This post is the second of a two-part series exploring how nations have recovered from the Great Recession. The first post, “Which Regions Have Recovered from the Great Recession?” appeared on Oct. 27.
Previously, we saw that not all regions around the world have recovered at the same rate from the Great Recession. In this post, we’ll explore some of the possible reasons for the uneven recovery.
St. Louis Fed Assistant Vice President Yi Wen and Senior Research Associate Maria A. Arias showed that Asia and Africa have grown the most since 2009, with each region experiencing an increase in gross domestic product (GDP) of about 50 percent. Europe (excluding Eastern Europe) has shown the least GDP growth (less than 10 percent), followed by North America (a little more than 20 percent).
To see why the recovery has varied throughout the world, it may help to examine the financial crisis. Wen and Arias explained that the crisis started in the U.S. financial sector and spread throughout the global economy through international financial networks. Economies were affected in two ways:
However, this indirect link could still indicate severe impacts, as empirical evidence shows that the financial crisis caused the greatest international trade collapse since the Great Depression.1 The authors noted: “Hence, areas that rely heavily on oil, or exports of goods or raw materials—areas such as Russia and the Middle East—saw big drops in GDP.”
Wen and Arias explored the recoveries of nations and regions that were most directly impacted by the financial crisis. Regarding Europe, the authors explained that the region as a whole didn’t adopt strict fiscal stimulus programs during the Great Recession. The U.S. did adopt such packages, but they were aimed more at consumer transfer programs than at job creation and infrastructure buildup. Hence, Europe suffered the most long-lasting effects, while the U.S. performed better, but not so compared to others.
China, on the other hand, not only adopted a serious fiscal stimulus package but was also successful in spurring job creation and infrastructure buildup. Wen and Arias noted: “As a result, it recovered the fastest.”2
China also played a role in the recovery of nations that were affected by the recession through trade impacts. The authors wrote: “Because of China’s rapid and strong recovery, regions that exported in large volumes to China (such as Southeast Asia) or that supplied raw materials to power China’s industrial engine (such as Africa, Australia, the Middle East and Latin America) also recovered reasonably well from the crisis.”
However, a slowdown in China’s growth—which fell from its long-run average of 10 percent in early 2011 to 7 percent in 2014—also triggered economic slowdowns in countries that relied on trade with China. Wen and Arias noted: “Indeed, imports of goods from Latin America and Oceania to China slowed and stagnated after increasing at a constant pace between 2009 and 2010. This decline in trade flows might help explain the slower pace of growth in Latin America and Oceania since 2012.”
1 Jiao, Yang; and Wen, Yi. "Capital, Finance, and Trade Collapse." Working Paper 2012-003A, Federal Reserve Bank of St. Louis, February 2012.
2 Wen, Yi; and Wu, Jing. "Withstanding Great Recession like China." Working Paper 2014-007A, Federal Reserve Bank of St. Louis, March 2014.