The speed of the recovery from the 2008 global financial crisis has been unusually slow. The slow recovery is a symptom of the permanent decline in GDP following a financial crisis, since the economy never fully rebounds from the initial recession. We estimate long term output losses from the crisis ranging from almost none in Germany to almost 20% in Italy and Spain. This article highlights several factors behind the slow recovery and the large long term effects of the crisis:
- The financial crisis made the economy more vulnerable to other negative shocks.
- Trend growth may have been slowing down before the crisis.
- Financial crises lead to big drops in labour productivity that take a long time to reverse.
Figure 1: GDP Per Working Age Person in Advanced Economies since 2007
Source: Euromonitor Macro Model and International Statistics
Note: 2007 level normalised to 1 for all countries. Forecast starts in 2014.