The Global Financial Crisis

The potential pace and path of a recovery from the present global recession are now beginning to emerge as important questions. The Great Depression again provides a useful point of reference. In the United States, for example, real GDP fell 8.6 percent in 1930 and continued to fall through 1933, four years in which output fell a cumulative 26.5 percent. The economy bottomed during the course of 1933 with recovery setting in from 1934 and continuing through 1937, followed by renewed but relatively brief recession in 1938 (figure 7).

Figure 6. G20 – Fiscal Stimulus and Financial Sector Support

Few expect the path of recovery from the present recession to be as delayed or protracted as during the Great Depression. Nevertheless studies have noted that the characteristics of the present recession – for example that it combines a credit crunch and financial crisis with busts in the housing and equity markets and that it is highly synchronized across countries – are such as to suggest that this recession will be deeper and more protracted than any in the post- war period. However, with high continued uncertainties on many fronts, one can at this stage only lay out some stylized scenarios for potential paths out of the recession, identifying some of the key variables to observe in the months to come that might help identify which (if any) of these scenarios is coming to pass. Figure 8 sketches four possible scenarios for the coming one to two years (and perhaps beyond), with the present (July–August 2009) highlighted as the point where many commentators have noted the emergence of some "green shoots" of incipient recovery.