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Chapter 6. Global Recoveries: Tales of Revival

Author(s):
Ayhan Kose, and Marco Terrones
Published Date:
December 2015
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Chapter Epigraphs

The recovery on which the fate of so many businesses depends has faltered in most major economies. Bankruptcies break new records. The revival in demand in the industrial world this year may soon putter out.

The Economist (1982b)

Many commentators are suggesting that the recent data… indicate that the “green shoots” of an economic recovery are clearly visible. While there do seem to be some signs of improvement… the most recent data may still suggest that the global economic contraction is still in full swing with a very severe, deep and protracted U-shaped recession.

Nouriel Roubini (2009)

Strong recoveries are all alike; every weak recovery has its own story. However, our knowledge about the evolution of global recoveries is limited. How does the world economy recover after a global recession? Has the ongoing recovery after the 2009 global recession been different? This chapter documents the main similarities of global recoveries and presents the specific features of the recovery following the Great Recession.

Global Recoveries: Main Similarities

A recovery at the national level is often defined as the early part of an expansion phase in the business cycle. We define a global recovery as the period—usually the first year—of increasing economic activity following a global recession. In addition, we study the first three years following a global recession, given the possibility that a global recovery can take longer than one year. We focus on the recoveries that followed the global recessions of 1975, 1982, 1991, and 2009.

A global recovery is the period—usually the first year—of increasing economic activity following a global recession.

Real Economy

The periods of revivals after global recessions display many similarities (Figure 6.1 and Tables 6.1A and 6.1B).1

Figure 6.1Global Recoveries: Activity Variables

Note: Time 0 denotes the year of the respective global recession (shaded with gray). All variables are in annual frequency. Aggregates for output are purchasing-power-parity-weighted per capita real output indices. Aggregates for industrial production are purchasing-power-parity-weighted industrial production of advanced and emerging market economies. Aggregates for trade are trade-weighted total trade flow indices. Aggregates for unemployment rate are labor-force-weighted unemployment rates in percent. Output, industrial production, trade, and oil consumption are index numbers equal to 100 in the global recession year. For the latest recovery, data for 2013 (year 4) are based on the IMF’s World Economic Outlook forecasts.

Table 6.1AGlobal Recoveries: Activity Variables(percent change unless otherwise noted)
Variable1976Average 1976–781983Average 1983–851992Average 1992–942010Average 2010–12Average of First YearsAverage of First Three YearsAverage 1960–2012
Total output (PW)5.434.742.913.781.972.445.174.023.873.743.83
Total output (MW)5.154.573.003.881.612.154.253.253.503.463.44
Output per capita (PW)3.793.021.162.050.210.883.992.862.292.202.19
Output per capita (MW)3.522.851.252.16−0.150.593.072.091.921.921.81
Trade flows10.337.252.414.865.686.6113.677.598.026.586.34
Capital flows0.850.07−1.12−0.192.090.724.79−0.471.650.030.17
Oil consumption6.254.76−0.470.691.020.913.321.332.531.922.25
Unemployment (labor weighted)−0.030.05−0.17−0.220.320.25−0.18−0.15−0.01−0.020.08
Industrial production (PW)8.085.932.104.170.892.239.365.985.114.363.36
Consumption (PW)4.824.623.923.923.343.304.363.804.113.913.90
Investment (PW)5.945.961.573.822.333.175.644.673.874.404.51
Consumption per capita (PW)3.142.842.041.681.631.563.182.752.502.212.16
Investment per capita (PW)4.264.19−0.551.620.621.414.473.622.202.712.76
Note: All variables except industrial production are in annual frequency. Industrial production is in quarterly frequency, and year-over-year growth rates are annualized as the average of four quarters. For unemployment, labor-weighted changes in levels are reported. “Average of First Three Years” column reflects the average of the three years following the global recessions. PW is the purchasing-power-parity-weighted average of the same variable for each country, and MW is the market-weighted average of the same variable for each country.
Note: All variables except industrial production are in annual frequency. Industrial production is in quarterly frequency, and year-over-year growth rates are annualized as the average of four quarters. For unemployment, labor-weighted changes in levels are reported. “Average of First Three Years” column reflects the average of the three years following the global recessions. PW is the purchasing-power-parity-weighted average of the same variable for each country, and MW is the market-weighted average of the same variable for each country.
Table 6.1BGlobal Recoveries: Financial Variables and Commodity Prices(percent change unless otherwise noted)
Variable1976Average 1976–781983Average 1983–851992Average 1992–942010Average 2010–12Average of First YearsAverage of First Three YearsAverage 1960–2012
Financial Variables
Credit (MW)4.045.572.765.502.612.532.973.183.104.175.25
House prices (MW)0.162.30−1.23−0.49−1.96−1.53−0.74−1.29−0.94−0.171.24
Equity prices (MW)3.45−3.5222.9315.946.479.5615.904.2812.188.543.79
Inflation rate (MW)2.37−0.721.652.44−1.19−0.551.550.551.100.57−1.17
Nominal short-term interest rates (MW)−0.290.15−1.43−0.71−1.47−1.050.040.09−0.79−0.60−0.08
Real short-term interest rates (MW)2.131.200.170.180.48−0.15−1.51−0.470.320.390.00
LIBOR overnight−1.910.70−3.29−1.52−2.19−0.510.00−0.03−1.84−0.80−0.04
Commodity Prices
Oil prices−9.63−6.71−19.86−18.17−16.02−21.9828.1916.37−4.33−12.806.15
Food prices−15.97−8.53−14.45−17.55−15.66−17.097.825.14−9.56−13.18−5.29
Gold prices−30.23−1.80−2.48−17.85−19.13−15.6921.7916.97−7.51−10.711.58
Note: All variables are in quarterly frequency, and year-over-year growth rates are annualized as the average of four quarters. For inflation, nominal and real short-term interest rates, and London interbank offered rate (LIBOR) overnight rate, the year-over-year changes in levels are reported. “Average of First Three Years” column reflects the average of the three years following the global recessions. MW is the market-weighted average of the same variable for each country.
Note: All variables are in quarterly frequency, and year-over-year growth rates are annualized as the average of four quarters. For inflation, nominal and real short-term interest rates, and London interbank offered rate (LIBOR) overnight rate, the year-over-year changes in levels are reported. “Average of First Three Years” column reflects the average of the three years following the global recessions. MW is the market-weighted average of the same variable for each country.
  • A broad rebound in activity. A typical global recovery is accompanied by a broad rebound in economic activity, generally driven by a pickup in consumption, investment, industrial production, and international trade. How do these variables respond to changes in world output? To answer this, we calculate the changes in these variables in response to a 1 percentage point change in the growth rate of global output per capita. The results indicate that in response to such an increase in world gross domestic product (GDP) growth per capita, growth in world consumption per capita increases by 0.8 percentage point, investment by 2.2 percentage points, industrial production by 2.4 percentage points, and trade by 2.5 percentage points (Figure 6.2).2 Most indicators of global activity also start growing in the first year of a recovery. In particular, industrial production, trade, and capital flows quickly rebound during the first year.
  • Some recoveries are stronger than others. The global recovery from the 1975 recession was the strongest in terms of average output growth in the first three years of the recovery. As we discuss in detail below, the latest episode featured an even stronger rebound in global industrial production and trade during the first three years. The global recovery following the 1991 recession was the weakest, partly reflecting sluggish growth in consumption, investment, industrial production, and trade flows.
  • Similar growth performance. The average growth over the three years following a global recession is close to the average growth of the global economy in a typical year.
  • Weak labor markets. Notwithstanding the pickup in activity, the rate of global unemployment often remains high in the year after a trough and tends to be more persistent than most other indicators. For example, during the weak recovery following the 1991 recession the global unemployment rate grew four years in a row.

Figure 6.2Sensitivity of Global Activity Variables

Note: Each bar represents the sensitivity of the respective variable to a 1 percentage point change in world GDP per capita. For example, the growth rate of global consumption per capita increases about 0.8 percentage points when the growth rate of global output per capita increases 1 percentage point. Details of these calculations are presented in Appendix G. PPP = purchasing power parity.

Financial Markets

Global financial markets become healthier as recoveries strengthen over time (Figure 6.3). Although global equity prices on average pick up quickly in the first year of a recovery, house prices tend to stay depressed for two to three years. Credit also takes longer to attain the types of growth rates observed during nonrecession periods. Although creditless recoveries observed in national economies do not take place at the global level, the growth of credit tends to be much weaker during global recoveries than the annual average during the nonrecession years (Table 6.1B).

There appear to be differences in the behavior of financial markets during the four global recoveries. Housing markets were mostly depressed during recoveries following the last three global recessions. In contrast, average growth in equity markets was much larger during the first year of the global recoveries than in other years. Equity markets stayed weak during the recovery after the 1975 recession, reflecting a long period of stagflation in several major advanced economies.

Inflation and Interest Rates

Inflation tends to decline during global recoveries (Figure 6.3). Nominal short-term rates stay low because monetary policies often remain accommodative. In fact, nominal short-term rates have declined in the first year of every global recovery. Real short-term rates tend to pick up, but patterns appear to vary widely across episodes depending on the behavior of inflation and nominal interest rates.

Figure 6.3Global Recoveries: Financial Variables, Interest Rates, and Inflation

Note: Time 0 denotes the year of the respective global recession (shaded with gray). All variables are in annual frequency. All variables are market weighted by output in U.S. dollars. Credit, equity, and house prices are for advanced and emerging market economies and are index numbers equal to 100 in the global recession year. Nominal and real short-term interest rates and inflation are only for advanced economies. Inflation is the change in the consumer price index.

The Latest Recovery: weaker or stronger?

Although the ongoing trajectory of global GDP growth since 2009 was quite similar to the period following the 1975 global recession, there was an even stronger rebound in industrial production and trade in the first three years. The first year of the latest recovery was the strongest among the four episodes (measured in GDP per capita in purchasing-power-parity terms).3 The robustness of the global recovery surprised many observers who expected a much weaker outcome, as the major advanced economies continued to experience the adverse effects of the financial crisis. The qualitative behavior of unemployment during the latest global recovery follows that during the previous episodes. The behavior of credit and equity markets has also been similar to that of the previous episodes.

The current global recovery is significantly different from the previous three episodes in at least five major dimensions. First, one of its most distinguishing features has been its uneven nature, with major differences in the performance of advanced economies and emerging market economies (Figure 6.4 and Table 6.2). Advanced economies were the engines of previous global recoveries, but the emerging market economies have accounted for the lion’s share of global growth since the 2009 global recession (Figure 6.5).

Figure 6.4Global Recoveries: Selected Activity Variables by Country Group

Note: Time 0 denotes the year of the respective global recession (shaded with gray). All variables are in annual frequency. Aggregates for output are purchasing-power-parity-weighted per capita real output indices. Aggregates for trade are trade-weighted total trade flow indices. Aggregates for unemployment rate are labor-force-weighted unemployment rates in percent. Output and trade are index numbers equal to 100 in the global recession year. For the latest recovery, data for 2013 (year 4) are based on the IMF’s World Economic Outlook forecasts.

Table 6.2Global Recoveries: Activity Variables by Country Group(percent change)
Variable1976Average 1976–781983Average 1983–851992Average 1992–942010Average 2010–12Average of First YearsAverage of First Three YearsAverage 1960–2012
Advanced Economies
Total output (PW)4.804.232.923.851.982.102.541.713.062.973.00
Total output (MW)4.804.233.044.031.841.922.571.713.062.972.92
Output per capita (PW)4.133.582.403.341.231.382.021.212.452.382.26
Output per capita (MW)4.133.582.533.521.101.212.051.212.452.382.18
Emerging Market Economies
Total output (PW)5.375.503.204.152.493.648.116.354.794.915.10
Total output (MW)4.955.293.534.241.883.907.816.124.554.895.01
Output per capita (PW)3.603.651.342.340.942.137.065.343.233.363.42
Output per capita (MW)3.193.441.672.430.332.396.775.102.993.343.34
Other Developing Economies
Total output (PW)9.645.791.892.08−0.150.205.154.734.133.204.21
Total output (MW)8.725.491.261.72−2.29−0.334.894.643.152.883.85
Output per capita (PW)7.453.42−0.61−0.45−3.42−2.193.202.791.650.891.83
Output per capita (MW)6.533.12−1.25−0.81−5.55−2.722.942.690.670.571.48
Note: PW is the purchasing-power-parity-weighted average of the same variable for each country, and MW is the market-weighted average of the same variable for each country.
Note: PW is the purchasing-power-parity-weighted average of the same variable for each country, and MW is the market-weighted average of the same variable for each country.

Figure 6.5Contributions to Global Growth during Global Recoveries

(in percent)

Note: Each bar represents the contribution of each country group to world GDP growth (purchasing-power-parity weighted) in the respective time periods.

Moreover, emerging market economies, as a group, have enjoyed their strongest recovery to date. Although they were also severely affected by the collapse of global trade in 2009, they delivered strong growth in 2010, largely driven by buoyant domestic demand, vibrant financial markets, and expansionary policies. However, as discussed in Chapter 5, average growth in emerging market economies during 2010–14 was quite high but was significantly lower than during 2003–08.

The role of emerging market economies in the 2009 global recession

The strong performance of emerging market economies during the early years of the recovery also reflects structural improvements such as better-regulated financial systems and stronger macroeconomic frameworks, which allowed them to pursue more credible and effective countercyclical policies. However, there were differences in the strength of recovery across regions as well (see detailed tables in Appendix H).4

Second, for advanced economies, the latest recovery appears to be the weakest during the postwar era (Figure 6.6).5 This partly reflects the legacy of the global financial crisis, particularly the need for balance sheet repair in both the household and the financial sectors. Some advanced economies in the euro area also struggled to finance their public debt and experienced severe sovereign debt crises. Compared with previous episodes, the growth rates of consumption and investment have also been much smaller. We discuss the role played by financial disruptions in explaining the sluggish nature of the ongoing recovery in advanced economies in Chapter 7.

Figure 6.6Global Recoveries: World and Advanced Economies

Note: Each bar represents the percent change in the respective variable during the years of the global recessions and the global recoveries. The variables for output, consumption, investment, and structural investment are the purchasing-power-parity-weighted averages and are in per capita terms. Output, consumption, and investment are in real terms. Structural investment and exports are in current U.S. dollars.

Third, the deterioration in labor markets was worse during the latest global recovery than during previous episodes, and it was much more pronounced in advanced economies. Consistent with weak income growth in these economies, unemployment fell only very slowly during the recovery, suggesting that the jobless nature of the two previous recoveries also characterizes the latest episode. In emerging market economies, in contrast, unemployment rates slightly declined on average in the first three years of recovery.

Among the advanced economies, increases in the unemployment rate varied considerably across countries during the recession. Three factors account for this: the extent of growth (or lack thereof) in incomes, structural bottlenecks, and the impact of macroeconomic and labor market policies. Structural factors may have played a supporting role in some countries, particularly where the collapse of the housing sector was a major reason for the drop in output. The role of policies, especially labor market policies such as work sharing, has been important in some specific cases (for example, in Germany, where unemployment declined). However, the growth factor was by far most important in explaining the differential performance of labor markets across countries.6

Fourth, cumulative growth in investment was quite small during 2010–12. Contrary to previous global recoveries, there was a contraction in investment in structures in the first three years of the latest recovery. The decline in the growth rate of investment in structures in advanced economies was especially severe because of the deterioration in credit and housing markets. Indeed, this has been the first time that house prices in the United States collapsed nationally. Housing markets in many advanced economies remained weak during 2009–14, and residential investment stayed depressed as households struggled to improve their balance sheets.

Fifth, this recovery has been different because uncertainty in the advanced economies has been unusually high and volatile whereas the previous episodes coincided with steady declines in uncertainty. We analyze the role of uncertainty in explaining macroeconomic outcomes in Chapter 8.

Finally, the latest recovery differs from the earlier episodes in the evolution of fiscal and monetary policies: these policies were aligned in previous recoveries, but they diverged in the latest episode. We present a detailed analysis of this divergence and its implications in Chapter 9.

Is It 1992 All Over Again?

Despite the marked difference in the severity of the 1991 and 2009 global recessions, their underlying causes and the evolution of activity during the following recoveries share remarkable similarities for the group of advanced economies.

Both the 1991 and 2009 global recessions were attended by financial crises, and the ensuing recoveries were weak and protracted.

Both recoveries were preceded by recessions associated with severe disruptions in credit and housing markets in the major advanced economies. In particular, the global recovery following the 1991 recession was adversely affected by the ripple effects of a collapse in credit and asset markets in the United States and Japan.7 Similarly, the deep 2009 global recession was associated with substantial problems in credit and housing markets in the United States and a number of other advanced economies, including Ireland, Spain, and the United Kingdom.

Both recoveries were also slowed by challenges in Europe (Figure 6.7). Specifically, the latest recovery and the one in the early 1990s were hampered by financial market problems in the advanced European economies, driven by their desire to protect the exchange rate mechanisms that they designed—the managed float regime of the European Exchange Rate Mechanism (ERM) in the earlier episode and the euro more recently. As Chapter 3 documents, the earlier recovery was shaped by downturns in many European countries during the ERM crisis of 1992–93, when interest rates were raised to defend the exchange rate arrangement after the 1991 global recession. This further depressed economic activity and credit and housing markets.8

Figure 6.7Global Recoveries: Euro Area

Note: Each bar represents the percent change in the respective variable in the years of the global recessions and recoveries. Growth rates of output, consumption, and investment are the purchasing-power-parity-weighted averages and are in per capita terms. Growth rates of real credit, real house prices, and real equity prices are market weighted by output in U.S. dollars.

The recent recovery lost its momentum in late 2011 as the financial crises in some euro area countries intensified and threatened growth in other parts of the world. Challenges associated with sovereign debt markets in some countries in the euro area exposed the flaws in the design of monetary union and led many member countries to resort to the use of contractionary fiscal policies amid a protracted period of balance sheet repair.9 The euro area suffered a double-dip recession that started in the third quarter of 2011. After experiencing its longest recession ever, the euro area began growing again, albeit at a very low rate, in the second quarter of 2013. Several countries again fell into recession or experienced weak growth during 2014.

The devastating effects of the crisis have lingered, particularly in Europe.

A speech in July 2012 by European Central Bank (ECB) President Mario Draghi marked a critical turning point in the euro area crisis as he sent a strong signal about the ECB’s policy line when he said that “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”10 Financial markets in Europe stayed relatively calm since the ECB employed its Outright Monetary Transactions program in September 2012 to lower the borrowing costs of EU periphery countries. However, corporate and household debt both remained high, which dampened growth during 2014.

There was substantial volatility in world oil markets during the global recessions of both 1991 and 2009. Oil prices increased rapidly in the 1991 episode, mainly because of the Gulf War. Likewise, oil prices escalated during the 2009 global recession to unprecedented levels in a short time. Although prices declined during the recovery following the 1991 recession (and other episodes), oil prices remained elevated through mid-2014, which was a drag on the recovery process. However, oil prices rapidly declined in the second half of 2014.

The recoveries following the 1991 and 2009 global recessions were both characterized by meager growth in advanced economies. In part, this was the result of disappointing growth in domestic consumption and investment, which in turn was driven by the legacies of the financial crisis in advanced economies—namely, the need to mend household balance sheets, weak credit expansion, and lingering problems in housing markets. Persistently high unemployment also marked both of these recoveries.

Large and Persistent Human and Social Costs

Adverse macroeconomic events, such as national recessions and crises, often carry significant human and societal costs. These have far-reaching implications, including the loss of jobs and lifetime incomes, increased poverty and inequality, loss of human capital, discouraged workers and lower labor force participation, weaker health outcomes, lower fertility rates, and a loss of social cohesion.11

The large social and human costs of global recessions have always left scars extending well beyond the period of recession and recovery.

Global recessions are periods of collapse for the world economy. This is not simply because of the decline in income per capita but also because of the enormous social and human toll they inflict. The world economy has been able to deliver growth in income per capita in the year following each global recession since 1960. However, the large social and human costs of these episodes have always left scars extending well beyond the period of recession and recovery.

In the 2009 global recession, for example, the adverse effects on labor markets were particularly pronounced, and it turned into a “jobs crisis” in many parts of the world.12 The number of people unemployed globally rose from 178 million in 2007 to 212 million in 2009. In 2014, seven years after the beginning of the global financial crisis, the global jobless totaled a staggering 201 million. The large and persistent social and human costs make all the more important a rigorous understanding of the sources of global recessions and policy responses to cope with them.

Global Expansions: What Happens between Global Recessions?

A global recovery is the early stage of the expansion phase in the global business cycle, and between two global recessions there is an expansion phase.13 We now briefly discuss the key features of global expansions.

The world economy experienced four expansions since the 1974 recession: 1975–81, 1983–90, 1992–2008, and one that started in 2010. The duration of the first three global expansions varied, with a minimum of 7 and a maximum of 17 years. The longest global expansion, 1992–2008, accompanied the information technology revolution and the economic transformation of China and many other emerging market economies.14 Although the longest expansion featured the “Great Moderation” in macroeconomic volatility, the period also included the 1998 and 2001 global downturns during which the world economy came close to experiencing a recession. The latest global expansion turned six years old in 2015.

The global expansion from 1992 to 2008 featured the economic rise of Asia.

The world economy registered 2 percent per capita GDP growth on average during the first three expansions (Figures 6.8 and 6.9). The latest expansion has seen relatively higher average growth so far primarily because of the vibrancy of emerging market economies. However, the average rate of global unemployment has been higher than during previous expansions, and credit and housing markets have performed worse in the aftermath of the 2009 global recession.

Figure 6.8Global Expansions: Activity and Financial Variables

Note: Each bar represents the average growth of the respective variable during the years of the global expansions. Growth rate of output is the purchasing-power-parity-weighted averages and is in per capita terms. Aggregates for trade are trade-weighted total trade flow indices. Aggregates for unemployment rate are labor-force-weighted unemployment rates in percent. Growth rates of real credit, real house prices, and real equity prices are market weighted by output in U.S. dollars.

Figure 6.9Global Expansions: Activity Variables by Country Group

Note: Each bar represents the average growth of the respective variable during the years of the global expansions. Growth rate of output is the purchasing-power-parity-weighted averages and is in per capita terms. Aggregates for trade are trade-weighted total trade flow indices. Aggregates for unemployment rate are labor-force-weighted unemployment rates in percent.

The Collapse of 2009 under a Microscope

There has been much discussion about what made the 2009 global recession so severe and the recovery so weak in advanced economies. In Part III we closely examine the main factors that explain the depth of the recession and the sluggish nature of the recovery. We start with an examination of the implications of the highly synchronized nature of the 2009 global recession.

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