Leaders and laggards, on the way down and up

Content Type
Working Paper
Oxford Economics
With the economies of most countries having passed their troughs, it is a good time to take stock of some of the main features of the crisis so far and to assess what the upturn may look like. In this article, we look back at how the different countries have fared in this crisis and how monetary and fiscal authorities have responded to the crisis. We then turn to the nascent recovery to compare and contrast the upturn across countries. Finally, we highlight some of the main legacies of this crisis. Exposure to financial services, housing booms, consumer debt and trade with the US were seen as factors that would make some countries suffer deeper downturns than others. In the event, the downturn has surprised by how quickly it has spread across countries. So the most affected countries turned out to be the most exposed to the world economy such as Germany, Italy, Japan and Eastern Europe. All major central banks have responded with aggressive cuts in interest rates and adopted wide-ranging unconventional measures. This has helped stabilise financial markets, but the goal of getting credit flowing to the non-financial economy has not yet been achieved. Governments have also responded to the crisis with large fiscal stimulus packages. These packages have helped contain the collapse in activity and contributed to some countries exiting the recession in 2009Q2. Whether these packages will be enough to get the world economy back on a sustainable growth path is still uncertain though. Beyond the short term, where fiscal stimulus and the stock cycle will boost growth, the recovery is expected to be sluggish and bumpy in most places. History suggests that recoveries from financial crises tend to be slower than others, and the repair of household and corporate balance sheets will be a drawn out process. In addition, with large amounts of spare capacity around the world, demand for investment will be weak for some time to come. Furthermore, the nascent upturn has already put pressure on oil and commodity prices. If this continues, it will hamper growth in net importer economies. These factors will combine with country-specific features that determine their potential growth. We forecast the recovery to be most drawn out in Italy, Japan and Germany as these countries are hit by weak demand for investment goods and are characterised by relatively low potential growth. One main legacy of this crisis is the likelihoo d of years of fiscal austerity, to bring public deficits back under control. Another legacy may be in changes to the regulation of financial services, although do date little progress has been made in this area. In addition, EMU has so far proved a resilient entity during the crisis, so that the euro could gain a more prominent role on the world stage, depending on how it fares in the upturn.
Economics, Globalization, Markets
Political Geography
Japan, Europe, Germany, Italy