes the differences of the economies of the US, UK, and Germany in light of this financial crisis, focusing on their unemployment rates, their Gross Domestic Product, and strategies that they have put in place in order to fight the recession.

Us, UK and German Economies: A Comparative View

Unemployment rate

Being the ‘originator’ of the global financial crisis, the US has suffered some of the worst ravages to its economy. Data from its labor department shows that since the onset of the crisis, the economy has had to shed jobs for eight straight months with an average loss of 76.000 jobs per month since the beginning of the year. The total number of unemployed people has increased by 2.8 million in the past twelve months alone and the unemployment rate has risen by 1.7% points. In July the unemployment rate was 5.7%, in August, it had topped 6% and by the end of October, it was at the 6.5% mark, prompting fears the worst is not over yet. The US Civilian unemployment rate forecast predicts that by January 2009, the unemployment rate will have reached 6.7% hitting the 7% mark by March of the same year (Bureau of Labor Statistics).

Unemployment has also been observed to vary, depending on sex, race, and age. As of the end of October 2008, the unemployment rate for adult men was 6.3%, while that for adult women was 5.3%. Whites had the least unemployment rate at 5.9%, compared to Hispanics (8.8%) and blacks (11.1%). The unemployment rate for teenagers was 20.6 %. ( Bureau of Labor Statistics).

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Other unemployment data shows that the number of long-term unemployed was at 2.3 billion as of October and the newly unemployed stood at 3.1 million. The job losses are mainly concentrated in the private sector with some of the worst declines being noted in the manufacturing and construction industry. Conversely, healthcare and mining employment has increased significantly (Bureau of Labor Statistics).

The UK labor market has also suffered seriously from the credit crunch. Its unemployment rate has hit an 11 year high at 5.8%, the worst since 1987. The office for National Statistics has indicated that the number of people claiming jobless benefits has increased dramatically from 36,500 in September to 980, 900 in October. It is estimated that the claimant count will reach 1 million in November and two million in the first half of 2010. The labor force statistics indicate that the working-age employment rate is 74.4% for the three months to September 2008 which was down 0.4% from the previous quarter. The number of unemployed people also increased by 140, 000 over the quarter to reach 1.82 million. The level of redundancy was 156,000 and the inactivity rate for people of working age was 20.9% for the three months to September 2008 (AFP, 2008).

Due to the crisis, the jobs are now paying lower than the national minimum wage. The gender pay gap has also widened, with the women now getting increasingly fewer wages compared to their male counterparts. In a survey, median weekly earnings for full-time female employees were found to be 21 percent less than for the males (UK Office of National Statistics).

The German labor market has not been spared either, its unemployment rate has hit record levels. In February 2008, approximately 5.2 million people were out of work; the highest employment rate for the country since the 1930s. By September, the unemployment rate was estimated at 7.4% and it is feared that it could get worse. However, part of Germany’s unemployment rise has been linked to its adjustment in the definition of an unemployed person to include the part-timers as well (Associated Press, 2008).

Generally, the labor market of all three economies has been adversely affected by the credit crunch and all countries have witnessed a steady increase in their unemployment rate and subsequently, a significant drain to their economies. Among the three, Germany has the worst unemployment rate despite it being the biggest economy in Europe.

Gross Domestic Product (GDP)

The Gross Domestic Product is a measure of the total output of an economy and its increase is usually taken to mean an economic improvement. A decline in this output means the economic growth contracts, that is, there is reduced economic activity. If the contraction is over two consecutive quarters then the economy is said to be in recession. A prolonged recession can give way to economic depression.

The US has the largest and most powerful economy in the whole world with a per capita GDP of $ 46,000. However, the economic growth has been declining sparking a recession. The economic growth for the fourth quarter of 2007 indicates a negative growth rate of 0.2%. The trend improved slightly at the beginning of 2008 to grow at a rate of 0.9%, the second-quarter GDP growth also improved by 1.9% but recent GDP trends show that the third-quarter GDP for 2008 has shrunk by 0.3%, thus confirming a recession. This has been largely attributed to a cutback in consumer spending due to a decrease in their purchasing power, as well as a slowdown in the housing market. Forecasters estimate that the GDP growth for 2009 will be 0.7%, one of the slowest growths ever in the American economy. The ideal GDP growth rate is 2-3% (IHT, 2007).

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The UK economy is also in danger of entering its first recession in two decades as the GDP falls. In the second quarter, it registered zero percent economic growth and in the third quarter, it shrank by 0.5%. The outlook of the UK economy is therefore very grim. It is largely seen to be heading for a recession by the end of the year and economic forecasts predict that the economy will stagnate in 2009 and face recession up to 2010. The UK GDP growth is also predicted to fall from 3.1% in 2007 to 1% in 2008 and it will shrink by 0.8% in 2009 (UK Office of National Statistics).

Germany, Europe’s largest economy, has also been forced into recession as its third-quarter GDP contracted by 0.5%. The second-quarter GDP also shows a contraction of 0.4%A German recession has more serious implications since it affects the Euro Zone’s growth prospects. This recession is predicted to persist through 2009. This is the worst recession for this country in 12 years and is largely attributed to foreign trade with increasing imports and weakening exports (Reuters, 2008).

All the three countries are thus arguably faced by their worst economic times and in all countries, the recession is seen to persist through to the year 2010. This has necessitated these countries to come up with a rescue plan for their economies.

Strategies to Fight the Recession

The adverse impacts of the global financial crisis have seen different countries coming up with plans to ease the pressure on their economies from recession and put a stop to the crisis before it escalates into a depression.

The United States federal government has a two-pronged approach to deal with the recession. One strategy aims to manage the availability and cost of credit. This basically means controlling the interest rates. When the economy is in recession, there is reduced economic activity due to decreased purchasing or spending power on the part of consumers. The government, therefore, works to reduce the interest rates so that the amount of money available for loans is increased and consumers are able to borrow and spend more. Conversely, in the event of an economic boom, the government will increase interest rates so as to reduce the availability of credit. Currently, the government has cut interest rates to 1 percent so as to boost the economy (Walden, 2008).

The other approach in the federal government’s economic policy is the prerogative of the president and congress to control credit through the federal budget or a plan. Currently, the US government has unveiled the 700 billion bailout plan to rescue the US financial system. How it works is that the government will buy stakes in several banks thereby injecting some cash into them. The US federal authority seeks to temporarily ensure most of the new debts issued by banks. The Federal Reserve also plans to be the buyer of last resort for companies’ short-term debts. Under this plan, government deposit insurance will also cover accounts used by small businesses. These measures are however supposed to be temporary (BBC report).

The UK government has also unveiled a 37 billion pounds bail-out plan. It intends to give financial help to the Royal Bank of Scotland (RBS), Lloyds TSB, and HBOS in an effort to prevent a financial meltdown. The banks are in turn required not to pay dividends this year and possibly the next and the next, and also to help those who are struggling to pay their mortgages (Guardian Report).

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Germany plans to fight the recession through a program of public spending and tax breaks that will enable companies to write off a share of their investments and also serve to kick start the economy… The government also aims to bail out bank deposits. Its rescue plan is estimated to cost up to 25 billion Euros to boost the economy and it includes support for carmakers and building renovations (Reuters, 2008).

Conclusion and Recommendations

The manifestations of the crisis in the three respective countries have not been very different from each other. The unemployment rates have shot up in all countries and the GDP accounts have faired quite badly, prompting an economic recession. The strategies implemented by these countries have been mainly targeted at their financial institutions as they try to promote the availability of credit. So far, they have not worked, prompting speculations as to whether these policies have failed. Experts say it is still too early to tell. However, these are not the only measures that can be taken. Businesses also need to have comprehensive plans to deal with the recession. Amazingly, most companies in these countries do not have any plans of action targeting recession. Investing in their workforce on tactics to be used in case of a recession is very helpful. Another way of tackling the recession would be for them to spread their business operations into the emerging economies which are unlikely to be affected by the recession. Business leaders cannot afford to wait on their governments to bail them out each time there is a crisis (McKinney Rogers). Lessons have been learned in the past, it is up to them to ensure they are carried forward into the future.

References

  1. The Employment Situation: 2008, US Department of Labor: Bureau of Labor Statistics, Washington D.C 20212.
  2. UK unemployment rate hits 11 year high, 12 Nov 2008. Agence France-Presse (AFP).
  3. Germany unemployment edges lower to 7.4%, published 2008, The Associated Press.
  4. German Q3 GDP contracts, economy in recession. Published 2008, Thomson Reuters.
  5. Michael Walden, NCSU economist, Can government steer the economic ship? Posted 27 Oct 2008. WRAL.com
  6. British government unveils 37 billion pounds banking bail out plan. Guardian Report.
  7. Japan, Germany spend billions to fight recession, Thomson Reuters 2008.
  8. Invest in people power to fight recession, McKinney Rogers business performance consultancy, 2008.
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