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Global Letter

LlewellynConsulting  |  Macro series  | John Llewellyn, Russell Jones and Soyon Park                                               7 May 2020

Global Letter

Recessions last years, not quarters 

It stands to be many years before countries’ GDP is back to 2019 levels.


Fluctuations in the pace of economic activity are self-evidently a fundamental feature of market economies. Before World War II, these fluctuations were sharp and frequent. Following WWII, by contrast, they became comparatively infrequent and markedly smaller.   

There were various reasons for this reduction in volatility. First, government expenditure, which is inherently relatively stable, had come to account for around 40% of GDP for the OECD countries taken together. Second, the so-called ‘automatic stabilisers’ imparted additional damping. Third, discretionary policy, particularly fiscal, was important on occasion.1  

Complacency set in. In 2003, Nobel Laureate Robert Lucas declared, in his Presidential address to the American Economic Association, that the "… central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”2 

But then came the 2008 global financial and economic crisis. It became clear, to purloin the words of Mark Twain, that in respect of economic fluctuations “the report of my death was an exaggeration.”3 Containing that 2008 shock required a dramatic and unorthodox monetary policy response, and a powerful fiscal boost of the order of 3% of GDP across the major economies. 

And now – even before recovery from the 2008 episode was properly complete, economies have been dealt a second, monster, negative blow  ̶  albeit this time from outside the economic system.  

And so to magnitudes 

It is becoming evident, in shadowy outline at least, that many countries’ fall in GDP this year stands to be at least 10 percent, and perhaps as much as 20 percent. Such numbers would exceed those following the Global Financial Crisis by a factor of five.  

Countries thus today face the biggest downturn in economic activity for a century. Bar the traumatic declines in economic activity in one or two economies following the fall of the Soviet Union, nothing like this has been seen since WWII, indeed since the Great Depression and, before that, the chaos of post-World War I restructuring. (See the left-hand side of the figure below.) 
If the magnitude of the GDP decline is as yet uncertain, the path of the recovery is even more so. It is tempting to imagine that economies will bounce back quickly, much as after for example a Christmas / New Year shutdown. But history suggests otherwise. 

Typically, the time that it takes from start to finish – i.e. for GDP to reach its trough and then get back to its pre-crisis level – is to be measured in years, not quarters.4 The right-hand side of the figure below shows, for a selection of the largest depressions and recessions, that their duration is almost invariably at least 3 years. Often the episodes last 4 or 5 years; sometimes even longer; and in one case – Italy – GDP is yet to get back to where it was in 2007 – some 12 years ago.

1 Often the timing of discretionary fiscal policy proved awry. But on big-shock occasions when it really mattered, such as following the 1973/74 oil price shock, which reduced world demand and output for a period by pushing up world savings, the major countries used discretionary policy – in this case fiscal policy – constructively.   

2 See Lucas, R. E., 2003. Macroeconomic Priorities, American Economic Review, March. Available at [Accessed 5 April 2020].  

3 Twain, M., (Samuel Langhorne Clemens), 1897. Note to London correspondent of the New York Journal, June 1. Cited in Bartlett’ s Familiar Quotations, Little Brown, Seventeenth Edition. 

4 Were recovery to be defined as a return of GDP to its pre-recession extrapolated tend, it would take considerably longer still. 

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