The current global financial crisis, initially taking hold of the USA, has among other things led to declining house prices and a severe credit crunch with substantial losses in equity markets. These dynamics substantiate that the actual crisis has a huge impact on real economy. IMF has completed a working paper concerning which factors prevail during recessions, and how these are affected by variables to take on a different character and complexity. Kairos Commodities has summed up the conclusions - thereby attempting to put the current crisis in perspective.
The report is based on a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business, and financial cycles for 21 OECD countries over the period 1960–2007.
Figure 1 – Associations between recessions, crunches and busts
In particular they analyze the implications of 122 recessions, 112 credit contraction (crunch) episodes, 114 episodes of house price declines (busts), 234 episodes of equity price declines (busts) and their various overlaps. Figure 1 illustrates how recessions are related to credit crunches, house price busts and equity price busts, both on a single and multi issued level.
From figure 1 it can be concluded that out of 122 recessions, only 10 can be solely related to credit crunches, 18 to house price busts and 31 to equity price busts - whereas 46 recessions have no association to either variable. The severity and duration increases when the variables are combined on a multi issued level - this has occurred 17 times, where 4 of the recessions could be related to fit all three variables. Furthermore IMF has found that there are indications of interactions between macroeconomic and financial variables, which can play a major role in determining the severity and duration of recessions.
More specifically, evidence is found that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions. The report also indicates that though there are a connection between recessions and the variables, indications points out that credit crunches, house prices, and equity bust last much longer than recessions do. The last recession in Denmark was from 2000-2003 and it was only related to the equity price busts of IT stocks. This put the current recession in a terrifying perspective as it is currently associated with all three variables.
Click here to view the full report (Source: IMF)