A Tale of Two Recessions: Grounds for Optimism
The economic news at the moment is mixed, and the impact of the 2007-2009 financial crash is far from over. But looking back into the past may give us something to feel cheerful about.
There have only been two global financial crises in the past century, that of the early 1930s and the most recent one. There have been plenty of recessions, when GDP growth was negative and employment fell. In the UK, in living memory we have experienced them in the mid-1970s, the early 1980s and the early 1980s. These had a variety of causes, but these were not primarily financial in origin.
The world has also seen a fair number of localised financial crises. In the previous twenty years alone, for example, Sweden and Finland had serious financial problems in the early 1990s. The late 1990s saw the East Asian crash, the near-demise of Long Term Capital Management, debt defaults in Russia. But none of these spread on a global scale. The global economic system seems sufficiently robust to confine them.
The early 1930s and the late 2000s were different. Very few economies indeed escaped the bad times. What happened to GDP as a result?
The contrast between the experience of America and Germany in these two periods is dramatic. There is only annual data available for the 1930s, but output fell in the US in 1930, and continued to fall in 1931, 1932 and 1933. Positive growth was registered for the first time in 1934. Germany fared a bit better, but output dropped for three successive years, 1930-32.
This time round, the period of falling GDP was much shorter. In Germany, the recession lasted just a single year. The first drop in output happened in the second quarter of 2008, and very modest but nonetheless positive GDP growth was seen in the second quarter of 2009. In America, the recession period was longer, but even here it was just eighteen months, between early 2008 and the autumn of 2009.
But it is the size of the GDP fall which shows the most dramatic contrast. Over the 1930-32 period in Germany, output fell 23 per cent. In the US in 1930-33, GDP collapsed by 27 per cent. This time round, the fall was only 4 per cent in America and 6 per cent in Germany. In both economies, GDP is above its previous peak level already. In contrast, it took until 1939 for the US to get back to 1929 output levels.
The picture for the UK is a bit more downbeat. We actually weathered the 1930s rather well, with a two year recession in which GDP fell 6 per cent. This time, the initial recession was shorter, and the drop in output just 5 per cent. But we remain 4 per cent below our previous highest level.
So history, too, gives us mixed signals. But the general message is optimistic. Global crises are rare, and the two most important developed economies have coped with them enormously better this time round.
As published in City AM on Wednesday 12th September 2012