The eruption of the financial crisis and the uncertainty that it provoked a crisis in the real economy.
Individuals, suddenly uncertain about their job prospects and facing more expensive and difficult-to-obtain financing, delayed purchases that could be put off, typically consumer durables such as automobiles, refrigerators, and televisions. Similarly, firms delayed the implementation of investment projects, preferring to wait and see if such projects would remain profitable under future demand and financing conditions. This increase in precautionary saving (and the associated reduction in investment and consumer demand), together with increased borrowing costs and tighter lending standards, explains the unprecedentedly rapid fall in global demand for manufactured goods during the fourth quarter of 2008 and the first quarter of 2009.
Moreover, while consumer demand has and will recover, saving rates are unlikely to return to earlier low levels, because households will continue to save to restore a proportion of the financial wealth destroyed during the crisis.
The cutback in fixed investment spending was widespread. It involved countries directly affected by the financial crisis, those with close links to affected commercial and investment banks, and those that suffered through the indirect channel of falling export demand.
For some economies, notably those with large current-account deficits, these transmission channels were further amplified by a reversal in private capital flows, which forced a much sharper decline in domestic demand. Investment activity fell by an average of 4.4 percent (at a 16.5 percent annualized rate) in 27 of 30 high-income countries in the fourth quarter of 2008.
The slowdown was not limited to the high-income countries where the financial crisis originated. In the 25 developing economies that report quarterly national accounts data, investment growth in the final quarter of 2008 fell by an average of 6.9 percent, or at an annualized pace of 25 percent. Investment demand continued to decline precipitously in the first quarter of 2009.
Investment fell at a 37 percent annualized pace in the United States, and by close to a 30 percent annualized rate in Japan, Germany, and Russia. Consumer savings increased sharply as households cut back or delayed large expenditures. In the United States, the personal saving rate increased from 0.6 percent in 2007 to more than 5.7 percent in April 2009. Demand for consumer durables fell at a 22 percent annualized rate in the fourth quarter of 2008 in the United States, and by 20 percent in high-income Europe. Worldwide demand for autos plummeted by 30 percent in the quarter, sending firms in the United States, Europe, and Japan to national governments for emergency financial support. Data for the first quarter of 2009 suggest that consumer demand for durable goods may be stabilizing or even advancing—partly in response to government-sponsored incentives in several countries. In the United States, consumer spending increased at a 1.6 percent annual pace in the first quarter, led by a 9.6 percent annualized gain in durable goods. The falloff in consumption growth was less pronounced in other countries, save Japan, in part because savings rates in most economies were not as depressed as they had become in the United States.
Nevertheless, increasing unemployment and the growing recession has pushed consumer confidence to all-time lows, which, in addition to the negative wealth effects from falling equity and housing prices, is weighing on—and will continue to weigh on— consumer demand for some time (the value of household assets in the United States declined by 14.7 percent, or $11.3 trillion, between the fourth quarter of 2007 and the fourth quarter of 2008). For developing-country commodity exporters, the decline in incomes resulting from lower commodity prices is exercising a similar effect, although lower food and energy prices will tend to boost the purchasing power of consumers in commodity-importing countries (see below). 
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