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A lasting scar

The Great Recession—the financial, economic and social crisis that started at the end of 2007—has proved to be one of the longest and deepest in half a century, and so it is no wonder that news of a recovery has been greeted with such enthusiasm. But will the recovery be strong enough to help put OECD economies back on a pre-crisis growth path?

Possibly not, according to calculations in the latest biannual OECD Economic Outlook: such was the extent of the crisis that it is likely to have resulted in a permanent loss in the level of potential output for most OECD countries. Even with a continuing recovery, the report warns, GDP may not catch-up to its pre-crisis trajectory.

The extent of these losses is very uncertain, the report says, in part because of policy changes which may have added to the effects of the crisis, and other unknowns. But if current estimates of potential output per head of the working population are compared with an extrapolation of the pre-crisis trend over 2000- 2007, and if demographic factors are taken into account, then it is likely that the crisis caused aggregate OECD-wide potential to fall by just under 3%.

That’s an overall figure, with the effect on some countries being worse than on others. The estimated effect of the crisis on the median OECD country is about double the effect on the area-wide aggregate, according to the calculations, reflecting that smaller countries have typically been hit harder than larger ones (see graph). On this basis, the effect of the crisis on potential has been small in Japan and Germany, and reduced output by less than 2.5% for the US. The crisis also had a relatively small effect on Austria, Australia, Israel, Mexico and Switzerland. However, the estimated effect is to reduce potential output in 2014 by more than 10% for Czech Republic, Hungary, Ireland, Iceland, Slovenia, Estonia, Greece and Luxembourg. This could be an underestimate for a few countries, notably Ireland and Spain, which have experienced a particularly marked slowdown in the growth of the population of working age. One likely cause of this was a sharp decline in net immigration flows, which was not included in the OECD Economic Outlook calculation. If it were, then the effect of the crisis on potential output in these countries may be larger still.

OECD Economic Outlook No 93, May 2013. Visit www.oecd.org/economy 

© OECD Observer No 295 Q2 2013