The seizing of financial markets that followed Lehman Brothers’ failure caused the global economy to fall into its deepest recession in decades. By the spring of 2009 industrial production (IP) in the 30 countries that comprise the Organisation for Economic Cooperation and Development (OECD) had plunged more than 15 percent from year-earlier levels (Figure 1).
Incredibly, it could have been far worse. The governments of the world’s major countries averted catastrophe at the height of the crisis by taking steps to prevent a wholesale collapse of their financial systems via recapitalization, loan guarantees and increased deposit insurance. In addition, major central banks slashed policy rates to unprecedented levels, and many implemented programs of “quantitative easing” to provide further stimulus. Governments in most major countries opened the fiscal taps. One year later, there are clear signs that the medicine is having its desired effects as IP in the OECD nations turned slightly positive in December 2009. Unfortunately, however, OECD IP remains 12 percent below its February 2008 peak. At its current rate of increase, IP will not return to its previous peak until mid-2011.
The Dollar Should Appreciate Modestly versus Major Currencies
The U.S. dollar trended lower throughout most of 2009 as the recovery in the global economy caused the greenback to lose its safe-haven appeal. However, the dollar has gotten off to a strong start in 2010, especially against the euro and other European currencies. U.S. economic data has generally been stronger than expected, while the upturn on the other side of the Atlantic has been disappointing thus far. Concerns about the Greek debt situation have also weighed on the euro.
GlobalChartbook _ March 2010
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