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22 Deleveraging, What Deleveraging
Figure 3.2 IMF GDP forecast vintages (GDP levels, 2006=100)
160
150
World
2012 f/c
2014 f/c
160
150
Developed markets
2012 f/c
140
2010 f/c
140
2010 f/c
130
120
2008 f/c
130
120
2008 f/c
2014 f/c
110
110
100
06 07 08 09 10 11 12 13 14 15 16 17 18 19
100
06 07 08 09 10 11 12 13 14 15 16 17 18 19
210
200
190
180
170
160
150
140
130
120
110
100
Emerging markets 2014 f/c
2012 f/c
2010 f/c
2008 f/c
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Source: Authors’ calculations based on IMF data.
As we show in Appendix 3.A, financial crises may produce not only a persistent
drop in the level of output (a ‘Type 1’ crisis, like in Sweden in the early 1990s),
but also a persistent fall in potential output growth (a ‘Type 2’ crisis, like in Japan
since the early 1990s), or a persistent fall in both output and potential output
growth (a ‘Type 3’ crisis). For this reason, the recovery from recessions associated
with financial crises can be much slower and follow a different path to that from
‘normal’ recessions. 13 An important obstacle to recovery from a financial crisis
consists of the vicious loop between growth and leverage that occurs in the
deleveraging phase, since paying down high debt levels deters activity, with the
slowdown in GDP dynamics making the deleveraging process more painful in
turn. Accordingly, the leverage cycle amplifies the output cycle, during both the
expansion and contraction phases.
Figure 3.3 provides a further perspective on the downgrades to growth
projections by comparing the realised levels of real GDP to pre-crisis trend levels.
It shows the immediate loss of output during the crisis, the post-crisis persistence
of below-trend growth in the developed economies and the interruption to the
pre-crisis growth path experienced by emerging economies. According to the
patterns shown in Figures 3.1 and 3.3, the advanced economies have endured
13 See, amongst many others, Jorda et al. (2013).