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Monday, 24 August 2009

We may get back to 2007 by 4Q2010

Many years ago I worked for a few months at a bank in Switzerland. Not any bank, but the Bank for International Settlements, where I developed a computer system for econometric analysis. In fact this was so long ago that this predated personal computers and was written to run on mainframes, but it did most of the sort of things that a statisticsal system for time series might do today, pulling data out of a database, running various statistivcal tests and producing fancy tests, and though I say it myself, it was a rather nifty program, albeit fairly clunky by today's standards, and no doubt it was consigned to the scrap heap when a PC came along with enough computing power to do the same arithmetic.

The only reason that I mention it, is because of a report presented at the Kansas City Federal Reserve Bank's annual conference last week by 3 economists from the same department of the BIS. According to their analysis, damage from financial crises is generally long-lasting and deep, and the U.S. and UK economies are not likely to regain their pre-crisis levels of activity until the second half of 2010.

In a study of how long it takes nations to recover from banking crises, the economists from the Bank for International Settlements said that a third of the 40 crises they studied led to contractions that lasted for three years or more and a quarter of the crises resulted in cumulative losses in economic output of more than 25% of pre-crisis gross domestic product.

The trouble with using such such a simple measure as nominal GDP is that even if the nominal values get back to where they were before the slump, in real terms activity will be 6-10% lower, and then when measuring individual prosperity we have to take into account that the population will have grown. So figuring GDP growth at say 3% and inflation at 2%, it may be way over a decade before we get beck to where we were in 2007.

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