Severe recessions intertwined with financial crises have historically been associated with lost output and slower potential growth. More than five years after the end of the global recession, we feel enough time has passed to assess the extent of the destruction of output in developed economies.
In applying a uniform framework across seven developed economies that account for nearly half of world output, we estimate that potential growth in these economies has fallen by 1.5pp since 1999 and, in turn, has reduced global potential growth by 0.7pp.
Our finding that slower growth in developed economies could slow global growth by 0.7pp is of similar magnitude to the effect of a slowing China on global growth. Slower potential growth in developed economies and a decelerating Chinese economy have reduced global potential growth by 1.5pp – a significant deceleration.
We estimate that the effects of the recession accounted for about two-thirds of the 1.5pp decline in potential growth in developed economies, with the remaining one third pre-dating the global recession. Policymakers’ efforts to stem the tide have been effective, but we doubt policy can fully reverse the slowing in trend output growth before the end of the decade.