For all of the focus there has been on the crisis in financial markets, the economic downturn has been led by the industrial sector.
Collapse in trade leads global downturn in production
For all of the focus there has been on the crisis in financial markets, the economic downturn has been led by the industrial sector. However, a substantial part of the reason for the decline in industrial output is a tightening of credit conditions – a direct result of the financial market crisis. But the key point is the downturn now underway is impacting countries which did not increase debt (leverage) excessively nor were involved directly in the credit markets that have now gone bad. Rather, they are being affected by the widespread collapse in global trade that is now underway. This means that the higher the share of foreign trade in a country’s economy, the worst the impact on it from the current slowdown in world growth. The credit crisis is acting to worsen the global economic downturn as trade credit and invoicing dry up. Not surprisingly, companies are reducing inventories rapidly, business confidence has fallen sharply and unemployment is now rising quickly.