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Monthly Economic Indicators

Special Topic: Recession and recovery in the OECD

This special topic briefly examines the recent recession and early stages of recovery in the 30 nations of the Organisation for Economic Co-operation and Development (OECD).[1]

Large impact from recession in the OECD...

There has been a large impact from the global recession on the economies of OECD nations.   Real GDP fell in all 30 nations for at least one quarter and fell by around 5% in the OECD as a whole over the four quarters from June 2008.  This is the largest and longest recession in the OECD since the Great Depression and not since 1981 had real GDP fallen in consecutive quarters across the whole OECD.

...but significant variation by country...

Smaller economies were most vulnerable to the financial crisis, the associated global recession and resulting falls in world trade.  From the peak of the previous expansion to the trough of the recession, the largest falls in real GDP were over 10% in Turkey and Iceland and just over 9% in Finland, Hungary and Mexico.  G7 economies highly exposed to trade also had large falls, with real GDP down at least 6% in Japan, Germany and the United Kingdom.  The smallest falls were in Poland (0.1%) and Australia (0.8%), while Switzerland and Norway also had relatively small declines.

Figure 6 - Changes in real GDP from peak to trough
Figure 6 - Changes  in real GDP from peak to trough.
Source:  OECD, Treasury calculations

The typical OECD recession in 2008/09 lasted for a year.  Recessions of six quarters occurred in economies more exposed to the financial crisis and housing bust, including Hungary, Spain and the United Kingdom.  The shallowest recessions were generally the shortest, with Poland and Australia technically avoiding recession as real GDP fell in just one quarter.  South Korea and Slovak Republic also had only one quarterly fall in GDP, but these were very large contractions.

...with local recession long but shallow

The recession in New Zealand began in the March 2008 quarter, before any OECD nation, as a result of domestic factors.  New Zealand’s recession was thus one of the longest, although was also among the first to finish and one of the shallowest.  The fall in real GDP of 3.3% between the December 2007 quarter and the March 2009 quarter was the 6th equal smallest with Canada.  Only Poland, Australia, Greece (where recession is yet to finish), Switzerland and Norway had smaller falls.  New Zealand, like Australia, did not suffer the worst of the global recession because of factors such as a sound financial system and continued growth in China.

Labour markets weakened across the OECD

An important impact of the recession has been on the labour market.  For the OECD as a whole, the unemployment rate rose from 5.7% in early 2008 to 8.6% in the September 2009 quarter, which is equivalent to over 15 million more unemployed people.  The largest rise in this recession, and the highest rate, was in Spain, up 10.7 percentage points (%pts) to 18.7%.  Ireland and Iceland had the next largest increases in the unemployment rate of 7.6%pts and 5.5%pts respectively, in line with their large falls in real GDP.  The rise in the United States was also over 5%pts, despite a relatively shallow recession, as firms shed staff as part of large-scale cost cutting.  The smallest increases in unemployment tended to be in Europe (eg, Germany up 0.6%pts), partly reflecting a higher starting point and greater labour market regulation.

In New Zealand, the unemployment rate rose by 3.0%pts to 6.5% in the September 2009 quarter.  This rise puts New Zealand in the top third of OECD nations in terms of the size of its rise.  However, New Zealand is near the bottom third in terms of its unemployment rate as it rose from a low level of 3.5% in the December 2007 quarter.  As such, New Zealand’s unemployment rate is also well below levels reached in its previous two recessions (11.2% in 1991 and 7.9% in 1998).

Recovery underway in most OECD nations

Recovery has begun in almost all OECD nations, reflecting a large amount of monetary and fiscal stimulus, higher confidence and robust growth in emerging markets.  Only Greece, Hungary, Iceland, Spain and the United Kingdom were still in recession in the September 2009 quarter, although early estimates suggest the United Kingdom exited with growth of 0.1% in the December 2009 quarter.  Strong recoveries have generally been in economies that experienced the largest recessions, including Turkey, Luxembourg and Mexico.  More gradual recoveries have begun in nations that had shallow recessions such as New Zealand, Canada and Switzerland.   The exceptions are Australia, Poland and South Korea, where real GDP has fully recovered the fall in late 2008.

As a lagging indicator, the rate of unemployment is likely to continue to rise in many OECD nations.  However, the largest increases occurred earlier in 2009 and unemployment is likely to peak in 2010 across the OECD.  On a quarterly basis, the unemployment rate has already fallen in Australia, South Korea and Turkey, with falls in other nations on a monthly basis such as the United States.  New Zealand’s unemployment rate is forecast to increase further in December 2009 quarter data due for release on 4 February 2010, but is then expected to stabilise.

There is still much uncertainty as to how strong and sustainable the recovery will prove to be, especially once policy stimulus is removed.  Nonetheless, the recovery in OECD economies, including New Zealand, is expected to continue in 2010 at least.

Notes

[1] “Recession” is simply defined here as consecutive falls in real GDP.  A wider perspective could account for non-consecutive falls in GDP or indicators of activity other than real GDP (eg, NBER pick December 2007 as the start of the US recession, with no trough yet identified).  Note that revisions to data are likely to change these results slightly over time.
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