Economics Assignment: The Great Recession & Covide-19 Crisis

Question

Task: Assignment: The great recession and Covid crisis As a future entrepreneur you will have to be able to understand and forecast the economic environment around you. The two major macroeconomic events of this generation are the financial crises and the covid crises. In this assignment, you are asked to analyse the following group of countries.

• France, Finland, and US;
In this economics assignment, you are asked to gather, analyse and present annual data for several macroeconomic variables in order to understand the biggest economic events of the last decades: The Great Recession, the European sovereign debt crisis, and the Covid crises.

a) Gather and analyze data on GDP, consumption, investment, government expenditure, unemployment, inflation and the interest rate for all the countries in your list. Use the knowledge you have obtained during the course to make sense of the relationship between economic variables.
Data sources: Data on these variables can be find in data sources such as the OECD database, AMECO or the FRED fed database. Data on long term interest rates can also be found on OECD database

b) Which components of GDP could explain a severe/modest economic contraction during the global financial crisis, European debt crisis and covid crisis and how do these measures reveal for your country now? Note: When you plot the data, make sure you know what information they carry and focus on the periods before, during and after the crises discussed above
c) The Great Recession has illustrated the importance of fiscal policy in the short run. But in the medium or long run, the government budget constraint limits the choices, as illustrated by the European sovereign debt crisis. Growth and inflation can be ways out of debt crisis. Present GDP growth, the government budget deficits, governments debt-to-GDP and interest rates in your countries over the last decades and analyse each country’s situation.

Data sources: Government debt-to-GDP and government deficit be found at OECD database
d) What is the medium to long term prospects of the country in terms of debt-to-GDP? Use the model from chapter 22 to construct your forecasts.
e) Choose a newspaper article about each country in your list and make sense of it using the data gathered, together with the models studied in class.
The news paper article needs to be from a good economics newspaper like The Economist, the Financial Times or the Wall Street Journal (Europe).

Answer

Introduction:
Through the present analysis on economics assignment economic situation of the three chosen states which are France, United States (US) and Finland has been considered. This study has analysed major economic variables and based on them has performed analysis of severity of economic contraction due to recent market shock occurred by financial crisis in 2008 and covid pandemic in 2020. Also, considering the recent newspaper article, present study has demonstrated utilisation of the data gathered for each country. Data for present study has been collected from data.oecd.org (2021) and data.worldbank.org (2021).

Analysis of economic performance of France, US and Finland:

Figure 1: Comparison of GDP of France, US and Finland

As per figure 1, it can be seen that GDP of US is highest and it has increased with small fall in 2008 and 2019. Identical path can be observed for France and Finland.

Figure 2: Comparison of public consumption of France, US and Finland
As per figure 2, it can be seen that consumption of US is highest and it has increased with small fall in 2008 and 2019. Identical path can be observed for France and Finland.

Figure 3: Comparison of government expenditure of France, US and Finland

As per figure 1, it can be seen that government expenditure of US and Finland is highest and it has increased with small fall in 2008 and 2019. France has identical path of expenditure; however, its total expenditure is lower compared to other two.

Figure 4: Comparison of unemployment of medium- and long-term France, US and Finland

As per figure 4, it can be seen that unemployment of US has increased highly post 2008 global financial crisis and 2019 pandemic. For France and Finland, unemployment has reduced significantly over the decades from 10% to 8%, though it is higher than US.

Figure 5: Comparison of inflation of medium- and long-term France, US and Finland
Inflation in US for all three demonstrated identical patterns during 2008 global financial crisis, 2015, euro crisis and 2020 pandemic. Inflation has fell during crisis causing stagflation in each market.

Figure 6: Comparison of interest rate of medium- and long-term France, US and Finland

Figure 6, demonstrated interest rate for France was highest however, post 2017 it become 0 in real term. For US, it remained within 1% to 5% throughout the last two decades.

Figure 7: Comparison of investment of France, US and Finland

Investment pattern for all three countries were identical. However, in terms of economic size, investment of Finland by government is high. For US, there has been fall in investment post crisis in 2008, 2015.

Analysis of severity of economic contraction during market shock:
Among chosen components, inflation, unemployment, interest rate and government expenditure can explain the impact of economic contraction due to global financial crisis, European debt crisis and covid crisis very well. With the inflation pattern, it was clear that all the economic faced stagflation during crisis situation and it when compared with other variables, it can demonstrate high unemployment, government expenditure and reduced interest rate.

Country situation analysis from debt to GDP perspective:

To analyse the country situation, here GDP growth, government budget deficit, debt to GDP and interest rate for two decades has been presented.

Figure 8: Comparison of GDP growth rate of France, US and Finland

As per figure 8, GDP growth rate of France has face high fluctuation. During 2007 to 2009 and 2019 onwards, all the economies has faced massive fall in growth rate.

Figure 9: Comparison of budget deficit of France, US and Finland

As per the figure 9, it can be seen that Finland has remained budget surplus, whereas France has faced budget deficit during 2002 to 2011, which started to reach better position 2012 onwards. During 2019, budget deficit remained flat for next year. For US, budget deficit was ever increasing post 2001. It faced massive fall during 2007 and 2017 onwards.

Figure 10: Comparison of debt to GDP of France, US and Finland

Debt to GDP comparison shows, all economy has faced high growth in debt, however, massive growth in debt ratio can be observed for US.

Figure 11: Comparison of interest rate of France, US and Finland

Interest rate for the France has remained high among all until 2017. For US, it remained within 1% to 5% bracket. For Finland, it continued to decrease since last two decades.
As per the analysis, it can be mentioned that economy of France and US is stable, whereas, Finland has faced much amount of blow in its economy post-recession owing to its smaller size of economy.

Medium to long term prospects of the chosen countries:
Using the figure 10, it can be seen that debt to GDP ratio of all the countries has increase post 2007. A sharp rise in debt ratio can be observed during 2008 when global financial crisis took place. A sharp rise can also be seen in 2019 when the pandemic started. As far as medium- and long-term prospect of France is concerned, then according to debt ratio equation it is found that France is stable and able to repay its debt. Difference between the spending and taxes is supposed to be reduced that eventually can reduce the debt for France as the economy moves (Blanchard et al. 2017). For the US, though the debt to GDP ratio is highest among all, it is most stable economy as it has high power of repayment. With the economic operation increase, interest payment and the difference between spending and taxes is supposed to fall that can lead to reduction in the debt ratio. For Finland, as the economy is developing, it is supposed to burn up higher investment. This way, interest payment will increase and the government tax will reduce to keep the consumption high. This way, primary deficit of the government will eventually increase in subsequent years causing inability in repayment of debt. Thus, as per the budget constraint, Finland is not in good shape for medium- and long-term prospect.

Newspaper analysis:
France – Article authored by Amaro (2021); it has been stated that France has faced a 145.81% debt to GDP ratio which is highest in the history. However, it is expected that the debt ratio will come down to 116% by 2024. The report also highlighted that the France since last decades has not seen any major decline in debt ratio post 2007. Economy of France is immune towards high debt and in comparison, to Germany, which is considered as standard economy of EU region France is stable, thus the economists are not worried. As the trend of other economic factor suggested in earlier section of the study, France is supposed to face higher growth and performance in coming year.

US – As per article published by Dmitrieva and McCormick (2021), US debt to GDP ratio has doubles during 2020 fiscal year due to the ongoing issue of pandemic. US had fiscal surplus las in 2001 and since then it has increased largely. Post 2008, during 2013 to 2015, budget deficit reduced, however, it almost doubled during pandemic crisis. This rise in the budget deficit is certainly going to hamper the economic performance of the state as demonstrated by the previous finding which shows downward economic movement of the US. However, recent proposal of $2.25 trillion infrastructure and job package is aimed to revive the economy.

Finland – Finland is another European economy, which has identical economic situation with France although the economic size is vastly different. Comparison to France, and US, Finland has much lower debt to GDP ratio; however, economists are not happy with that. Authored by Pohajanpalo (2021) demonstrates that as the economic operation of Finland is limited and there is limited scope for the economy to repay its debt in case surplus goes down, then economy will eventually peril. Rising debt ratio in recent time due to market shock has deteriorated the economic parameters of the state.

Conclusion:
To conclude it can be stated that economy of France and US is somewhat stable and its mid-term and long-term forecast of debt to GDP ratio is also looks good. Both these countries have ability to repay their debt obligations even if they are very high due to recent market crisis. For Finland, though the debt to GDP ratio seems low, however, the country has high risk of defaulting due to its small economic size.

Reference:
Amaro, S. 2021. France’s debt pile is surprisingly high — but experts aren’t worried. https://www.cnbc.com/2021/05/07/frances-debt-pile-is-surprisingly-high-but-experts-arent-worried.html
Blanchard, O., Amighini, A. and Giavazzi, F., 2017. Macroeconomics: a European perspective, 3rd.
Countryeconomy.com 2021. Finland Government budget deficit 2021. https://countryeconomy.com/deficit/finland Data.oecd.org 2021. General government - General government debt - OECD Data. https://data.oecd.org/gga/general-government-debt.htm Data.worldbank.org 2021. World Bank Open Data | Data. https://data.worldbank.org/
Dmitrieva, K and McCormick, L. 2021. Economics assignmentBloomberg - Are you a robot.https://www.bloomberg.com/news/articles/2021-04-12/u-s-budget-gap-hits-record-1-7-trillion-for-first-half-of-year
Jackson, J.K., 2021. Global economic effects of COVID-19. Congressional Research Service. https://apps.dtic.mil/sti/pdfs/AD1152929.pdf Pohjanpalo, K. 2021. IMF Urges Finland to Add Jobs, Cut Spending to Stem Debt, BloombergQuint. https://www.bloombergquint.com/politics/imf-urges-finland-to-boost-jobs-cut-spending-to-stem-debt-rise