As part of our “questions that are asked an awful lot” series (not really) we have decided to revisit the comparison between the current economic slump and previous depressions/recessions.
In a recent report a trio of IMF researchers (messrs Kose, Loungani and Terrones) argue that the ongoing recovery has been quite similar to previous ones and that, for advanced economies at least, we are essentially back in 1991.
In fact and somewhat surprisingly, if the 2012 IMF growth projections of world per capita real GDP are realised (and we do arch a sceptical eyebrow here), the path of recovery from this current slump will have been slightly faster than those following previous global recessions.
However, the authors argue, the path of global recovery masks a very critical difference between advanced economies and emerging market economies (with our emphasis):
The recovery in advanced economies has been on the path to become the weakest one compared to past recoveries. Per capita real GDP in several of these economies has not yet rebounded to its pre-recession level and is not forecasted to do so even by 2014. The weakness in output growth is reflected, on the spending side, in both consumption and investment.
In contrast, the recovery in the emerging market economies has been the strongest to date. Per capita output growth in these economies has already out-paced the growth seen during previous global recoveries, and is projected to continue to do so in coming years as well. Notable exceptions are the emerging European economies, which are on a recovery track similar to that in the advanced economies.
And the authors argue the trajectory of the ongoing recovery in advanced economies has so far paralleled the recovery following the 1991 recession to a surprising degree (with our emphasis):
Both recoveries were preceded by recessions associated with a bust in credit and housing markets in key advanced economies. In 1991, there were busts in credit and asset markets in the US, UK, and Japan. The recent recession was associated with severe problems in credit and housing markets in the US and a number of other advanced economies, including Ireland, Spain, and the UK.
Both recoveries were slowed down partly by challenges in Europe. The earlier recovery episode was shaped by downturns in many European economies during the European Exchange-Rate-Mechanism crisis of 1992–93. Interest rates had to be raised during that period in order to defend the exchange rate arrangement, and several advanced European economies were forced to reduce their large fiscal deficits. This suppressed economic activity and further depressed credit and housing markets in the region. Currently, high sovereign risk premiums are inflicting similar or even worse damage to fiscal deficits and economic activity. The recent problems are result of a confluence of factors, including deficiencies in the structure of the Eurozone, unsustainable policies, and mispriced debt. In both cases, the lack of a timely, credible, and coordinated policy strategy heightened financial turmoil.
In both recoveries, there has been disappointing growth in domestic consumption and investment driven by the legacy of the financial crisis. Both episodes are also marked by persistently high unemployment and lack of competitiveness in some economies. However, considering the deep fall in output in 2009, the rise in unemployment has been more limited. This is particularly true in Europe and may well reflect policies involving more job-friendly wage setting and greater labour hoarding.
Anyway, none of this will shock many people but charts are charts and we will
shamelessly take any opportunity to get them up.