The IMF expects a very slow recovery when it occurs:
“These findings suggest that the current recession is likely to be unusually long and severe, and the recovery sluggish. However, strong countercyclical policy action, combined with action to restore confidence in the financial sector, could improve prospects for recovery,” the fund said.
In a study of 122 recessions across 21 advanced economies since 1960, the IMF found that crises that are globally synchronized and caused by financial shock tend last twice as long as the average recession, at more than seven quarters. They are also more severe, with real gross domestic product contracting 4.8%, versus an average of 2.7%.
Recoveries from such events take twice as long on average – nearly seven quarters – and are weaker in a global financial crisis. GDP tends to rise 2.8%, compared with an average of 4.1%.
In the current crisis, 15 out of the 21 advanced countries covered in the study were in recession by the fourth quarter of 2008 and the downturns “are already more severe and longer than usual,” the fund said.
“Hence, it is unlikely that overleveraged economies will be able to bounce back quickly via strong growth in domestic private demand – fundamentally, a prolonged period of above-average saving is required,” the report said.
Lead author Marco Terrones told reporters that the report is “sobering news” for the current crisis, but that it’s difficult to predict the likely extent of the global recession and recovery since each country’s situation is different. In general, it takes nearly three and a half years for an economy to return to the peak level of growth before a global financial crisis, he said.
While the study only covered recessions since 1960, it also examined comparisons and contrasts with the 1930s Depression, which remains the most severe crisis on record in the U.S. and many other countries.
It found that the unprecedented international response, better macroeconomic conditions and a more flexible monetary system unfettered by a gold standard have enabled policymakers to avoid some of the painful financial upheavals of the Depression. But the IMF noted some “worrisome parallels,” such as the feedback between the real economy and the financial sector and inflation likely to near zero in a number of countries.
“Further policy action is needed to restore confidence in the financial sector, stop damaging asset price deflation, and support an early global recovery,” the IMF said.