Wednesday, May 1, 2013

Why This "Recovery" is Different

An article by M Ayhan Kose, Prakash Loungani and Marco Terrones, all of the IMF, on the VOX website examines why this global recovery is different and why, despite the fact that we are four years into the recovery, has it been so weak compared to past post-recession recovery periods.

As shown on this graph, global real per capita GDP growth after the Great Recession (in red) has followed a path that is very similar to the average of previous recoveries (in blue):

On the graph, global real per capita GDP is normalized to a level of 100 in the year before the recession.  On average, the world's economy has generally returned to its pre-recession level of output within a year of the end of the recession and this recession was no different on a global level.

Now, let's take a quick look at a graph showing GDP growth in the United States since 1990:

Notice that after the recession in the early 1990s and 2000s, that economic growth rates in excess of 5 percent were not uncommon.  Such is not the case since 2008 as shown here:

That noted, there is something different this time as shown on these graphs:

This time, the current recovery (in red) has been far different for advanced economies than it has been for emerging market economies with the economies of advanced nations being quite weak compared to both previous recoveries (in blue) and the recoveries of emerging nations.

Why the difference this time?

1.) Problems in the design of the single currency Eurozone.
2.) The severity of the financial crisis.
3.) The uncertainty of policies implemented by governments and central banks.
4.) The synchronized nature of the Great Recession across most major economies.

There are two additional factors at play that I will elaborate on.

First, government expenditures, used to stimulate moribund economies, in the advanced and emerging economies are very different this time as shown on these these graphs:

In the past, in advanced economies, government expenditures expanded and real government expenditures increased as governments prodded their economies back to life.  Not this time.  For example, even though the United States government pumped trillions of dollars of fiscal stimulus into the economy, this was done very early in the recession and fell thereafter.  In contrast, real expenditures in emerging market economies grew more rapidly than average.  This is largely because emerging market economies had stronger fiscal positions than their advanced economy counterparts.

Second, the governments of advanced economies have a far higher level of debt prior to and during the recession than in past recoveries, particularly when compared to their emerging market counterparts.  On top of that, the severity of the Great Recession meant that revenues collapsed, resulting in very high deficits and even higher debt levels.  Here are graphs that show how public debt-to-GDP levels are different this time for both economies:

Note that the public debt levels of emerging market economies are basically the same as they have been throughout previous economic cycles in contrast to advanced economies.

This time, unlike past post-recession periods, the governments of most of the world's largest economies have been unable to spend their way out of trouble.  It appears that the elevated level of public debt has finally caught up to us and that the world's economy has reached the point where it has to rely on central bank policies to bail it out.  Unfortunately, now that we're at the zero bound on interest rates, central bankers are having to rely on unconventional (read experimental) measures that may have unintended consequences over the long-term.  


  1. Unfortunately I think this has more to do with the inner connectedness that the world is operating on. This is not a good thing for those in western countries middle class life style. It is great for the new middle classes springing up in 3rd world countries but has the World becomes flat we (middle class folks of western countries) get pulled toward the Worlds new standard of middle class, which is much lower standard of living than what we had/ are used to. Children born now and their children probably won’t know the difference. They will just think that it is normal (well for them it will be) that they live the same as someone from Peru, Angola, or Vietnam. We are all being pulled to a new global standard of living.

  2. Having an uber Socialist president bent on pushing the nation Leftward by revising the entire healthcare system and giving subsidized care to millions while touting lower costs is being revealed as a means to more government control of the economy as a single payer/single provider setup. What rational business would expand or hire additional employees without knowing what the final cost may tally?

    1. If you think Obama is a socialist you have no understanding of socialism.

  3. Your conclusion belies your data. You've shown that those countries that have employed stimulus, as the US only partially has done during this recession, have emerged from the Great Recession earlier and with stronger growth. The Reinhart-Rogoff data, reanalyzed by Arindrajit Dube for direction of causation, showed that low growth has been more likely the cause of higher debt levels rather than the reverse, as your conclusion implies. You need to rethink this considering the likely direction of causality: low GDP growth-> high Debt/GDP levels.
    See Dube's plots here…

  4. The main problem this time is the excessive burden of Negros, Muslims, and Mexicans in the USA and European economies, which is dragging them down like a millstone.

    1. Do you have any strong evidence to back that up? Maybe you casually engage in hate-speech without evidence because that kind of speech doesn't bother you in the least.

    2. The United States was built on the (enforced) labour of the 'Negros' as you call them.

    3. Yep those Mexicans are causing chaos in Europe. Clearly this guy is a racist idiot and every time people like this spout their views on the internet they weaken their position

      Keep going please

  5. I would have liked to see some mention of the structural problems: the hollowing out of US manufacturing industry, and the insidious growth of the financial sector, old (in many cases outdated infrastructure), the educational system (student debt) and decrease in entrepreneurship, just to name a few points.

    Overall a good analysis though. Thanks for sharing.

    1. I agree. We don't have the ability to pull ourselves out the recession but buying local products if we don't have many local products to buy. It's such a loss, but I don't know which of the jobs we can bring back (though I've heard that some call centers have returned).

  6. One of the basic problems faced by the West is that new business start ups are in effect strangled by the cosy relationship of government banking and corporations.
    Usually restrictive regulation is the result of corporate lobbying.
    Corporate+Banking+Government = Fascism, (the modern version of, being fascism with a smile). it melds into one state.
    One very inefficient wasteful state too.