Last year I wrote a piece predicting a severe recession in 2009. Based on my analysis of 16 previous economic shocks I forecast a 3% drop in GDP and a 3 million increase in unemployment in Europe and the US. Unfortunately this looks to be reasonably accurate. But I also worried about a far worse outcome – the World slipping into another Great Depression due to a damaging policy response to the crisis. Fortunately this looks to be inaccurate.
I now think that the broadly pro-market consensus of the G20 governments means this worst case scenario has been avoided. Tariffs are not going to be dramatically raised in global trade wars. Governments are not regulating away free markets, and wholesale nationalizations of banks seem to have been avoided as well.
Many pundits (e.g. Krugman) are warning that a dire recession is in the offing. We would have agreed with them three months ago; indeed, we wrote a VoxEU column predicting a severe recession in 2009; based on the analysis of 16 previous economic shocks, we forecasted a 3% drop in GDP and a 3 million increase in unemployment in each of Europe and the US with these predictions made from VAR forecasts (see Bloom 2008 for details).
Every horror movie fan knows the scene before the attack. Creepy electronic music plays. The victim is shown from behind. The camera scans around the bushes, in the dark, to the sound of heavy breathing. You know something evil is going to happen, but not when, where or how.
Back in June 2008 I wrote a piece for VOXEU predicting a mild recession in 2009. Over the last few weeks the situation has become far worse, and I believe even these pessimistic predictions were too optimistic. I now believe Europe and the US will sink into a severe recession next year, with GDP contracting […]
One of the most striking effects of the recent credit crunch is a huge surge in stock market volatility. The uncertainty over the extent of financial damage, the identity of the next banking casualty, and the unpredictability of the policy response of central banks and governments have all led to tremendous instability.A standard measure of […]