Ten years later

Posted by Cardiff Garcia on Sep 14 19:58.

Unlike Roubini & Bremmer, we doubt the recent crisis has produced an “irreversible” setback from which developed economies will never recover.
But that doesn’t mean the current pain will be short-lived or easy to bear.
Carmen Reinhart and Vincent Reinhart have posted an abbreviated version of their Jackson Hole paper at VoxEU, where they look at how national economies have historically fared in the decade after financial crises. They examine fifteen periods of post-crisis performance in specific countries along with the global economy’s rebound after three different episodes (1929, 1976, 2006).

Among the highlights, beginning with unemployment (emphasis ours in all excerpts):
The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher (Figure 2). In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009.

On housing:
Real housing prices for the full period is available for ten of the fifteen financial crisis episodes. For this group, over an eleven-year period (encompassing the crisis year and the decade that followed), about 90% of the observations show real house prices below their level the year before the crisis. Median housing prices are 15% to 20% lower in this 11-year window, with cumulative declines as large as 55%.

And deleveraging:
In the decade prior to a crisis, domestic credit/GDP climbs about 38% and external indebtedness soars. Credit/GDP declines by an amount comparable to the surge (38%) after the crisis. However, deleveraging is often delayed and is a lengthy process lasting about 7 years. The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.

And here is where we are in the current, um, recovery:
During the first 3 years following the 2007 US subprime crisis (2008-2010), median real per capita GDP income levels for all the advanced economies is about 2% lower than it was in 2007. This is comparable to the median output declines in the first 3 years after the 15 severe post World War II financial crises. However, while 82% of the observations for per capita GDP during 2008 to 2010 remain below or equal to the 2007 income level, the comparable figure for the fifteen crises episodes is 60%. This indicates that during the current crisis, recessions have been deeper, more persistent, and widespread.

Great. The authors also note that in those instances where a country experienced a double-dip after the initial recovery — this happened in seven of the fifteen episodes — it was largely because of a new and unexpected shock.
Which means that even if growth does soon return to its pre-crisis trend, don’t get too comfortable.

Related links:Diminished expectations, double dips, and external shocks: The decade after the fall – VoxEU
In the long run we’re all…just fine (maybe) – FT Alphaville
And you thought we were bearish – FT Alphaville
The Jackson Hole papers (finally) – FT Alphaville