World Economic Outlook, April 2002

• Author: James Morsink
• Pages: 16-

Page 16

The main analytical chapter contains an empirical analysis of recessions and recoveries in industrial countries , in order to place the recent global slowdown in context. The chapter looks at all the level recessions (these are roughly defined as two consecutive quarters of negative GDP growth) in 21 industrial countries over the period 1973-2001: 93 recessions in all. The chapter also look at the history of recessions going back to 1881 for a narrower set of countries. The main result is that, while every recession has its own unique features, the recent global slowdown had much in common with past downturns:

* synchronized recessions are the historical norm,

* a sharp drop in business fixed investment is typical in the lead-up to a recession,

* increases in interest rates have regularly marked the onset of recessions,

* the historical trend is toward shallower recessions, and

* recoveries tend to be driven by upturns in private consumption.

Another analytical chapter contains three essays on how financial markets affect real activity. The first looks at why many countries in Latin America have had a disproportionate number of debt crises . The essay emphasizes three vulnerabilities. First, although external debt levels have not been high relative to GDP, they have often been high relative to exports. Second, macroeconomic volatility has been high, stemming not only from terms-of-trade shocks, but also from procyclical fiscal policy. Third, government borrowing is disproportionately external and foreign currency denominated, which has left countries exposed to the effects of a sharp sudden exchange rate depreciation. The essay notes that many countries in the region have made substantial progress in recent years, including important fiscal reforms and more flexible exchange rate systems, so vulnerabilities should be lower going forward.

The second essay looks at wealth effects on consumption, in particular the impact of huge run-ups in household wealth in industrial countries during the 1990s on consumer spending. The essay finds that the impact is larger in market-based financial systems than in bank-based systems...