An optimistic tale of the world’s two last financial crises

Paul Ormerod
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THE impact of the 2007-2009 financial crash is far from over. But, despite the doom and gloom, history may give us something to feel cheerful about.

Even in living memory there have been plenty of recessions, when GDP growth was negative and employment fell. The UK has experienced them in the mid-1970s, the early 1980s and the early 1990s. These had a variety of causes, but these were not primarily financial in origin.

The world has also seen a fair number of localised financial crises. The previous 20 years are littered with examples. Sweden and Finland had serious financial problems in the early 1990s, while the late 1990s saw the East Asian crash, the near-demise of Long Term Capital Management and debt defaults in Russia. But none of these spread on a global scale. The world’s economic system was sufficiently robust to confine them.

There have only been two global financial crises in the past century: that of the early 1930s and the most recent one. Very few economies escaped the bad times.

So how were the early 1930s and late 2000s different? And what happened to GDP as a result?

The contrast between the experience of America and Germany in these two periods is dramatic. There is only annual data available for the 1930s, but output fell in the US in 1930, and continued to fall in 1931, 1932 and 1933. Positive growth was registered for the first time in 1934. Germany fared a bit better, but output dropped for three successive years from 1930.

This time round, the period of falling GDP was much shorter. In Germany, the recession lasted just a single year. The first drop in output happened in the second quarter of 2008 and was very modest. But, nonetheless, positive GDP growth was seen in the second quarter of 2009. In America, the recession period was longer. But even here it was just 18 months, between early 2008 and the autumn of 2009.

But it is the size of the GDP fall which shows the most dramatic contrast. From 1930 to 1932 in Germany, output fell 23 per cent. In the US, GDP collapsed by 27 per cent between 1930 and 1933. This time round, the fall was only 4 per cent in America and 6 per cent in Germany. In both economies, GDP is above its previous peak level already. In contrast, it took until 1939 for the US to get back to 1929 output levels.

The current picture for the UK is a bit more downbeat. We actually weathered the 1930s rather well, with a two year recession in which GDP fell 6 per cent. This time, the initial recession was shorter, and the drop in output just 5 per cent. However, we remain 4 per cent below our previous highest level.

But the broad message from history is optimistic. Global crises are rare, and the two most important developed economies have coped with them enormously better this time round than they did in the 1930s.

Paul Ormerod is an economist and partner at Volterra Partners, and author of Positive Linking: How Networks Can Revolutionise the World.