What comes next?

Two economists have studied previous financial shocks to understand what we might expect now. Carmen M. Reinhart, professor of economics, University of Maryland, and Vincent Reinhart, resident scholar at the American Enterprise Institute, find:

Economic growth is notably slower in the decade following a macroeconomic disruption. We extend our results to provide evidence of several post-crisis “double dips” in the years following a crisis. Indeed, a faltering of economic recovery is not uncommon after a severe financial shock.

Here are some of their findings.

• Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1%.
• In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009.
• About 90% of the observations show real house prices below their level the year before the crisis. Median housing prices are 15% to 20% lower in this eleven-year window, with cumulative declines as large as 55%.
• Of the 15 post World War II episodes examined, nearly one half of these (seven episodes) involved a broadly-defined double dip.