Andrew Knight

Germany, the third biggest economy has fallen into recession over night as the global financial crisis continues to strike. Europe’s largest economy shrank 0.5 per cent in the third quarter, following a contraction of a revised 0.4 per cent in the second quarter. The contraction is known to be the worst than expected, analysts polled by Dow Jones Newswires predicting a 0.1 percent fall compared to the previous three months.

According to The Capital Economics research group, the data that was published could mean the economy is heading for the worst recession since the 1930s. I wasn’t alive at this date, nor was my father and it’s scary to think with all our technological advances, we could go back just as fast.

Germany actually got off to a good start this year, expanding by 1.4 per cent in the three months to March. What happened you ask? The country had been hit by slumping activity in its major export markets while domestic consumption remained at low levels. Corporate investment also suffered as well from a sharp decline in the business outlook. Following on in October, German business confidence hit its lowest point in more than five years, a widely-watched survey by the Ifo research institute showed.

Now the outlook for 2009 is looking grimmer than ever, with Berlin slashing its forecast for 2009 growth to just 0.2 per cent! A panel of experts also advised the government, saying it expects a standstill next year.

So with the world is utter chaos, does this mean Australia will fall into recession and economic fright? To be honest, I don’t think we will be effected hard like the US, UK and China. Our banking system has been strengthed over the years with good, solid grounding, provided by all the regulations the government put in place over the past. Even with the Australian stock market crashing, recovering and then repeating the process, we are still ahead in comparison to many other countries.

People are suggesting you save your money, stock it away and be a scrooge, this is the wrong mentallity as I’ve said previously. Don’t over spend but the economy needs money injected into to help it survive and prosper. Buying shares in banks and mining companies should be something to also consider, especially when the demand can be so high for certain materials and so forth.

Remember, now is the time to be investing - not squirreling your money away…not that anything is wrong with doing that, just we need money into the economy to help it survive and keep it strong!

Source: http://news.smh.com.au/business/germany-in-recession-as-slowdown-bites-20081113-666s.html

UPDATE: Interest Rates have officially been cut by 0.75 percent, leaving the current interest rate at: 5.25%

Where money is being splashed around, being lost and being gained, the Reserve Bank of Australia will be meeting with the focus on cutting interests rates by another 0.5 percent. This of course isn’t certain, only theory by economists not to mention ANZ, CommSec, AMP and Austock’s Michael Heffernan predicting the cut. However, Mark Dutton spoke for most experts suggesting the slow economy would push the RBA into cutting rates between 0.5 to 075 where as Robert Camilleri of Aviva Investments was more optimistic, saying he believed the banks would cut rates by 1 per cent.

An interest rate cut is of course vital in our economy though it’s uncertain how much improvement this can do to the economy, asking questions like how much would rates fall. According to News.com.au, a rate cut of 0.5 percent would would lower payments on a 25-year mortgage of $250,000 by about $85 a month, meaning more money for necessities like groceries.

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Information: News.com.au

The US economy has been in turmoil for much longer than most actually know. Dating back to the horrific event of 9/11, the US have never really recovered to a feasible level and ever since, has been on a slow downward slide. Financial advisors yelling and screaming about this current time wasn’t enough for people to realise the possible catastrophic effects it will have on the economy, and ultimately on themselves. The US being the strongest economy for decades distilled comfort in most which has made people simply not acceptant of the possibility of a crash. Though, as many still fail to realise, a lot of life events are still connected with physics with the popular saying going, “What goes up, must go down”.

So how does this affect us Aussies? Well, unfortunately it has already effected us very hard but all hidden below the surface. The Reserve Bank of Australia (RBA) firstly cut interest rates by a whole 1% to help inflation, though the banks only declared a 0.8% cut, holding onto their “well earned” money. To non-financial savvy people, this means, they simply don’t wish to get into bad debt. I’ll give you a short explanation:

Firstly, a bank in Australia will borrow money from a large corporation (e.g. US Bank) at a specific interest rate for a particular term, like 5 years. They then loan that money to consumers (us) at a higher rate in order to pay back their loan and make a profit. However, as many know there is good debt and bad debt and unfortunately, much bad debt like Lehman Brothers is floating around. Large corporations with good money surplus don’t wish to loan their money around as it can easily become a liability and turn into bad debt.

If you have recently gone into a bank to apply for a loan, credit card or a new bank account, you would’ve noticed new “restrictions” and the possibility of being declined far greater. This has been put into play to only allow people with the proper financial backing to become eligible. You might have certain assets which are valuable to you, however they could be easily deemed liabilities by your bank, depending on circumstances. A good explanation of assets vs liabilities can be found here.

So in result of the US economy crashing, the biggest economy in the world, other countries will of course follow suit. Our dollar hit a 5 year record low of 0.65 cents (0.6584) to the US dollar.

As you can see above, just before 6AM, it hit the record low and then climbed strongly from thereon, nearly hitting 0.68 before finishing just under 0.67.

Kevin Rudd and 20 finance ministers are working with Washington to provide relief to the Australian economy. More can be read at the Sunday Morning Herald here.

All I can suggest is to be cautious, not frugal. As history repeats itself, especially like in this occasion (1980 recession), we will eventually get through it. We will live and evolve into a bigger and better world…

Stay tuned for more updates.

Lehman Brothers - Shut Down

Lehman Brothers, one of the major financial brokers in America, has been forced to file for the biggest bankruptcy in history, according to the Financial Review this morning. Lehman Brothers, the 158-year-old finance broker, had made over US$59 Billion in 2007 with it’s total assets equating over US$691 Billion in the same year. Lehman Brothers also employed over 26,200 employees in 2008 alone, 130 of which were employed here in Australia were forced to file for Chapter 11 with the bankruptcy court for the Southern District of New York - “In order to protect its assets and maximise value”.

At the same time, another large Wall Street bank, Merrill Lynch, has been sold to Bank of America as fear has been spread of a global meltdown in the financial market. As the United States is one of the biggest economies in the world with Wall St, this has impacted hard on our Australian market, with the stock market tumbling sharply to 4,817 - a decrease of 1.8 per cent.

One of the biggest drops was seen in National Australia Bank which dropped 4.1 per cent but our dollar climbed steadily and stopped trading at 82.14 US cents.

Employee's Vacating Lehman Brothers

The Australian Stock Exchange (ASX) commented, saying Lehman Brothers had been suspended for up to a month, because its third-party clearers Citi Securities and Berndale Securities had terminated their arrangements with the firm.

Worldwide Financial Institutions who have had dealings with Lehman Brothers stand to lose billions of dollars due to its recent declaration of bankruptcy. To minimise losses, there was an emergency trading session on Sunday in New York to allow them to unwind some of their positions with Lehman, lets hope things work out. Unfortunately, this will only delay the inevitable when stock markets fall fast when opened.

Information sourced from following:

Financial Times (Paper)
ABC News (Information & Image)