Economic recovery in the advanced countries: Lessons from the past

The Covid-19 crisis has deeply affected our economies. Although the rebound observed in recent months seems to have been confirmed, uncertainty persists over their capacity to fully recover. This article will look at how the G7 economies reacted during post-recession phases in the past, in terms of GDP, private consumption and investment. How quickly did GDP in these economies catch up with pre-crisis levels and trends? What were the most dynamic components of aggregated demand during recovery phases? Given the specific characteristics of the Covid-19 crisis, can it really be compared with previous shocks? These are some of the questions that we will discuss in this article while highlighting current sector disparities.

The Covid-19 crisis is different from past crises. It combines a triple shock –1/2" a supply shock, a demand shock and an uncertainty shock –1/2" and its long-term consequences are still partly unknown. In the G7 countries (United States, Japan, Germany, UK, France, Italy and Canada), GDP in volume plummeted by nearly 6% in 2020, a much sharper contraction than the 3.6% decline reported during the 2009 recession. The gradual lifting of health restrictions, the acceleration of vaccination campaigns in most countries, and public policy support –1/2" both fiscal and monetary –1/2" should bolster the economic rebound in the second half of 2021.

We are still left with the question of whether the crisis will leave any lasting scars on these economies. The size of any scars will depend on several factors, especially public policy decisions. So far, the governments of the advanced economies have opted to intervene rapidly and massively to support economic agents, with measures geared towards households and companies. These interventions were mainly designed to limit the destruction of productive capital that may have occurred through a wave of bankruptcies or a significant surge in unemployment, especially long-term unemployment. So far, the gamble seems to have paid off fairly well, although some disparities can be seen between countries. In the European Union, for example, most of the negative shock of the Covid-19 crisis was absorbed through short-time working schemes and similar furlough measures, which significantly softened the impact on the labour market. The unemployment rate rose from 6.4% in March 2020 to 7.8% in August, before slipping back to 7.3% in March 2021. In the United States, in contrast, the fluctuations were much more abrupt. After reaching a pre-crisis low of about 3.5%, the US unemployment rate reached a peak to nearly 15% at the height of the pandemic. Since then, it has fallen back to about 6% of the active population.

One of the main questions now facing analysts and decision makers is the rebound capacity of these economies once all the health restrictions have been lifted. When will GDP, private consumption and investment return to pre-Covid levels in the advanced economies? When will they return to the levels they would have reached if the Covid crisis had never occurred (see box 1)? Has the crisis eroded the long-term growth potential of these economies? If yes, then by how much? Although we present these questions here in macroeconomic terms, they also raise numerous questions about changes in labour market conditions, the effectiveness of public policy support measures, and the sustainability of public finances in the different countries. If an economy rapidly closes the gap created by the crisis, then the consequences for the real economy will be smaller and not as lasting. Inversely, if the economy is slow to recover and remains weak, it will take longer for the labour market to return to normal. In this case, public support would still be necessary, raising the question of the sustainability of public debt.

In the second part of this article, we will try to get an idea of post-Covid macroeconomic trends in the months ahead by analysing the behaviour of the G7 economies during the exit phases of past recessions. We looked at recessions in which average growth was negative for a full year, which differs from the standard definition based on two consecutive quarters of contracting GDP. We observed the impact of these crises on the G7 economies and the speed at which they recovered based on the analysis of traditional macroeconomic variables: GDP, potential GDP, private consumption, total investment and exports of goods & services. Our sample comprises the G7 countries (US, Japan, Germany, UK, France, Italy and Canada) and we analysed about past 25 recessions. We looked not only at recessions that hit all of the G7 economies, but also took into account more localised recessions. We examined the oil shocks of 1974 and 1980; the subprime crisis of 2008-2009; the recessions of the early 1990s in the US, the UK and Canada, at a time of rising interest rates; the European Monetary System crisis of 1992-1993, which impacted several Eurozone member countries; the 1980 recession in the UK; the 2002-2003 recession in Germany due to the euro’s appreciation and the slowdown in world trade; and the recessions in Japan in the late 1980s (bursting of the equity and housing market bubbles) and late 1990s (Asian crisis).

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