In 2007, macroeconomic imbalances between countries and regions were growing but most of the world enjoyed strong economic growth. Emerging countries, and China and India in particular, recorded high growth.

The US household savings rate, which was already among the lowest in the OECD area, turned negative in 2005, owing to the build-up of large debts for housing. Rising housing prices created a “wealth effect” which encouraged households to contract excessive amounts of debt. In the United States between 2003 and 2008, mortgage debt increased strongly, with outstanding home mortgages nearly doubling.

An expanded supply of credit and an underassessment of risk combined with the use of intermediate (often unregulated and nontransparent) lenders to gradually undermine the stability of the financial system. Owing to the extent of the contagion across assets, institutions and countries, the financial crisis rapidly acquired a global character (Blanchard, 2009).

Most OECD countries recorded positive economic growth in 2007. While growth of gross domestic product (GDP) was relatively strong in the OECD area, it was much stronger in the emerging BRICS (Brazil, the Russian Federation, India, China and South Africa). As in previous years, China recorded doubledigit growth.

The decline in international trade in 2008 triggered by the crisis has been the deepest decline on record, much deeper than during the Great Depression. The fact that the downturn was steeper in terms of value than of volume suggests that a “price effect” also played a part in some countries. The scale of the decline reflects the increasing interdependence of trade, which can accelerate the spread of cyclical effects. Hence, the recession caused by the crisis intensified the drop in world trade, which resulted from the concurrent decline of trade flows in almost every country of the world.

The dramatic collapse in world trade in 2008 seems to have resulted from strongly synchronised drops in trade across countries due to the combined effects of several factors: the credit crunch, the spread of global value chains, and falling consumer and producer confidence.

In 2008, inward foreign direct investment (FDI) was down overall in developed countries, particularly in the OECD area (–35%), but increased in non-OECD countries (+13%), particularly in Asia. FDI declined in the European Union by around 43% while it increased in Japan by 11%. In contrast, foreign direct investment increased by some 16% in the United States in spite of the crisis.

The fall in international investment during/after the crisis is also reflected in recent figures on mergers and acquisitions (M&As). International M&As are on track to decline by more than 50% in 2009 from 2008. However, there are major differences across countries and regional zones.

Foreign affiliates contribute to a host country’s international competitiveness through several channels. They provide access to new markets and new technologies for domestic suppliers and buyers along the value chain, they generate knowledge spillovers to domestic firms, and they invest a higher share of their revenue in research and development (R&D).

The link between the economic crisis and global value chains is not straightforward and has recently received a lot of attention in policy discussions. However data on the effects of the crisis are scarce. Figures on international trade and foreign direct investment have decreased dramatically in the aftermath of the crisis (see earlier), and some data also show that the activities of multinationals have been hard hit by the crisis.