Early 2000s recession

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The Early 2000s recession was felt in mostly Western countries, affecting the European Union mostly during 2000 and 2001 and the United States mostly in 2002 and 2003. Canada and Australia avoided the recession for the most part, while Russia, a nation that did not experience prosperity during the 1990s, began to recover. Japan's 1990s recession continued. The Early 2000s recession had been predicted by economists for years, since the boom of the 1990s, which was accompanied by both low inflation and low unemployment, had already ceased in East Asia during that region's 1997 economic crisis. The 1990s were also a period of recession between 1995 and 1998 inclusive. The Early 2000s recession was not as bad as many predicted it would be, nor was it as bad as either of the two previous world-wide recessions.

Contents 1 United States 1.1 Possible Causes 2 Canada 3 Russia 4 Japan 5 European Union 6 References

[edit] United States

The US economy experienced negative growth in three non-consecutive quarters in the early 2000s (the third quarter of 2000, the first quarter of 2001, and the third quarter of 2001). Using the common definition of a recession as "as a fall of a country's real Gross Domestic Product in two or more successive quarters", then the United States was, strictly speaking, not in recession during the period.

The beginning and ending dates of the recession, however, are debated by those using a less traditional definitions of the term. According to the initial report by the National Bureau of Economic Research (NBER), the Early 2000s recession lasted from March 2001 to November 2001, as real Gross Domestic Product dropped during this period by 0.2% total from the fourth quarter of 2000. However, even this definition is in doubt. Several members of NBER's business cycle dating committee have said that revised data indicates the recession actually began some time within the final months of 2000. Committee members suggest they are inclined to move the date.^[1] NBER President Martin Federstein said:

"It is clear that the revised data have made our original March date for the start of the recession much too late. We are still waiting for additional monthly data before making a final judgment. Until we have the additional data, we cannot make a decision."^[2]

Using the stock market as a benchmark, the recession began in March 2000 when the NASDAQ crashed following the collapse of the Dot-com bubble. The Dow Jones Industrial Average was relatively unscathed by the NASDAQ's crash until the September 11, 2001 terrorist attacks, after which the DJIA suffered its worst one-day point loss and biggest one-week losses in history. The market rebounded, only to crash once more in the final two quarters of 2002. In the final three quarters of 2003, the market finally rebounded permanently, agreeing with the unemployment statistics that the recession lasted from 2001 through 2003.

President Bush responded to the recession with tax-cut legislation in 2001 and 2003. Critics lambasted these acts, arguing that they increased the federal deficit to dangerous levels, while others felt that they helped keep the Early 2000s recession from being as sharp a decline as it was predicted to have been. Nonetheless economists have shown mathematically that the time taken from peak to trough (of the economic cycle) was approximately the same as in the early 1990s, casting a shadow on the efficacy of these tax cuts. This is because statistics suggest the economy would have recovered regardless. Economic growth started picking up in the second quarter of 2003, months before the tax cuts were fully implemented. Many argue the recovery was ushered in by a bottoming out of Interest rates in June 2003, and a sharp downward correction in energy prices that spring.

[edit] Possible Causes

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The cause of the recession are often ascribed politically either to President Clinton by the Republicans or President Bush by the Democrats. However it would be untrue to suggest that either President caused the economy to recede. Causes often cited include:

• The bursting of the dot-com bubble, which caused an end to the 'irrational exuberance' of the late 1990s, in Economic terms, the wealth effect happened in reverse. As consumers saw the value of their assets fall, they were less likely to purchase as many goods and services, choosing instead to save, possibly for fear of job losses. In addition, the Tech bubble saw the creation of many Web businesses with unsustainable business models that survived on high stock prices or venture capital. As the stock bubble deflated, the cash for these companies dried up, and many failed or sharply downsized. In turn, this created a flood of server hardware on the secondary market, and hardware and telecom companies suffered as a result.
• Corporate scandals such as the Enron and Worldcom debacles. President Bush is often blamed for the flourishing of corporate scandals in 2001 however it must be remembered that these scandals began two years before he took office, furthermore, these scandals were revealed way into 2001, marking these scandals off as events that made the existing problems worse, rather than initial causes.
• The natural end of the economic cycle. The U.S. economy had been expanding since mid 1991, according to some economists it was time for the usual cycle to occur.
• A high deflationary impact because there were huge budget surpluses at the time ($236 billion in FY01). Keynesian economics suggests that this would slow the economy because the government is hoarding a substantial amount of money.
• The millennium bug. Prior to 2000, a lot of money was spent trying to tackle the Y2K bug. After the start of 2000, this spending dried up and many firms decided to cut down sharply on technological investment because they had most of the technology they needed for the meantime, this may have been a key factor in the decline in the stock market after March 2000, and this fall in investment was detrimental to the general performance of the economy.
• The economic shock of the September 11th terror attacks, which resulted in a drastic fall in consumer confidence, huge insurance payouts and a fall in the demand for travel and tourism

[edit] Canada

Canada's economy is closely linked to that of the United States, and economic conditions south of the border tend quickly to make their way north. Canada's stock markets were especially hard hit by the collapse in high tech stocks. For much of the 1990s the rapid rise of the TSX had almost wholly been attributed to two stocks: Nortel and BCE. Both companies were hard hit by the downturn, especially Nortel that was forced to lay off much of its workforce. The events of September 11th also hurt the Canadian stock markets and was especially devastating to the already troubled airline sector.

However in the wider economy Canada was surprisingly unhurt by these events. While growth slowed, the economy never actually entered a recession. This was one of the first times that Canada had avoided following the United States into an economic downturn. The rate of job creation in Canada continued at the rapid pace of the 1990s. A number of explanations have been advanced to explain this. Canada was not as directly affected by 9/11 and the subsequent wars, and the downward pressure of these events were more muted. Canada's fiscal management during the period has been praised as the federal government continued to bring in large surpluses throughout this period, in sharp contrast to the United States. Unlike the United States no major tax cuts or major new expenditures were introduced. Many provincial governments suffered greater problems with a number of them returning to deficits, which was blamed on the fiscal imbalance. 2003 saw elections in six Canadian provinces and in only one did the governing party not lose seats.

[edit] Russia

see also History of post-Soviet Russia#The crises of 1998

The Soviet Union's last year of economic growth was 1989, and throughout the 1990s, recession ensued in the Former Soviet Republics. In the May 1998, following the 1997 crash of the East Asian economy, things began to get even worse in Russia. In August 1998, the value of the ruble fell 34% and people clamored to get their money out of banks (see Russian financial crisis). The government acted by dragging its feet on privitization programs. Russians responded to this situation with approval by electing conservative Vladimir Putin as President in 2000. Putin proceeded to re-assert the role of the Federal government, and gave it power it had not seen since the Soviet era. State run businesses were used to out-compete some of the more wealthy rivals of Putin. Putin's policies were popular with the Russian people, gaining him re-election in 2004, as the early 2000s recession was, for the most part, avoided in Russia due to a return to conservatism.

[edit] Japan

Japan's recession, which started in the early 1990s, continued into the 2000s, with deflation being the main problem. Deflation began plaguing Japan in the fiscal year ending 1999, and by 2005 the yen had 103% of its 2000 buying power. The Bank of Japan attempted to cultivate inflation with high liquidity and a nominal 0% interest rate on loans. Other aspects of the Japanese economy were good during the early 2000s; unemployment remained relatively low, and China became somewhat dependent on Japanese exports. The bear market, however, continued in Japan despite the best efforts of the Bank.

[edit] European Union

Transition left the economy of the European Union in a cautiously optimistic state during the early 2000s. The most difficult years were 2000-2001, precipitating the worst years of the American recession. The European Union introduced a new currency on January 1, 1999. The euro, which was met with much anticipation, had its value immediately plummet, and it continued to be a weak currency throughout 2000 and 2001. Inflation struck the Eurozone for a few months in summer 2001 but the economy disinflated within months. In 2002, the value of the euro began to rapidly rise (reaching parity with the US Dollar on July 15, 2002. This hurt business for companies based in Europe, as the profits made abroad (especially in the Americas) had an unfavorable exchange rate.

[edit] References