The GFC six years on
Everyone will be familiar with the Global Financial Crisis (GFC). In many parts of the world economic growth was buoyant up until late 2007, but the tide turned and by September 2008 the global financial system was close to collapsing.
Exposure to complex AAA rated investments (which turned out to be backed by poor quality assets) was destabilising the balance sheets of many established banks in the US and Europe. As a result many of those banks were finding it increasingly difficult to refinance loans and were facing a ‘credit crunch’.
In September 2008 Lehman Brothers filed for bankruptcy and widespread panic gripped financial markets. Governments were forced to step in and bail out banks and other financial institutions to avert an even bigger financial crisis.
Since 2008 the global financial system has faced many strains and pressures. Many national economies have struggled to recover. Governments and their central banks have used strategies such as Monetary Policy (reducing cash rates) and Quantitative Easing (buying bonds in the secondary market) to stimulate economic growth – with mixed success.
This article looks at some of the key economic and market indicators from 2005 up until the present for six major developed economies.
In general terms a healthy economy should grow at between 3-4% a year. Actually achieving this target over the long term is very difficult – probably impossible on consistent basis.
The pre GFC period was a period of ‘prosperity and tranquility’ in all six economies. The credit crunch sent all but Australia into recession – with Japan, Germany and UK faring the worst.
Governments have since sought means to boost their economies. The UK and US have been successful with growth back over 3% and 2.5% respectively. Germany has had inconsistent growth and has been dragged down by the problems of the rest of the Euro zone. Japan continues to struggle to create sustainable growth and France has barely grown at all in the last 3 years.
The Australian economy was supported by Government stimulus packages and the mining investment boom. Growth has recovered, but probably not to the level desired by many Australians.
Some inflation is a good thing for economic progress. It stimulates spending because there is an expectation that prices will rise. The Reserve Bank of Australia targets 2-3% over the long term and that is an acceptable range for most economies. High inflation is undesirable because it destroys purchasing power and depresses investment. Deflation (falling prices) is also bad news because consumers and businesses hold off spending or investing in the expectation that prices will fall.
Japan has been in a deflationary state since the 1990’s and the GFC made things worse. Recent government initiatives appear to have resurrected inflation.
In the other five economies inflation fell during the GFC. France and Germany still have very low inflation (less than 1%) whilst Australia, the US and UK are within the target band.
Traditionally an unemployment rate of 5% has been considered ‘full’ employment because there will always be people between jobs or who are unemployable.
Over the last 10 years Germany has introduced successfule initiatives that have driven unemployment down. France has been less successful and unemployment has persisted at over 10%. Japan has consistently low unemployment because the low numbers of women in the workforce, a declining workforce as the population ages and flexible wage rates.
Unemployment in the UK and US rose significantly during the GFC but has since improved. In Australia unemployment stayed under 5% in the GFC but has since crept up to over 6%.
The pre GFC euphoria was fed by excess leverage and pushed sharemarkets to record highs levels. All sharemarkets took a hit during the GFC but the recovery since has differed. All markets recovered in 2010 and 2011 but all (except the US) slumped again in 2012. Since then markets have recovered with the strongest growth in Japan and US.
It should be noted that the year-on-year growth numbers in the above table do not include dividends which are particularly significant for Australia.
In terms of overall movement during the period the German and US sharemarkets are significantly higher than their pre GFC peaks – Germany by 25% and US by 28%. The UK is just over their 2007 peak whilst Australia and Japan are 10% and 15% respectively under their peak. The French sharemarket is 30% off their 2007 high.
From a financial planning perspective the key lesson from all of this analysis is the importance of diversification. For a variety of reasons countries perform differently which flows on to the returns from their investment markets. In 2011 very few commentators were forecasting Japan and the US as the likely top performers in global equities over the following three years.