Adjustment and growth prospects in the developed economies

The global financial crisis triggered in 2007-2008 has been the most serious shock to the world economy since the Second World War. As a result of the crisis, the GDP of the main developed economies fell by between 3% and 6% from its previous high, despite the rapid and coordinated response of the economic authorities. The measures aimed at stimulating aggregate demand, supporting the financial sector and restoring agents’ confidence succeeded in breaking the negative feedback loop between the weakness of financial systems and the deterioration in the real economy, and contributed to the start of a moderate recovery. Gradually, the role of macroeconomic policy in support of the recovery has become more focused on monetary policy, given the deterioration in the public finances of many advanced economies. Despite the support of monetary policy, recovery in the major economies is proving slow, fragile and uneven. Some of these economies, such as the United States, have returned to growth rates close to pre-crisis levels; others, including some in the euro area, continue to post growth rates far below those achieved in the previous upswing, and have even suffered fresh setbacks. As a result, GDP levels are well below their pre-crisis trends (see Charts 1 and 2). In this context, there is heated debate about the causes of the persistent low growth in advanced economies, which has significant implications both for their prospects and for economic policy responses. The numerous factors that have been highlighted in this debate include the imbalances accumulated in the past (both before and during the crisis), certain longer-term trends, that were already apparent before the global financial crisis was triggered and might be behind the persistent weakness of aggregate demand (such as the increasingly unequal income distribution or the higher demand for safe assets), and various phenomena that might point to a reduction in potential growth (such as population ageing or a slowdown in technical progress). This article offers a broad overview of the studies that have been emerging on the impact of the crisis on advanced economies, with a view to determining and assessing the main factors responsible for the weakness of the recovery in these economies, and reflecting on the appropriate economic policies to overcome this prolonged period of slow growth. The next section outlines the usual patterns of exit from financial crises, and compares them to the current path of recovery. The third section analyses the main imbalances resulting from the crisis, assessing the extent to which they are being corrected. In the fourth, the outlook for potential growth is discussed, while in the fifth the role of economic policies in the current situation is reviewed. The article concludes with some brief final reflections.