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The Financial Crisis of 2007–2008: Economic Explanation

The financial crisis of the 2007–2008 seems to have affected the global economy greatly, the world debt increasing rapidly and major companies incurring considerable losses. In fact, recent evaluations of the 2014 economic environment show that a new and even more severe crisis is on the way. Seeing that the world debt is growing increasingly huge, the premises for another tidal wave of a devastating financial collapse can be considered set. Nevertheless, with a careful evaluation of the company’s chances and assets, as well as a cohesive and adequate marketing plan, one will be able to enter the global market without incurring major losses. Moreover, rather big revenue can be expected with a proper marketing and financial strategies adopted.

As far as the reasons for the crisis are concerned, a range of experts blame the crisis on the poor financial regulations and the inconsistencies in the strategies adopted for controlling the key financial transactions. In fact, the similarities found between the 2008 financial issues and the 1987 stock market crisis are truly striking (Wakefield 2008). Particularly, in Australia, the crisis was triggered by the impossibility to continue successful trading relationships with USA, England, and several other states, which Australian economy hinged on. As a result, the underperformance of the Australian corporations and SMEs led to the infamous 2008 crisis.

Addressing the crisis in Australia, one must mention that the economy of the states in the continent has suffered greatly, and it will take long for the Australian major entrepreneurships to recover from the financial shock. According to the official statistics, the Australian dollar has declined since 2008 by 30% (Australian Bureau of Statistics 2012, para. 10).

Number of businesses closed during 2000–2010
Graph 1. Number of businesses closed during 2000–2010 (‘Infographic: 2008 financial crisis led to closure of 800,000 businesses’ 2012, para. 4)

An analysis of the change in the CPI (Consumer Price Index) occurring in 2005–2014 shows that the global market has experienced a drastic downfall in 2008, which, surprisingly enough, was preceded by a comparatively high CPI. Graph 2 displays clearly that a steady rise in the CPI, which occurred in 2005–early 2008 plummeted suddenly in the middle of 2008. Highly dependable on the performance of its major companies and SMEs, Australia clearly suffered a major crisis on 2008.

All Groups CPI, Quarterly change
Graph 2. All Groups CPI, Quarterly change (Australia Bureau of Statistics 2014, para. 2).

According to the data represented in the Graph 2, in 2008, the market was literally devastated; not only did the companies have no chance of meeting the consumers’ demands, but also the customers themselves were incapable of paying the price that could cover the costs for goods and services production. Though the financial issues seem to have been improved in 2009, the mark that the 2008 crisis has left on the global economy is not going away any time soon. This means that the company will have to develop strategy allowing for higher security rates within the global economy.

It is important to bear in mind that the financial shock, which the Australian economy experienced in 2008, has had a devastating effect on the key economic indicators of the Australian financial state. The recent data shows that the GDP of Australia, though far from being steady, could be described as quite satisfactory before 2008. While statistics says that the state economy experienced a drastic crisis in 2001, Australia managed to overcome the financial difficulties and deliver an impressive result in 2002. This signified that the state was geared towards stability. In 2008, however, the GDP dropped from 5% to 4% as a result of the economic recession (International Monetary Fund 2008, p. 4). Inflation rates, another essential indicator of state economy, went completely out of proportion in Australia in 2008. This affected business greatly. The Australian foreign exchange turnover has also dropped significantly:

Australian foreign exchange turnover
Graph 3. Australian foreign exchange turnover (Reserve Bank of Australia 2014).

According to the data provided by the International Monetary Fund, the 2006 progress was cancelled by the crisis that brought the economic recession rates one percent up and made it reach 6% (International Monetary Fund 2008, p. 5). The pattern of the specified economic indicators shows clearly that Australia has suffered a major downfall due to its dependency on its trading relationships with the rest of the state. Capturing Europe and the United States, the global crisis spread to Australia, which needed its trading relationships with U.S. and European states in order to maintain its economic growth.

Australian GDP per capita
Graph 4. Australian GDP per capita (Stevens 2014).

The table shows clearly that the GDP within the state have dropped together with the GDP rates all over the world. It was the dependency on the trade with Europe and the United States that made the Australian economy so vulnerable to the outside factors. In addition, the specifics of the local entrepreneurship have also contributed to the development of the problem.

It would be wrong to assume that only the Australian organizations belonging to specific domains suffered from a rapid economic recession within the country – quite on the contrary, the drop in the economic performance could be witnessed practically in every company. To a certain extent, the phenomenon of a complete collapse of the Australian economy can be explained by the connections, which the globalization process facilitated and which the global economy encouraged. Indeed, it should be born in mind that the Australian production takes an impressive part of the global market, not to mention the fact that the products and services delivered by the Australian companies are rather diverse. Australia’s economic relationships with China are rather close – in 2013, the total amount of exported goods made 101,590, while the import rates made 49,329. Australia is also highly dependent on its trade with Germany, England and the United States. Being cut off from the specified states during the crisis, Australian entrepreneurs could not possibly raise their revenues (OECD 2008). In fact, the cessation of trade with China was the greatest blow to the Australian economy, as the Graph 4 shows:

China monthly trade with Australia.
Graph 5. China monthly trade with Australia.

Among the most adequate strategies for adapting towards the post-crisis environment of 2014, the strategy of mergers and acquisitions seems the most obvious choice to make. Indeed, creating a partnership means not only having the support sufficient for staying afloat during a crisis, but also splitting liabilities and, therefore, cutting costs. Since “the marketplace is populated by fewer but larger, independent insurance organizations as a result of consolidation” (Rejda & McNamara 2014, p. 70), by applying the principle of mergers and acquisitions to practice, a company may benefit to a considerable degree.

It would be wrong to claim that the global economy is stable at present – quite on the contrary, the recent financial crisis and the approach of another one can clearly be viewed as major threats even to financial titans, not to mention SMEs, which are only starting to enter the global market. However, with an efficient financial strategy up one’s sleeve, a cohesive market plan and a reasonable principle of resources management will help the company fight the crisis.

Reference List

Australian Bureau of Statistics 2012, Feature article: the global financial crisis and its impact on Australia, Web.

Australia Bureau of Statistics 2014, Consumer Price Index, Australia, Web.

‘Infographic: 2008 financial crisis led to closure of 800,000 businesses’ 2012, Metro UK, Web.

International Monetary Fund 2008, ‘Australia: 2008 article IV consultation—staff report; staff supplement; public information notice on the Executive Board discussion; and statement by the Executive Director for Australia,’ International Monetary Fund, Web.

OECD 2008, ‘Economic survey of Australia 2008: key challenges,’ OECD, Web.

Stevens, G 2014, ‘The glass half full,’ RBA, Web.

Reserve Bank of Australia 2014, The exchange rate and the Reserve Bank’s role in the foreign exchange market, Web.

Rejda, G E & McNamara, M J 2014, Principles of risk management and insurance, Pearson, Upper Saddle River, NJ.

Wakefield, D 2008, ‘Financial crisis 2008 similar to 1987 stock market crash,’ The Market Oracle, Web.

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StudyKraken. "The Financial Crisis of 2007–2008: Economic Explanation." January 25, 2022.


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