The economic recession: where are we now, and how bad has it been?
The world economy as a whole is roaring away. The 5 per cent real GDP growth on 2010 is almost the highest annual growth rate seen over the past 20 years. And even in 2009, world output fell by only 0.5 per cent.
The problems have been almost exclusively in the developed world. Looking at annual growth rates in 17 countries since 1871, the current recession can be placed in the context of 140 years of data.
Quarterly data is now routinely available, but for most of this period, this was not the case.It only started in a few countries in the late 1940s, and gradually spread.But for long term comparisons, we have to rely on annual data.
We can define a recession in two ways. First, the successive periods in which (annual) real growth is less than zero. Second, the periods in which the level of GDP is below that of its pre-recession peak.
I published statistical analysis of recessions 1871-2010 in Risk Management in 2010, which is on the papers section of the website, and I have extended it for a conference in Kiev in honour of Simon Kuznets in the ‘new’ section of the site. So details are available there.
Looking at the economies of Western Europe, Canada, the US, Japan, Australia and New Zealand, the falls in output started to happen in the period from the third quarter of 2007 (2007 Q3) to the second quarter of 2008 (2008 Q2). In almost all the 20 economies, growth had resumed by 2009 Q4, and often earlier in 2009. In Portugal and Spain growth resumed, albeit very haltingly, in 2010 Q1, leaving Ireland as the only exception.
So on this conventional definition, the recession was short, entirely in line with historical experience: over 90 per cent of all recessions last no more than 2 years. The size of the recession across the sample of 20 countries varied substantially, but overall it was a pretty big one, with the average fall in output being arouind the third quartile of all recesssions.
Despite the size of the recession and the financial nature of the crisis, in 9 of the 20 countries, by 2011Q1 (the latest data), the level of output had exceeded its previous peak value. This group includes America and Germany.
This perspective indicates that the recession was a serious one. Even on this measure, very few recessions last for longer than 3 years, yet it has already lasted this long. Some economies, such as France and the Netherlands, are close to their previous peak output levels. There is a group (Denmark, Finland, Italy, Japan, Portugal, Spain, UK) where the level of GD remains 3 to 6 per cent below its previous peak – Ireland again is the exception.
But overall, even the economies of the developed world have demonstrated great resilience in the face of a financial shock which had the potential to turn into a repeat of the 1930s.