The Triangle

Issue date: 3/6/09 Section: Ed-Op

Media Credit: MCT

Once again, we find John Stocks and his Swedish wife Mary Banks at the dinner table in their spacious house to discuss the current recession, still their favorite topic of conversation. Both have high paying jobs and are worried about keeping those jobs, never mind their bonuses. They are concerned about the amplitude (peak to trough) and duration of the ongoing 2008 recession. Both have glanced over the International Monetary Fund paper written by Stijn Claessens, M. Ayhan Kose and Marco E. Terrones (2008) on recessions, crunches and busts. This time John starts the conversation.

John: Mary, I know you have read the recent IMF paper on recessions, crunches and busts. They examined 122 recessions and hundreds of crunch and bust episodes in 21 Organization for Economic Co-operation and Development countries during the period 1960-2007. They found that the duration of the shortest recession was less than two quarters but the longest one persisted for 13 quarters - more than three years. What do you think the duration of the current recession will be?

Mary: John, as you know the causes of recessions are closely related to their durations. In the IMF paper, one out of six recessions was accompanied by a credit crunch, while one out of four recessions was associated with a real estate bust. The cause of the U.S. 2001 recession was the dot-com bubble bust. That recession lasted for only two quarters. But recessions whose root causes are credit crunches or real estate bubble busts last much longer. The Japanese recession, which was caused by an asset bubble bust, lasted for about a decade. The U.S. 2008 recession has a double cause: a real estate bubble bust and a credit crunch. Therefore, you can characterize it as a severe recession that should last more than two years. Severe recessions last on average more than 15 months. Our 2008 recession has been documented to be one year old, having celebrated its first birthday last December. By my account, it has now reached the middle age. That puts it in the category of the 1981-82 recession in terms of duration. What do you think the impact of the 2008 recession will be on our gross domestic product? As you know, we call the negative output impact when measured from peak to trough the amplitude of recession.

John: Mary, let us get more clues from the IMF paper. If the duration alone is used to calculate the economic cost terms of output declines, the average recession costs nearly 2 percent of GDP, while the severe one costs more than 5 percent. Our 2008 recession should cost our country more than 5 percent based on duration only. The IMF paper also calculates the combined output loss due to both duration and amplitude. By this account, severe recessions cost on average about 10 percent of GDP. You can count that by the end of 2009 or beginning of 2010, our cumulative loss would be about 10 percent of our GDP. In current dollar terms, this should be equal to $1.5 trillion of GDP loss. But do not panic. The Japanese lost about 15 percent of their GDP during the 1990-1999 lost decade. The loss associated with aftermath of the 1997 Asian crisis was about 35 percent of their GDPs.

Mary: Wow! Ten percent loss of our GDP is a staggering amount! I hope it will not become a depression, which usually lasts more than three years and leads to an unemployment rate that exceeds 10 percent. Let us also hope that when we celebrate this recession's second birthday in December 2009, we will still have this fancy dinner table in this spacious house. And hopefully our bonuses will resume then!



Shawkat Hammoudeh is a professor of economics and international business. He can be reached at op-ed@thetriangle.org.

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