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From Recessions to Recoveries: how long and how soon? IMF Economic Outlook, April 2009 Discussion

From Recessions to Recoveries: how long and how soon? IMF Economic Outlook, April 2009 Discussion London, May 5 th 2009 Lucrezia Reichlin London Business School. What does the Report say?. The outlook is gloomy The gloominess is prompted by two observations:

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From Recessions to Recoveries: how long and how soon? IMF Economic Outlook, April 2009 Discussion

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  1. From Recessions to Recoveries: how long and how soon? IMF Economic Outlook, April 2009 Discussion London, May 5th 2009 Lucrezia Reichlin London Business School

  2. What does the Report say? • The outlook is gloomy • The gloominess is prompted by two observations: 1. This recession is global 2. It is associated with a financial crisis Impressive data on recessions and recoveries across countries and time

  3. Point 1: ‘global’ recessions Is this recession really more global than others?

  4. US and EA recessions: 1970-2008 Source: Eurostat, Bureau of Economic Analysis Page 4

  5. US and EA GDP per head: growth rates 1970-2007

  6. Euro Area and US recessions have always been highly synchronized and so have G7 recessions • ... until 2000, these economies represented the largest share of world GDP, now new players

  7. What is new now is not that the recession is more global but that there are new large countriesWhy should this make a difference? • Until recently the common wisdom was “decoupling” ......

  8. POINT 2: How robust is the link between financial crises and the depth of recessions? • Let us look at global recessions and industrialized countries • FACTS: high synchronization, continental European recessions follow Anglo-Saxon ones, they are milder and more prolonged • Cases of financial crisis: Italy, UK and France hit by financial crisis early 90s, Germany early 80s • However, this did not change timing and typology of recessions in these countries

  9. Averaging across many recessions including minor countries’ recessions might be a dangerous exerciseIf we concentrate on the big ones ... puzzling features. It does not look as though financial stress changes the nature of downturns and expansions

  10. POINT 3: Do I believe the forecasts? • 2007 to now: From optimism to pessimism • Aren’t we now over-shooting with pessimism? Very Large revision in Jan 2009 for the 2009 forecast of the EA The forecast for the EA contradicts historical experience of milder recessions in the EA which lag US

  11. IMF forecast for GDP growth 2009: evolution Source: IMF World Outlook Database Page 11

  12. IMF forecast for GDP growth 2009: evolution Source: IMF World Outlook Database Page 12

  13. What does the IMF forecast for the US and the EA? Year-on-year GDP growth My forecast: more optimistic for 2009, more pessimistic for 2010 in the EA ---- timing might have implications for world recovery 2007 2008 2009 2010 US 2.0 1.1 -2.9 0.0 EA 2.7 0.9 -4.2 -0.4

  14. The End

  15. Big errors Particularly on Europe since November. Didn’t incorporate lead-lag relation between US and EA Next two charts + counterfactual (you could have seen it in the Summer) Is this now in the projections? (it seems than now it is …. / not sure how to comment) Point 1: Very gloomy outlook – over-shooting?

  16. Blue line: probability of EA recession when conditioning for US economic activity; Red line: without conditioning

  17. Question 2: you make a big deal out of the fact that this downturn more global than previous ones – True? From next 2 charts: before this millennium world growth explained by advanced economies From charts on US and EA: recessions in US synch with recessions in EA and explained world recessions Implications: all previous US recessions have been global – no difference now No change in cross-country corr of ec activity if one considers big actors. Implications: less pessimism Page 18

  18. Point 3: Things are differences in financial markets • Increasing corr in financial markets (slide 6) but no increasing corr in real activity (US-EA) Implications: stock prices are in the IMF index of financial stress – ????? Not sure how to comments in a simple way

  19. Correlation among the growth rates in the stock price indices

  20. Point 4: classification and causality • These international comparisons are dangerous Example: • Recession early 90s: US and UK synch and earlier than continental Europe • Financial crisis hit UK and Italy but not Germany and France – did not affect timing Next slides show it [although horrible]

  21. Point 4: should we look at total credit? • Should look at credit to NFC (more cyclical) rather at total … although boty are !!!

  22. Qui seguono grafici con annualized rather than annual, ma mi sembrano meno interpretabili.

  23. CONCLUSIONS • Results based on 2 facts: (i) more real synch now; (ii) financial crisis makes recessions worse • Not clear that this is really true • Also, view on linkages seems to have changes (US-EA …. Why?) • BOTTOM LINE: the world will go up when the US go up – agree that a lot will depend on banking sector but the story may bee simpler than what told by IMF

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