IMF Warns Downturn Will Be Prolonged and Recovery Shallow

Readers may know we have oft pointed to the work of Carmen Reinhart and Kenneth Rogoff on financial crises. They have built a large database of past crises, and have compared the US to past crises countries. Their conclusion was that the US looked like a typical crisis country “only more so”, and in two presentations, compared our progress to date to the trajectory of past postwar crisis countries. Their conclusion is that financial crises are protracted affairs. For instance, it typically takes the stock market 3 1/2 years and the housing market over 5 to bottom.

The IMF, in its latest World Economic Outlook, confirmed the Reinhart/Rogoff take, based on its own analysis of business cycles in 21 countries from 1960 onward (click to enlarge)

From the summary:

..recessions associated with financial crises have typically been severe and protracted. Financial crises typically follow periods of rapid expansion in lending and strong increases in asset prices. Recoveries from these recessions are often held back by weak private demand and credit reflecting, in part, households’ attempts to increase saving rates to restore balance sheets. They are typically led by improvements in net trade, following exchange rate depreciations and falls in unit costs.

Globally synchronized recessions are longer and deeper than others. Excluding the present, there have been three episodes since 1960 during which 10 or more of the 21 advanced economies in the sample were in recession at the same time: 1975, 1980 and 1992. The duration of a synchronous recession is, on average, nearly 1½ time as long as the duration of the typical recession. Recoveries are usually sluggish, owing to weak external demand…

The analysis suggests that the combination of financial crisis and a globally synchronized downturn is likely to result in an unusually severe and long lasting recession.

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  1. Leo Kolivakis

    The IMF is following the OECD in saying its the most severe and sychronized recession in post-war history.

    The big question for the U.S. is the worst behind now? Unemployment will creep higher but employment is a lagging indicator.

    On the positive side, mortgage refinancing is picking up and the USD has fallen, allowing exports to pick up. Moreover, the effects of fiscal stimulus and quantitative easing should start kicking in during the second half of the year.

    But any recovery will be tepid at best. Real wages are falling and people are saving more in the U.S. so consumption will not pick up in the next year or so.

    The staggering job losses will make this the weakest recovery in post-war history.

    As for the stock market, all the liquidity being pumped into the system will create another bubble in financial assets.

    Where? Your guess is as good as mine.



  2. patrick neid

    While I’m sure all the data points are accurate I’m not so certain about the final analysis.

    In all previous cases we had whatever the responses of the day were, interest changes, money supply etc, all within reason. Now the inmates are running the machinery and we are printing dollars by the trillions. What effect that has is anyone’s guess. I think comparisons to the past are a bit of a stretch now.

    It’s not totally insane to posit that the next greatest bubble is coming soon as this monopoly money makes its debut.

  3. utopiaorbust

    The first signs of how deep the recession was going came from the employment numbers. Im not sure why employment numbers should be considered lagging numbers, certainly not like RGDP.

  4. Crazy Nut Job

    utopia, employment is always considered a lagging indicator. Just as firms might be a little slow to fire people when things turn bad, they’re also rather cautious about hiring when things start to get better.

  5. viv

    I thought we’re now in a depression officially? I remember that post from VOXEU about a tale of two depressions, showing that this downturn globally has been even worse then the great depression.

    The IMF are being very cautious, look at how their expected credit related write downs rose to 4 trillion plus compared to less then a trillion when the crisis started.

    There’s no need to guess, this is a depression and unemployment and social unrest are well on their way.

    Biggest credit bubble in history and we all read daily how preposterously the world is responding. China’s loan boom is going to push up stocks, the US’s fiscal stimuli and bank bailouts are a pointless exercise without the pre-requisite transparency and openness. Why are the Zombie banks allowed to live? Why is mark to fantasy allowed or AIG being used as a conduit to funnel money to other banks?

    Bloomberg openly challenge whether Japan’s stimulus programs will do anything to help the economy? Japan has kicked the can down the road for 20 years and look where it is now? An economy possibly contracting at an annualized rate of 20% in the first quarter.

    Britain is technically bankrupt IMO with it’s huge deficits, 450% Debt to GDP ratio and low currency reserves. Eastern Europe is on the precipice because they borrowed in foreign currencies to fund their boom, now bust.

    The Obama administrations budget deficit is projected to reach 1.8 trillion but given how Govt statistics always understate the situation, i’ll give it 2.2 trillion. Plus the US Treasury has to roll over 2.56 trillion in debt this year. Where is the money going to come from? That’s nearly 4.5 trillion there.

    This will crowd out the private sector, local and state governments. The bad money and misallocation of capital is driving the good money out and confidence with it. This bear rally is without any legs at all as implied by the Zero Hedge post here recently, the green shoots of recovery are more like poison ivy.

    The problem is too much debt, the government is trying to borrow it’s way out of debt? Past crisis were papered over but always led to something worse down the line. The credit bubble started expanding greatly under Reagan from 1982. Since then the solution to any crisis has been an adrenaline shot of debt(credit).

    At some point the cancerous tumor of excessive debt must be removed from the system, adrenaline shots won’t do. The US economy is on its death bed. The Banks must be allowed to fail, the bad debt must be defaulted on. We must start “clean” (perform triage) or perish.

  6. joe

    Leo Kolivakis – Why is this different than what the Japanese did, which seems to me as close to anything we have? The biggest difference being the Japanese didn’t have the entire global economy going south.

  7. mmckinl

    The new GEAB is out … and it’s UGLY

    Summer 2009: Crash of International Currency System CONFIRMED

    Thus, in this GEAB N°34, our researchers develop more their anticipations on the possible forms that the American suspension of payment will take by the end of the summer 2009, and from April 2009 (principal month of collection of the tax incomes in the United States) will be impossible to mask (10). The suspension of payment by the United States in the summer 2009 is indeed a topicality increasingly more extreme from now on with the public deficit completely out of control on the back of explosion of the expenditure (+ 41%) and of collapse of the revenues from taxes (- 28%), like LEAP/E2020 anticipated more than one year ago: for only March 2009, the federal deficit was assembled to nearly 200 Billion USD (much above the most pessimistic forecast), that is to say not under half of the deficit recorded for the whole of the year 2008 (11). And the same phenomenon is repeated on all the levels of the public structure of the country: federal state, federate states (12), counties, cities (13) … everywhere the revenues from taxes disappear involving in an accelerated way the worldwide in an overdrawn spiral that nobody (Washington in first chief) controls any more.

  8. kackermann

    There are select employment stats that are not lagging, but leading indicators.

    An increase of wage hours paid would be a great leading indicator, and I think it should track and strongly reinforce factory orders.

  9. Leo Kolivakis

    "Why is this different than what the Japanese did, which seems to me as close to anything we have? The biggest difference being the Japanese didn't have the entire global economy going south."

    >>Don't get me wrong, in many ways it's worse than Japan. I agree with Krugman who thinks we are creating Japanese-style zombie banks.

    But I am not a perma bear or a perma bull. I call it like I see it. There are some glimmers of hope out there, but nothing to get excited about.

    The structural debt in our global economy will take years to clear out. I do think that Q1 might have been the worst of it, but I expect weak growth for a long, long time.


  10. sagar

    This is the biggest crisis all the people alive today have ever seen and also the extent of the rescue program is unprecedented.

    What is Team-Obama exactly doing ?
    Pump in massive amount of funds in these toxic assets and do it without having any accountability or transparency.
    1. The assests are really cheap at the moment
    2. Help their friends in wall-street who provide the money for running and winning elections

    How to make the plan work?
    People have lost the hope in the system … just add oil to the fire
    by getting all the leading economists and traders to bash the government programs and make people believe that the programs are unfair,unjustified and ineffective. In short term it will create even more negativity and maybe more bailout funds or some mini-bubbles or mini-rallies as we are experiencing right now !
    and very slowly and discretly these economists will start making statements which would approve these programs partially and one day one of the mini-rallies will form the next big rally and very slowly the US govt will offload everything bought during this period with a huge margin.
    The end result, NULL fiscal deficit and govt liabilities which has mounted for quite a few years because of the wars and indiscriminate spending …

    Why is US govt playing this game ?
    Was there any other option … other than insider TRADING and market manupulation at the macro-economic level !

    who gains and who losses?
    gainers: US treasury, wall street, central banks and offcourse these economists who are bashing these plans!

    loosers: China, India and all the third world countries, retail investors in equity,real estate the world over …

    why no one would complain: because the looses are already done, jobs are already lost and when things improve in a few months/yrs no one would complain

  11. Brick

    The IMF has released two sections from its up coming paper as a sort of teaser. While the first about how long the recession is likely to be and how quick and strong the recovery will be is interesting especially because they clearly express their view that this is very similar to the great depression, it is the other paper that has me more worried.

    The context of this section is that financial systems are closely linked and a financial problem in developed countries can quickly impact emerging economies. Whilst this may seem obvious some of the implications may be slightly less obvious. First up is

    Banking flows to emerging economies are likely to take a severe hit Ok not such a surprise there now that it has come to pass, but confirmation that is a consequence of the financial problems.

    the degree of current account and fiscal deficits will likely determine how quickly economies can reestablish financial stability, once stress in advanced economies recedes. Not so obvious and seems to imply that if China goes down the stimulus route it is now, then it will take a long time to recover.

    In turn, a broad-based economic and financial collapse in emerging economies would have a significant negative impact on the portfolios of advanced economies. This could further exacerbate financial deleveraging in mature markets and lead to further stress transmission, capital outflows, and economic slumps. In other words it does not matter how US banks or the US economy is doing if the Korean and Malyasian economies are continuing to fall this will come full circle back to the US.

    it is clear that under current circumstances, policies will need to focus on averting further escalation of stress in emerging economies. This would not only limit the impact on the real economy in these countries, but also would thwart a second round of global deleveraging in the wake of damage to lenders’ balance sheets in mature markets. So the solution is to use US tax payers money for a stimulus in China rather than at home. I can just see US politicians trying to sell that one. It does make an important point that any individual countries attempt at recovery can be thwarted by lack of action elsewhere. In other words our economic fortunes rely on economic cooperation between countries that could not agree on a price of a loaf of bread.

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