Responding to the Crisis while Protecting Long-term Growth

Abstract

OECD countries have taken a wide range of measures in response to 18The OECD experienced a major financial crisis that led to the deepest recession since the Great Depression. GDP fell by four percentage points during 2009, industrial production and global trade shrank drastically before starting to recover from depressed levels in the second half of the year, and unemployment has risen into double digits in many OECD countries. Fortunately, governments and central banks swiftly took unprecedented steps to save the financial system, and thus avoid a complete economic collapse as in the 1930s. In addition, most governments adopted major fiscal stimulus packages, and the operation of automatic stabilisers also offered support. A wide range of other policy measures were undertaken that overall seem to have set the stage for a gradual recovery.Although the worst may have been avoided, past experience with financial crises indicates that GDP and income levels are unlikely to return any time soon to their initially projected path. Recent OECD estimates put the permanent GDP loss at about three percentage points on average across the OECD, because of a long-lasting elevation of risk premia that will raise the cost of capital, as well as persistently higher structural unemployment (OECD, 2009b). There is a considerable amount of country-specific heterogeneity, mostly on the unemployment side (see Box 1.1), as well as large Box 1.1. The effect of the crisis on potential output over the long term Recent OECD analysis estimates that even as economies eventually recover, the crisis could well reduce medium-term potential output by about 3% in the OECD area compared with levels that would have prevailed otherwise, with much of the reduction occurring already by 2010 (see OECD, 2009b. As shown in the table below, there is a large crosscountry variation in the expected impact of the crisis on potential output, reflecting partly differences in the size of the shock as well as structural policies. While the crisis will leave OECD countries poorer than they would otherwise have been, growth may not be affected by the crisis in the long term. It is nevertheless expected to slow (from the 2-2¼ per cent per annum achieved over the seven years preceding the crisis to around 1¾ per cent per annum on average in the long term) owing to unrelated reasons, not least slower growth in potential employment due to ageing populations.