2 min read

Happy 1936, sorry 2016

Here’s something that isn’t often mentioned these days. The world economy is currently doing worse, seven and a half years after the crash, than it was at the same stage of the Great Depression.

If at first that sounds improbable, consider the graph below, from a paper by Kevin O’Rourke. The blue line shows you how industrial activity around the world collapsed, and then recovered, in the months following June 1929. The red line, on the other hand, shows you the comparable performance from the world economy from April 2008.


As you can see, this time around the sheer collapse in economic activity in the first years of the downturn was far, far less severe than in the 1930s. This owed much to the proactivity of central bankers, who poured trillions of dollars into the global economic system through quantitative easing. But the intriguing thing is what happened thereafter.

Whereas in the mid-1930s the world economy bounced back quite quickly (at least until the late 1930s, when it lurched down again) after the initial 2008 downturn it grew painfully slowly. The upshot is that we are now, seven and a half years after the Lehmans crash, actually doing worse (in industrial activity terms) than the world economy was seven and a half years after the Great Crash of 1929.

Of course, industrial output is not the only measure of economic success. Other measures of health, life expectancy, of percentage of people living in absolute poverty, are far better than in the 1930s. Unemployment in the US and UK has been far lower than it was in the 1930s. Then again, unemployment in many parts of the eurozone, including Greece and Spain, rose even higher than in the dust bowl during the Depression.

And it is hard to escape the conclusion, looking at the chart above, that something has gone dreadfully wrong. Now, this may be a gloomy way to begin the economic new year, but then again the news has been mostly gloomy so far this week.

Chinese stock markets are slumping, and while commentators have fished out a variety of explanations — poor industrial data, changes in circuit-breakers and anti short selling regulations, falls in the Chinese exchange rate — the falls are more likely to reflect a broader, more nebulous sense of concern. After all, not only is the world economy stuttering, the law of averages suggests we are now likely to be within years or months of the next downturn (the economic cycle suggests a recession or slowdown every seven or eight years).

All of this comes with most central banks still holding interest rates close to zero and the Federal Reserve having only just raised interest rates for the first time. It comes with most governments around the world attempting to repair their own fiscal balance sheets, leaving them with little cash to spend in the event of another slump.

Perhaps most worrying of all, we are still no clearer on precisely what has caused this weakest of all recoveries. There are some economists who blame it on “secular stagnation” — a permanent change in the world economy’s capacity to create growth. There are some who cite demographic factors. There are others who say the real explanation lies in overindebtedness.

Now, there’s nothing new about economists not being able to agree with each other. But given that the world economy is on some yardsticks doing comparatively worse than in the 1930s, it is unsettling that there is still no comprehensive coherent explanation of why — let alone what politicians can actually do about it.


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