From Recession to Recovery Marco E. Terrones June 2009

Motivation Global economy is experiencing deepest downturn in post-WWII period Most advanced economies currently in recession Two key aspects of the current recessions are: Their association with financial crisis Their high international synchronization

Questions Are recessions and recoveries associated with financial crises different from others? What are the main features of globally synchronized recessions? What are the implications for the short-term prospects of the global economy?

Key Messages Recessions associated with financial crises are severe and recoveries from such recessions are typically slow. These features become more pronounced if, in addition, the recession is global. Consistent with these findings, the April 2009 WEO projected that global economic activity will decline in 2009 and recover gradually during 2010. Recent developments are mixed … outlook remains broadly in line with April 2009 WEO forecast.

1. Recessions and Recoveries

We Examine Business Cycles in 21 Advanced Economies … Excluding the current recessions, there were 122 recessions since 1960. Of which: 15 were associated with financial crises 37 were globally synchronized (1975, 1980 and 1992). 6 were both associated with financial crises and globally synchronized.

Recessions and Recoveries are Longer when Global and associated w/ Financial Crises … Note: Source: P:\WRK\CHT\w2009weo\Ch3\Figures\Video\Ch3_VIDEO_FIG1.xls 7

Highly Synchronized Recessions Mainly Reflecting Consumption Dynamics … (Median = 100 at t = 0; peak in output at t = 0) Financial Crises Highly Synchronized Recessions Note: Source: Fig 3.8 & 3.10 8

Highly Synchronized Recessions Which, in turn, Reflects House Prices Dynamics … (Median = 100 at t = 0; peak in output at t = 0) Financial Crises Highly Synchronized Recessions Note: Source: Fig 3.8 & 3.10 9

Highly Synchronized Recessions And sharp increases in unemployment … (Median difference from t = 0, in percentage points; peak in output at t = 0) Financial Crises Highly Synchronized Recessions Note: Source: Fig 3.8 & 3.10 10

Highly Synchronized Recessions Exports Play Important Role in Recovery … (Median = 100 at t = 0; peak in output at t = 0) Financial Crises Highly Synchronized Recessions Note: Source: Fig 3.8 & 3.10 11

2. Current Global Outlook

WEO forecast sees world contracting in 2009 and recovering modestly in 2010 … Real GDP Growth (Annual percent change) Emerging and Developing economies Source: P:\WRK\TULUN\JD\Figures 1,3,4,5.xls Advanced economies World 1970 75 80 85 90 95 2000 05 10

Advanced economies are projected to suffer the deepest recession since World War II... Real GDP Growth Rates (percent change) CC Oct 2008.xls: Sheet [3c] 2007 08 09 10 United States 2007 08 09 10 Euro area 2007 08 09 10 Japan 2007 08 09 10 Emerging and Developing Economies

Unemployment in advanced economies would reach very high levels, retreating only in 2011 ... Unemployment Rate P:\WRK\CHT\W2009WEO\CH2\JY\GGD_LUR_NGAP.XLS

Emerging economies are projected to suffer too, but high growth in Asia is holding up activity … Real GDP Growth Rates (percent change) 2007 08 09 10 Africa 2007 08 09 10 Emerging Asia 2007 08 09 10 Latin America 2007 08 09 10 Middle East 2007 08 09 10 Emerging Europe&CIS

(percent change, ppp-GDP weighted average) Risks to April WEO projections were seen to be large and tilted to the downside. Global GDP Growth (percent change, ppp-GDP weighted average) CC OCT 2008.xls: Sheet [2]

April 2009 WEO baseline is broadly consistent with recent developments … Following a disappointing Q1-2009, some indicators suggest that global downturn might be moderating. However, signals are mixed and not uniform across country regions.

Risks to the outlook remain tilted to the downside, although probably to a diminishing extent … Downside risks. Financial strains could intensify again. Trade and financial protectionism remains a concern. Deflation risks. Concerns about high public debt and fiscal sustainability. Upside potential. Faster than expected restoration of market trust and confidence, helped by successful macroeconomic policies.

Websites: http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm