IMF real GDP trend graph

he latest IMF World Economic Outlook returns, however, to the charge in its fourth chapter, which unfortunately is only obtainable online.

The IMF authors estimate that after a financial crisis output remains 10 per cent below its previous trend in the medium term, which it defines as seven years. This is, of course, an average with wide variations on either side. In Chile after 1981 and Mexico after 1994, output soon rose well above its previous trend while in Japan after 1997 it stagnated for many years. The average estimate may give an exaggerated impression of the enduring loss of productive capacity. It may be influenced by lingering recession effects, which may take more than seven years to disappear. The UK Treasury for example puts the permanent loss of output at 5 per cent of gross domestic product.

Countries currently in the midst of a banking crisis account for close to one-half of real GDP for the advanced economies. This is equivalent to a combined GDP total of about $40,000bn (€27,050bn, £24,440bn) per annum. Applying the 5 per cent figure for the enduring output loss, the ensuing hole in the world economy amounts to $2,000bn. It is only limited consolation that, according to the IMF, “economies that apply countercyclical fiscal and monetary stimulus in the short run to cushion the downturn after a crisis tend to have smaller output losses over the medium term”.