Lasting Effects: Global economic recovery 10 years after crisis

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In the year following the 2008 financial crisis, economic activity declined in half of all countries in the world. Our analysis in Chapter 2 of the October World Economic Outlook shows that in many countries output is still well below levels that would have prevailed had output followed its precrisis trend.

Moreover, there are also signs that the crisis may have had lasting effects on potential growth through its impact on fertility rates and migration, as well as on income inequality.

The output loss represents a correction from unsustainable precrisis paths. But the widespread pattern, spanning advanced, emerging market and low income developing economies, suggests losses go beyond such corrections.

Despite these effects, specific policies did have an effect on how individual countries fared after the crisis. Those in better fiscal shape, with better regulated and supervised banks and flexible exchange rates generally suffered less damage.

There are signs that the crisis may have had lasting effects on potential growth.

Crisis costs
Our study looked at a sample of 180 countries — covering advanced, emerging market and low income developing economies — to measure the decline in economic activity in the decade after Lehman Brothers collapse.

While many economies saw output losses relative to precrisis trends, the postcrisis experience varied across countries. Advanced economies and commodity-exporting low income developing countries were harder hit than others.

This variation partly reflected differences in the type of shock that hit individual countries. Some suffered severe banking crises as part of the global financial panic, while others saw weaker activity in advanced economies reverberated globally through trade and financial channels.

Among the economies that experienced a banking crisis in 2007–08, about 85 percent are still operating at output levels below precrisis trends. The number is smaller (around 60 percent) for the group that did not experience a banking crisis in 2007–08.

For some countries, the output loss represents a correction from unsustainable precrisis paths. But the widespread pattern, spanning advanced, emerging market and low income developing economies, suggests losses go beyond such corrections.

Possible long-term consequences
Our analysis shows that the crisis may have left lasting scars beyond these well-documented effects on growth trends. For example, fertility rates have been on a steeper decline in many economies — a development that will drag on the size of the labor force in the future in those countries. Another effect is that net migration (immigration minus emigration) rates among advanced economies declined after the crisis.

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