Magazine article Economic Trends

Mighty Bad Recessions

Magazine article Economic Trends

Mighty Bad Recessions

Article excerpt

05.04.09

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No two recessions are exactly alike. They differ in terms of their depth and duration, their diffusion across various industries, and the economic shocks that set them off. Nevertheless, recessions often share basic characteristics that determine their severity and the pace of subsequent recoveries. Recently, the International Monetary Fund (IMF) has been studying two of these--association with a financial crisis and global reach--to see how they affect a recession's contours. The implications for our current global economic malaise, which shares both of these characteristics, are sobering. They explain why the current global downturn is the worst since the Great Depression.

The IMF investigated business cycles which occurred between 1960 and 2007 in 21 advanced countries. Researchers wanted to know if recessions associated with financial shocks and recessions highly synchronized across countries were distinct in their depth and duration from recessions with different characteristics. The sample yielded 122 recessions, 15 of which were associated with financial crises, 37 of which were highly synchronized across the globe, and 6 of which got a double whammy.

Recessions associated with financial crises are deeper and longer lasting than recessions associated with other types of economic shocks. In addition, their recoveries are slow and prolonged. Such recessions tend to follow periods of rapid credit growth, involving overheated goods and labor markets, housing booms, and a loss of international competitiveness. Rapid credit growth often results in low household savings rates and a deterioration in household balance sheets. After the credit bubble bursts, a long period of retrenchment ensues. …

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