Pakistan Economy Profile 2009
Transcript of Pakistan Economy Profile 2009
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Pakistan Economy Profile 2009
Economy - overview
Pakistan, an impoverished and underdeveloped country, has sufferedfrom decades of internal political disputes, low levels of foreigninvestment, and declining exports of manufactures. Faced with untenablebudgetary deficits, high inflation, and hemorrhaging foreign exchangereserves, the government agreed to an International Monetary FundStandby Arrangement in November 2008. Between 2004-07, GDPgrowth in the 6-8% range was spurred by gains in the industrial andservice sectors, despite severe electricity shortfalls. Poverty levelsdecreased by 10% since 2001, and Islamabad steadily raised developmentspending in recent years. In 2008 the fiscal deficit - a result of chronically
low tax collection and increased spending - exceeded Islamabad's targetof 4% of GDP. Inflation remains the top concern among the public,jumping from 7.7% in 2007 to 20.8% in 2008, primarily because of risingworld fuel and commodity prices. In addition, the Pakistani rupee hasdepreciated significantly as a result of political and economic instability.
GDP (purchasing power parity)
$427.3 billion (2008 est.)$416 billion (2007 est.)
$392.5 billion (2006 est.)note: data are in 2008 US dollars
GDP (official exchange rate)
$167.6 billion (2008 est.)
GDP - real growth rate
2.7% (2008 est.)
6% (2007 est.)6% (2006 est.)
GDP - per capita (PPP)
$2,500 (2008 est.)$2,500 (2007 est.)$2,400 (2006 est.)
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note: data are in 2008 US dollars
GDP - composition by sector
Agriculture: 20.4%industry: 26.6%services: 53% (2008 est.)
Population below poverty line
24% (FY05/06 est.)
Labor force
50.58 millionnote: extensive export of labor, mostly to the Middle East, and use ofchild labor (2008 est.)
Labor force - by occupation
agriculture: 43%industry: 20.3%services: 36.6% (2005 est.)
Unemployment rate
7.4% (2008 est.)5.6% (2007 est.)note: substantial underemployment exists
Household income or consumption by
percentage share
lowest 10%: 3.9%
highest 10%: 26.5% (2005)
Distribution of family income - Gini index
30.6 (FY07/08)41 (FY98/99)
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Investment (gross fixed)
20% of GDP (2008 est.)
Budget
Revenues: $22.3 billionexpenditures: $32.35 billion (2008 est.)
Public debt
49.8% of GDP (2008 est.)71.4% of GDP (2004 est.)
Inflation rate (consumer prices)
20.3% (2008 est.)7.6% (2007 est.)
Central bank discount rate
15% (31 December 2008)10% (31 December 2007)
Stock of money
$NA (31 December 2008)$52.76 billion (31 December 2007)
Stock of quasi money
$NA (31 December 2008)$18.42 billion (31 December 2007)
Stock of domestic credit
$NA (31 December 2008)$65.05 billion (31 December 2007)
Industries
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textiles and apparel, food processing, pharmaceuticals, constructionmaterials, paper products, fertilizer, shrimp
Industrial production growth rate
4.6% (2008 est.)
Electricity - production
93.26 billion KWh (2007 est.)
Electricity - production by source
fossil fuel: 68.8%
hydro: 28.2%nuclear: 3%other: 0% (2001)
Electricity - consumption
68.4 billion KWh (2006 est.)
Electricity - exports
0 kWh (2007 est.)
Electricity - imports
0 kWh (2007 est.)
Oil - production
68,670 bbl/day (2007 est.)
Oil - consumption
345,000 bbl/day (2006 est.)
Oil - imports
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290,600 bbl/day (2005)
Oil - exports
28,060 bbl/day (2005)
Oil - proved reserves
395.6 million bbl (1 January 2008 est.)
Natural gas - production
30.8 billion cu m (2007 est.)
Natural gas - consumption
30.8 billion cu m (2007 est.)
Natural gas - exports
0 cu m (2007 est.)
Natural gas - imports
0 cu m (2007 est.)
Natural gas - proved reserves
792.8 billion cu m (1 January 2008 est.)
Current Account Balance
-$14.99 billion (2008 est.)
-$8.297 billion (2007 est.)
Agriculture - products
cotton, wheat, rice, sugarcane, fruits, vegetables; milk, beef, mutton, eggs
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Exports
$21.9 billion (2008 est.)$18.12 billion (2007 est.)
Exports - commodities
textiles (garments, bed linen, cotton cloth, yarn), rice, leather goods,sports goods, chemicals, manufactures, carpets and rugs
Exports - partners
US 16%, UAE 11.7%, Afghanistan 8.6%, UK 4.4%, China 4.4% (2008)
Imports
$38.3 billion (2008 est.)$28.76 billion (2007 est.)
Imports - commodities
petroleum, petroleum products, machinery, plastics, transportationequipment, edible oils, paper and paperboard, iron and steel, tea
Imports - partners
China 15.4%, Saudi Arabia 12.2%, UAE 11.3%, Kuwait 5.5%, US 4.8%(2008)
Reserves of foreign exchange and gold
$8.903 billion (31 December 2008 est.)$15.69 billion (31 December 2007 est.)
Debt - external
$44.15 billion (31 December 2008 est.)$38.8 billion (31 December 2007 est.)
Stock of direct foreign investment - at home
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$25.44 billion (31 December 2008 est.)$20.01 billion (31 December 2007 est.)
Stock of direct foreign investment - abroad
$1.032 billion (31 December 2008 est.)$982 million (31 December 2007 est.)
Market value of publicly traded shares
$23.49 billion (31 December 2008)$70.26 billion (31 December 2007)$45.52 billion (31 December 2006)
Economic aid - recipient
$1.666 billion (2005)
Currency (code)
Pakistani rupee (PKR)
Currency (code)
PKR
Exchange rates
Pakistani rupees (PKR) per US dollar - 70.64 (2008 est.), 60.6295 (2007),60.35 (2006), 59.515 (2005), 58.258 (2004)
Fiscal year
1 July - 30 June
December 18, 2008
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Pakistan Economy 2009http://www.theodora.com/wfbcurrent/pakistan/pakistan_economy.html
SOURCE: 2009 CIA WORLD FACTBOOK
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Economy - overview:Pakistan, an impoverished and underdeveloped country, hassuffered from decades of internal political disputes, low levels offoreign investment, and declining exports of manufactures. Facedwith untenable budgetary deficits, high inflation, andhemorrhaging foreign exchange reserves, the government agreedto an International Monetary Fund Standby Arrangement inNovember 2008. Between 2004-07, GDP growth in the 6-8%range was spurred by gains in the industrial and service sectors,despite severe electricity shortfalls. Poverty levels decreased by10% since 2001, and Islamabad steadily raised developmentspending in recent years. In 2008 the fiscal deficit - a result ofchronically low tax collection and increased spending - exceededIslamabad's target of 4% of GDP. Inflation remains the topconcern among the public, jumping from 7.7% in 2007 to 24.4% in2008, primarily because of rising world fuel and commodity prices.In addition, the Pakistani rupee has depreciated significantly as aresult of political and economic instability.
GDP (purchasing power parity):$452.7 billion (2008 est.)$427.9 billion (2007)$404.5 billion (2006)note: data are in 2008 US dollars
GDP (official exchange rate):$160.9 billion (2008 est.)
GDP - real growth rate:5.8% (2008 est.)5.8% (2007 est.)6.4% (2006 est.)
GDP - per capita:$2,600 (2008 est.)$2,500 (2007 est.)$2,400 (2006 est.)note: data are in 2008 US dollars
GDP - composition by sector:agriculture: 20.4%industry: 26.6%services: 53% (2008 est.)
Labor force:50.58 millionnote: extensive export of labor, mostly to the Middle East, and useof child labor (2008 est.)
Labor force - by occupation:agriculture: 43%industry: 20.3%services: 36.6% (2005 est.)
Unemployment rate:
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Economy of PakistanFrom Wikipedia, the free encyclopedia
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Economy of Pakistan
Currency 1 Pakistani Rupee (PKR) Rs. = 100 Paisas
Fiscal year July 1June 30
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Trade
organisationsECO, SAFTA, ASEAN,WIPO andWTO
Statistics
GDP $452.7 billion (PPP) (2008)[1]
GDP growth 2.0% (2009 est.)[2]
GDP per capita $2,600 (PPP) (2008)
GDP by sectoragriculture: 19.6%, industry: 26.8%, services: 53.7%
(2007)
Inflation(CPI) 11.17% (2009-2010)[3]
Population
belowpoverty line23% ((2007))[1]
Labour force 49.18 million (2006 est.)
Unemployment 7.5% (2007 est.)
Main industries
textiles, chemicals, food processing, steel,transport
equipment, automotives,machinery,beverages,
construction,materials,clothing,paper products
External
Exports $17.78 billion (2008 est.) (68th[4])
Export goods
textile goods (garments, bed linen, cotton cloths, and
yarn), rice, leathergoods, sportsgoods, chemicals
manufactures, carpets andrugs
Main export
partners
United States 22.4%,UAE8.3%,UK6%,China
5.4%,Germany4.7% (2006 est.)
Imports $30.99 billion f.o.b. (2007 est.)
Import goods
Petroleum, Petroleum products, Machinery, Plastics,
Transportation equipment, Edible oils, Paper and
paperboard, Iron and steel, Tea
Main import
partners
China 14.7%, Saudi Arabia10.1%,UAE 8.7%, Japan
6.5%,United States 5.3%,Germany5%,Kuwait
4.9% (2006 est.)Public finances
Public debt $45 billion (2007)
Revenues $27.5 billion (2006 est.)
Expenses $35 billion (2006 est.)
Main data source: CIA World Fact Book
All values, unless otherwise stated, are in US dollars
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i/Saudi_Arabiahttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Kuwaithttp://www.theodora.com/wfb/wfb2000/definitions.html#importshttp://www.theodora.com/wfb/wfb2000/definitions.html#imports_commoditieshttp://www.theodora.com/wfb/wfb2000/definitions.html#imports_commoditieshttp://www.theodora.com/wfb/wfb2000/definitions.html#imports_commoditieshttp://www.photius.com/energy/https://www.cia.gov/library/publications/the-world-factbook/geos/pk.htmlhttp://www.theodora.com/wfb/wfb2000/definitions.html#imports_partnershttp://en.wikipedia.org/wiki/United_States_dollarhttp://www.theodora.com/wfb/wfb2000/definitions.html#oil_productionhttp://www.theodora.com/wfb/wfb2000/definitions.html#oil_consumptionhttp://www.theodora.com/wfb/wfb2000/definitions.html#oil_exportshttp://www.theodora.com/wfb/wfb2000/definitions.html#oil_importshttp://www.theodora.com/wfb/wfb2000/definitions.html#oil_proved_reserveshttp://www.theodora.com/wfb/wfb2000/definitions.html#natural_gas_productionhttp://www.theodora.com/wfb/wfb2000/definitions.html#natural_gas_consumptionhttp://www.theodora.com/wfb/wfb2000/definitions.html#natural_gas_exportshttp://www.theodora.com/wfb/wfb2000/definitions.html#natural_gas_importshttp://www.theodora.com/wfb/wfb2000/definitions.html#natural_gas_proved_reserveshttp://www.theodora.com/wfb/wfb2000/definitions.html#current_account_balancehttp://www.theodora.com/wfb/wfb2000/definitions.html#exportshttp://www.theodora.com/wfb/wfb2000/definitions.html#exports_commoditieshttp://www.theodora.com/wfb/wfb2000/definitions.html#exports_partnershttp://www.theodora.com/wfb/wfb2000/definitions.html#importshttp://www.theodora.com/wfb/wfb2000/definitions.html#imports_commoditieshttp://www.photius.com/energy/http://www.photius.com/energy/http://www.theodora.com/wfb/wfb2000/definitions.html#imports_partnershttp://www.theodora.com/wfb/wfb2000/definitions.html#reserves_of_foreign_exchange_and_goldhttp://en.wikipedia.org/wiki/Economic_Cooperation_Organizationhttp://en.wikipedia.org/wiki/SAFTAhttp://en.wikipedia.org/wiki/ASEANhttp://en.wikipedia.org/wiki/WIPOhttp://en.wikipedia.org/wiki/WTOhttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-CIAFB-0http://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-1http://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-2http://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-CIAFB-0http://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Chemical_industryhttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Automotiveshttp://en.wikipedia.org/wiki/Machineryhttp://en.wikipedia.org/wiki/Beverageshttp://en.wikipedia.org/wiki/Constructionhttp://en.wikipedia.org/wiki/Materialshttp://en.wikipedia.org/wiki/Clothinghttp://en.wikipedia.org/wiki/Paper#Applicationshttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-3http://en.wikipedia.org/wiki/Textilehttp://en.wikipedia.org/wiki/Garmentshttp://en.wikipedia.org/wiki/Yarnhttp://en.wikipedia.org/wiki/Ricehttp://en.wikipedia.org/wiki/Leatherhttp://en.wikipedia.org/wiki/Sportshttp://en.wikipedia.org/wiki/Carpetshttp://en.wikipedia.org/wiki/Rugshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Kuwaithttps://www.cia.gov/library/publications/the-world-factbook/geos/pk.htmlhttp://en.wikipedia.org/wiki/United_States_dollar 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The economy of Pakistan is the 27th largest economy in the world in terms ofpurchasing power, and the 48th largest in absolute dollar terms. Pakistan's economymainly encompasses textiles, chemicals, food processing, agriculture and other industries.The economy has suffered in the past from decades ofinternalpolitical disputes, a fastgrowingpopulation, mixed levels of foreign investment, and a costly, ongoing
confrontation with neighboring India. However, IMF-approved government policies,bolstered by foreign investmentand renewed access to global markets, have generatedsolid macroeconomic recovery the last decade. Substantial macroeconomic reforms since2000, most notably at privatizing the banking sector have helped the economy.
GDP growth, spurred by gains in the industrial and service sectors, remained in the 6-8%range in 2004-06. Due to Economic Reforms of the Year 2000 by the Musharrafgovernment.[5] In 2005, the World Banknamed Pakistan the top reformer in its region andin the top 10 reformers globally. [6] Pakistan's then Prime Minister Shaukat Aziz statedPakistan grew at a rate of 8.4% making it the 2nd Fastest Growing Economy in theWorld, after China, in the same year.[7]
Islamabadhas steadily raised development spending in recent years, including a 52% realincrease in the budget allocation for development in FY07, a necessary step towardreversing the broad underdevelopment of its social sector. The fiscal deficit - the result ofchronically low tax collection and increased spending, including reconstruction costsfrom the devastating Kashmir earthquake in 2005 was manageable.
Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005before easing to 7.9% in 2006. In 2008, following the surge in global petrol pricesinflation in Pakistan has reached as high as 25.0%. The central bank is pursuing tightermonetary policy while trying to preserve growth.Foreign exchangereserves are bolstered
by steady worker remittances, but a growing current account deficit - driven by awidening trade gap as import growth outstrips export expansion - could draw downreserves and dampen GDP growth in the medium term.[8]
Since the beginning of 2008, Pakistan's economic outlook has taken stagnation. Securityconcerns stemming from the nation's role in theWar on Terrorhave created greatinstability and led to a decline in FDI from a height of approximately $8 bn to $3.5bn forthe current fiscal year. Concurrently, the insurgency has forced massive capital flightfrom Pakistan to the Gulf. Combined with high global commodity prices, the dual impacthas shocked Pakistan's economy, with gaping trade deficits, high inflation and a crash inthe value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a fewmonths. For the first time in years, it may have to seek external funding as Balance ofPayments support. Consequently, S&P lowered Pakistans foreign currency debt rating toCCC-plus from B, just several notches above a level that would indicate default.Pakistans local currency debt rating was lowered to B-minus from BB-minus. Creditagency Moodys Investors Service cut its outlook on Pakistans debt to negative fromstable due to political uncertainty, though it maintained the countrys rating at B2.Thecost of protection against a default in Pakistans sovereign debt trades at 1,800 basis
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/Purchasing_power_parityhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Internalhttp://en.wikipedia.org/wiki/Internalhttp://en.wikipedia.org/wiki/Internalhttp://en.wikipedia.org/wiki/Politicalhttp://www.theodora.com/wfb/wfb2000/definitions.html#exchange_rateshttp://www.theodora.com/wfb/wfb2000/definitions.html#exchange_rateshttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Foreign_investmenthttp://en.wikipedia.org/wiki/Foreign_investmenthttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Musharrafhttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-londonstockexchange.com-4http://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-5http://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-6http://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-6http://en.wikipedia.org/wiki/Islamabadhttp://en.wikipedia.org/wiki/Islamabadhttp://en.wikipedia.org/wiki/2005_Kashmir_earthquakehttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Foreign_exchangehttp://en.wikipedia.org/wiki/Foreign_exchangehttp://en.wikipedia.org/wiki/Foreign_exchangehttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-7http://en.wikipedia.org/wiki/War_on_Terrorhttp://en.wikipedia.org/wiki/War_on_Terrorhttp://www.theodora.com/wfb/wfb2000/definitions.html#debt_externalhttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_at_homehttp://www.theodora.com/wfb/wfb2000/definitions.html#stock_direct_foreign_investment_abroadhttp://www.theodora.com/wfb/wfb2000/definitions.html#exchange_rateshttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)http://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Chemicalshttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Internalhttp://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Foreign_investmenthttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Musharrafhttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-londonstockexchange.com-4http://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-5http://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-6http://en.wikipedia.org/wiki/Islamabadhttp://en.wikipedia.org/wiki/2005_Kashmir_earthquakehttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Foreign_exchangehttp://en.wikipedia.org/wiki/Economy_of_Pakistan#cite_note-7http://en.wikipedia.org/wiki/War_on_Terror -
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points, according to its five year credit default swap, a level that indicates investorsbelieve the country is already in or will soon be in default.
The middle term however may be less turbulent, depending on the political environment.The EIU estimates that inflation should drop back to single digits in 2010, and that
growth should pick up to over 5% per annum by 2011. Although less than the previous 5year average of 7%, it would represent a overcoming of the present crisis wherein growthis a mere 3.5-4%. [9]
The Effect of Global Recession on Pakistan
In economics, the term recession means The reduction of a countrys Gross DomesticProduct (GDP) for at least two quarters; or in normal terms, it is a period of reducedeconomic activity The International Monetary Fund regards periods when global growthis less than 3% to be global recession.
recession
DefinitionAperiodof generaleconomicdecline; typically defined as a decline inGDP for two ormore consecutive quarters. A recession is typically accompanied by a drop in the stockmarket, an increase in unemployment, and a decline in thehousing market. A recession isgenerally considered less severe than a depression, and if a recession continues long
enough it is often then classified as a depression. There is no one obvious cause of arecession, although overall blame generally falls on the federalleadership, often eitherthe Presidenthimself, the head of the Federal Reserve, or the entire administration.
Causes of recession
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One of the most important causes of economic recession is unrestrained capitalism. Weare paying our dues for years of overproduction and rampant greed. The golden age ofcapitalism in the seventies and eighties is now finally taking its toll on our economy.
Another one of the important causes of economic recession is falling demand for goods
and services. It's not hard to understand that if we produce more than we are consuming.the demand for the excess production just won't be there, and we have a waste ofresources.
High Interest Rates Cause Recession
High interest rates are also a cause of recession. That's because it limits liquidity, or theamount of money available to invest. In spite of the stock market decline in March 2000,the Federal Reservecontinued raising interest rates to a high of 6.25% in May 2000. TheFed didn't start lowering rates until January 2001, and lowered them about 1/2 point eachmonth, resting at 1.75% in December 2001. This kept interest rates high when theeconomy needed low rates for cheap business loans and mortgages.
One of the causes of the current recession was that the Fed was also slow to raise interestrates when the economy started to boom again in 2004. Low interest rates in 2004 and2005 helped created the housing bubble. Irrational exuberance set in again as manyinvestors took advantage of low rates to buy homes just to resell. Others bought homesthey couldn't afford thanks to interest-only loans.
Recession - Causes of recessions
Recessions are mostly caused by external economic shocks, or the unwinding of majorimbalances in the economy. One mechanism is based substantially on the role of
consumer confidence and business confidence, which are important for example forindividuals and organizations to decide whether their current investment or debt levels
are correct. A wave of bad news (eg job losses at a big company) may lead enoughpeople to worry about the future, increase their saving and reduce their spending, so that
further bad news is caused.
What are the causes of the recession?
1.House Construction BustFirst, what started it all was the end of the buildingboom, which caused the unemployment of millions of construction workers andworkers engaged in producing and supplying materials to the building industry,and its multiplier effects.
2. Sub-Prime Mortgage Crisis. The end of the boom triggered the sub-primemortgage crisis which caused the collapse world-wide of financial institutions,
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defaults of millions of home-owners on their mortgages, and reduced the marketvalue of homes.
3. Stock Market Collapse. The collapse of the stock market wiped out the savingsof millions of shareholders, created adverse expectations that ended up reducing
consumption and invesment.
4.Environmental Regulations. Production of manufactured goods was made morecostly by environmental laws and regulations, which not only made it more costlyto produce goods but caused a decrease in prospective profits negatively affectinginvestment in manufacturing and reducing our ability to compete with foreignmanufacturers.
5.Energy Policies. Foolish energy policies prevented the creation of millions ofjobs by not permitting drilling for oil on public lands within the fifty states andeven off-shore in the Pacific and Atlantic. And the program to reduce CO2 andother emissions over the next century will cost many trillions of dollars reducing
the real incomes of American workers to the level of competing Chinese workers.
6. Trade Deficits. The surging trade deficits of the past decade which reached$750 billion in 2006 cost the U.S. an estimated 7.5 million jobs directly andindirectly, mostly in manufacturing. More workers competing for the availablejobs caused the wages of American workers to stagnate, worsened the distributionof income, contributed to the lack of savings by Americans, and made investmentin the U.S. less attractive and investment abroad more attractive to Americanbusinesses.
7.Lack of Investment Opportunities in US Manufacturing. Investment
opportunities in manufacturing have become insufficient to sustain the economichealth of the economy. Corporations in recent years plowed-under hundreds ofbillions of dollars of savings by buying back their own stock. Studies have shownthat shareholders have not benefited from the practice. Many of our businessleaders have evidently pursued policies that weakened their ability to survive arecession. Our policy of bailing out losers has the effect of keeping incompetentCEOs in office.
8.Federal Reserve Mistakes. The Fed is in control of the money supply includingthe flow of funds from abroad. Instead of talking about irrational exuberancewhich provoked the stock market boom of 1998-1999 and its collapse in 2000, it
ought to have raised margin rates to deter the bulls and taken action to neutralizethe flow of funds from abroad that fed the frenzy It could likewise have preventedthe irrational housing boom that started this recession. To the contrary,government policy has been to encourage foreign purchases of financial assets inthis country which raised the price of share and bonds and financed the tradeimbalances.
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In our view, the reduction in the standard of living of the American worker as a result ofthe recession is likely to continue. We need policies to prevent the causes of the recession
from repeating themselves. CEOs who reward themselves more than they benefitshareholders and employees should be held to account. Investment in new products or the
expansion of existing plant and equipment and increasing exports are what will restore
growth to the American economy. We need to regain industries lost to countries that stillpursue mercantilist practices. And we need to get energy independence. The stimulusspending will create temporary jobs; we need policies that will put us back on the path to
sustainable economic growth.
Recession, Its Causes & Effects
Its been a lot of time we hear of Recession going on in US market. Everyone is talkingabout recession. We cling to newspapers, television news channels, and financial reports
only to discover what next in recession. Technically, recession means decline in GDPor Gross Domestic Product of a country for two consecutive quarters. Now, this explainsrecession only as a definition to remember. When we go more deep, we need to first
understand the meaning of GDP. Gross Domestic Product is the value of all final goodsand services produced in an economy in a given year. These final goods are those goods
which are not transformed into other goods. These goods are evaluated as per theirmarket value. It means when the value of all final goods and services produced in a given
year declines for two consecutive quarters, the state is referred to as recession. It isvisible in real GDP, real income, employment, industrial production, and wholesale-retail
sales in an economy.
There are various factors that flush an economy into the weird state of recession butInflation is the main factor which contributes more towards the situation. Inflation is acondition of an economy when the prices of goods and services rise immensely over aperiod of time. The higher the rate of inflation, the smaller the percentage of goods andservices that can be purchased with the same amount of money. This may be because ofincreased production costs, higher energy costs and national debt. When the prices ofgoods reach their ever higher stage, people tend to cut on overall spending, luxuriousspending, restrict them towards basic necessities and thus save more n more. As a result,GDP declines when people begin to cut expenditures in order to cut down costs. Thismakes the companies to cut their costs as well and they chuck out workers which bringsunemployment.
Thereby, following are some of the factors that push an economy into recession..
Credit crunch - shortage of finance
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Falling house prices - related to shortage of mortgages and credit crunch
Cost push inflation squeezing incomes and reducing disposable income
Collapse in confidence of finance sector causing lower confidence amongst 'realeconomy'
Recession brings with itself all major consequences which create mayhem within theeconomy. One of the major effects of recession is Inflation. Recession comes into effectwith inflation while on the other hand; it is one of the after effects of recession. This
means the commodities reach their ever highest prices and people generally cut down oncosts. Hence, inflation becomes the major effect left out by recession. Lower income isanother effect of recession in the economy. As people cut down on costs, they tend to buyless which reduces the income and thereby fewer profits or no profits. The nextconsequence is the increment in mortgage rates. Lenders increase the mortgage rates in abid to cover the losses they bear during that time. Employment opportunities are also oneof the main targets when the economy is burning under recession. In order to cut down oncosts, companies cut down on employment opportunities thereby leading withunemployment in the economy. So when an economy enters into recession, firmsexperience a decline in profitability. This is because:
1. Tendency for price wars to develop in a recession. Low sales encourage firms to cutprices
2. Falling sales will lead to lower revenues.