Economic forecasting is never an easy task but admittedly this year is harder than usual. The deep financial and social dislocations we suffered in the last 12 months have set in motion dynamics we hardly understand in their full ramifications. Most forecasts seem to point to a difficult first half followed by a solid recovery in the second half of 2009.
On January 3rd, Prof. Rogoff of Harvard University and Prof. Carmen Reinhart of the University of Maryland presented a new study at the American Economic Association Annual Meeting in San Francisco that illustrates the aftermath of the most significant financial crises in history in developed and emerging economies. The results of such study can help us shape our mind on what to expect in the next 12 months.
Examining the fallout from major financial crises in developed and emerging markets, Rogoff and Reinhart found strikingly similar post-crisis developments. For example, after a financial crisis, the cumulative decline in real estate prices from peak to trough averaged 35.5% and the duration of the decline averaged six years, the study showed.
But what does that tell us about the current situation in the U.S.?
As of December 2008, the real estate price decline in the U.S., as measured by the Case-Shiller index, is 28%–but only two years in duration.
According to the study, the average equity decline following a major financial crisis is 55.9% and averages 3.4 years in duration. In the U.S., the stock market correction (so far) measured from the peak in October 2007 to the bottom on November 21, 2008, has been 52.98%.
The study provided some insight into the job market as well: data showed that, on average, unemployment rises for 5 years after a crisis and registers an average increase in the unemployment rate of about 7%. This could indicate a possible peak of unemployment in the U.S. of 11-12% between 2011 and 2012. Additionally, Rogoff and Reinhart report that following a crisis, average GDP decline is 9.3% and the average government debt rises over 86%.
In conclusion, if we follow the historical path, it would seem that calls for a relatively quick recovery (somewhere in the middle of 2009) may be a bit premature.
Davide Accomazzo is as an adjunct professor at the Graziadio School of Business and Management of Pepperdine University, where he teaches global capital markets and investments/portfolio management.
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