The Return of Depression Economics and the Crisis - Case Study Example

? Global Business Environment – the Banking sector of Pakistan vs. UK & Greece Grade Banking Sector – boom and decline 1.1 Rise of the Banking Sector According to Davies (2010), banking sector – arguably the back bone of an economy, had seen incredible rise and growth in the early years of 2000s. With global economies flourishing, the banking sector flourished in direct proportion – both in terms of consumer as well as corporate lending. However, the sub-prime crisis that jolted the western economies around 2007-08, brought about a huge crash in the banking sector primarily in Europe and America (Chossudovsky and Marshall, 2010). 1.2 The Crisis Chain The global financial crisis brought about a tremendous and dramatic turn around in the banking sector across the world and there were hardly any economies that remained unaffected by the same. Not just the banking sector, but the sub-prime mortgage crisis brought about a chain of crisis causing a high velocity downfall in real estate, stock exchanges, and insurance companies as well – many big names fell apart, bail out packages were developed in order to reduce the impact, inflation went sky rocketing, and at the end of the chain, consumers lost loads and loads of money. Krugman (2009) states that a situation came where economists describe that there were empty houses in the US, and homeless people outside the same – showing the reduced purchasing power, and high prices of land and mortgage. Economists call the year 2008 as the ‘Global Financial Earthquake’. This era was known as the most depressive economic scenario since after the Great Depression of the early 30s. This assignment aims at discussing and comparing how the environmental and macroeconomic variables in countries like UK, Greece, and Pakistan have affected the banking sector in these respective regions. The environmental variables include the PLEST analysis, whilst the macroeconomic variables primarily comprise of GDP, unemployment rates, and inflation. For analysis purpose, these variables would be studied between the term of Jan 2007 and Dec 2010. Following is a pictorial representation of the macroeconomic variables: The description of this diagram is beyond the scope of this assignment; however, it clearly illustrates the strong inter-connection between various economic indicators. It shows the linkage of financial markets with government, the employment (or unemployment), organizations and corporate, households, and the commodities markets. There is strong co-relation between these entities and any jolt, can lead to a drastic effect on all the others. 2. Analysis of Banking Sector in UK 2.1 PLEST Analysis Paulson (2011) states that the global financial earthquake of 2008 ripped apart the exceptionally high growth of the previous years, closing the huge names of the financial sector close to bankruptcy. In terms of the banking sector in the UK, the banks are rather politically and legally secured – as UK is recognized as the pioneer of financial system globally. The banking sector is also technologically fairly sound. The 2008 decline was primarily witnessed due to the drastic changes in the economic and social habits and norms of the population. Primarily a sub-set of the sub-prime mortgage crisis that initiated the panic, UK’s economy took a downturn. The primary cause of this being the over -spending habits that had embedded in the norms of the society, which was in turn, was caused by the easy presence and availability of the credit cards. Lewis (2011) states that most of the consumers had over spent their budgets in expectation of their future cash flows, which did not happen as bankruptcy became a common feature, employees were laid off in one go, salary, were reduced, and big names like JP Morgan, Lehman Brothers, etc. went off the hook. Government ultimately intervened with bail out packages to assist in the survival of the financial backbone of the economy. 2.2 Macroeconomic Indicators There are three primary macroeconomic indicators i.e. GDP, unemployment rates, and inflation – their brief explanation is essential prior to indicating their values. GDP (Gross Domestic Product) comprises of the total output that an economy produces. Unemployment rate defines the number of people that are not employed at present but have the willingness and ability to be employed. Inflation is the increase in price level over a period of time, calculated on a base period. Following the GDP growth of UK in the form of bar chart presented for both halves of the year separately for the term Jan 2007 till Dec 2010: The growth rate illustrates how slump had hit the UK economy. Following is the graphical representation of unemployment in the UK during the same term: This three year chart shows how unemployment has stuck the UK economy. Following is the inflation data for UK: Simultaneous analyses of the three variables show that the first half of the year 2008 was the time when the downfall initiated for the UK economy, and the second half was the worst period. The huge spike in the same time-line shows the tough time that the region was going through. It is worth mentioning that majority of this was linked to the lean patch of the banking sector. As a cyclic affect, it had hit back the banking sector as the later was a major contributor towards lay off, and its reduced support to the corporate clients led to the reduced GDP and rising levels of inflation across the UK. 3. Banking Sector in Greece 3.1 PLEST Analysis According to Foster (2009), Greece is one of the few economies that suffered the most in the 2008 economic crisis. Analyzing the PLEST, the government became less stable – thus instability prevailed in its political landscape. In terms of the regulations and policies, again, there were instable policies and confusion for bail outs. The economical system crashed on the whole, leading to socio problems. The banking sector in Greece collapsed dramatically, causing bankruptcy, leading downfall of many businesses, and gradually affected the GDP decline, increased inflation, and rising unemployment as visible from the graphics illustrated below in the next section. 3.2 Macroeconomic Indicators Following is the GDP growth of Greece between Jan 2007 and Dec 2010: Following is the unemployment comparison of Greece for the same time period: Following is the inflation in Greece during the said time span: The soaring inflation and unemployment in the region says a lot for itself, and it was mainly an outcome of the decline in the banking sector activities. 4. Banking Sector in Pakistan 4.1 PLEST Analysis McLean (2011) states that Pakistan has been known politically as one of the most instable environments in the region, with the laws and regulations are far from order today; Socio-economically, the country is fairly unstable, but has maintained good pace with the technological turn around. In terms of banking sector, Pakistan did prosper good guns in the early years of 2000 with the Musharraf regime, and lower interest rates, life styles and industries flourished. The banking sector did well till the time when the global financial crisis initiated. The impact of the same on the banking sector in Pakistan is more like a reaction of the global crisis. Locally, the variables were not as opposing as they were in the global arena; however, the reactive scenario led to a downfall in the local financial sector. In accordance with Soros (2008), banks took, what they called, preventive measures to ensure that the local financial market does not move towards a slump but the same measured enacted otherwise, and led to the slump in the market. As visible from the statistics mentioned below, the levels of growth, unemployment and inflation illustrate a healthy sign; however, the region itself couldn’t sustain the pre-cautionary measures taken by the financial sector decision makers. 4.2 Macroeconomic Indicators Following is the GDP growth of Pakistan between Jan 2007 and Dec 2010: Following is the unemployment comparison of Pakistan for the same time period: Following is the inflation in Pakistan during the said time span: Conclusion The statistics, numbers, and graphs illustrated during the course of this assignment depict the starters of the disasters and the ones that are the reactive economies. Soros (2009) states that UK is more of a trend setting economy in the European trade zone, and other economies, despite being independent, tend to follow the trend either consciously or otherwise. Likewise is the example of Greece; Siegel (2009) states that this does not imply that economies such as Greece do not have strong fundamentals, but the point of the matter is that these economies are highly influenced by the bigger fish in the picture. Third world economies such as Pakistan tend to become a reaction point for what happens on the broader scope or landscape across the world. The banking sector saw its boom from the year 2000 till somewhere around 2007-08 when the sub prime mortgage crises got out of control. Even today, not many economies are in the best of stages, and majority is alive due to the bail out that has been taking place over a period of time. Lewis (2010) states that the revival may be near soon if the policies of spent-vs.-save are not rectified to correctly match the ideal economic scenario. References Chossudovsky, Michel & Marshall, Andrew G., 2010. The Global Economic Crisis The Great Depression of the XXI Century. Global Research Publishers. Davies, Howard, 2010. The Financial Crisis: Who is to Blame? Polity. Foster, John B. & Magdoff, Fred, 2009. The Great Financial Crisis: Causes and Consequences. January Edition. Monthly Review Press. Krugman, Paul, 2009. The Return of Depression Economics and the Crisis of 2008. W. W. Norton & Company. Lewis, Michael, 2011. The Big Short: Inside the Doomsday Machine. W. W. Norton & Company. McLean, Bethany & Nocera, Joe. 2011. All the Devils Are Here: The Hidden History of the Financial Crisis. Portfolio Trade. Paulson, Henry M. & Frank, Barney, 2011. On the Brink: Inside the Race to Stop the Collapse of the Global Financial System. Business Plus. Siegel, Laurence B., 2009. Insights into the Global Financial Crisis. The Research Foundation of CFA Institute. Soros, George, 2008. The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. Public Affairs. Soros, George, 2009. The Crash of 2008 and What it Means: The New Paradigm for Financial Markets. 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