IMF: 2008 Financial Crisis Damage Lingers

Output and fertility rates in many countries have not recovered from the Great Recession and income inequality is increasing even as the world financial system is more resilient.

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One decade after the collapse of Lehman Brothers, global economies are still coping with the lasting effects of the financial crisis, the International Monetary Fund said.

Despite a stronger financial system, economic output trends have not returned to pre-crisis levels in most countries around the world, according to the analytical chapters of the World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR).

The reports paint trends behind a less-optimistic scenario than anticipated in July when the IMF projected 3.9% global growth for 2018 and 2019. “The outlook has since become less bright,” Managing Director Christine Lagarde said in a speech on October 1. The Washington-based institution will release its new economic forecasts on October 9, during its annual meeting, in Bali, Indonesia.

Falling fertility rates and increasing income inequality are some of the persistent legacies of the crisis, the IMF says. While fertility impacts the size of the labor force, inequality shapes government policies and political forces. Global trade tensions and nationalist tendencies have already materialized.

“The post-crisis rise in inequality has likely contributed to frustration with establishment political parties as well as protectionist sentiments,” the IMF economists say.

Despite the recovery in 2017–2018, large challenges loom for the global economy. “Our analysis shows that the crisis may have left lasting scars beyond these well-documented effects on growth trends,” the IMF says.

In many countries, output is still well below pre-crisis levels, IMF economists say. Output losses are not restricted to countries that suffered a banking crisis in 2007-2008. Output is still below pre-2009 trends in about 85% of the 24 countries that suffered a banking crisis and around 60% of the countries that did not. The IMF analyzed 180 economies.

However, the global financial system appears more resilient today than it was a decade ago.

“This was the most catastrophic economic event in seven decades since the Great Depression, but even against this backdrop, there were policy actions to seemed to have helped limit the harm,” says Malhar Nabar, deputy chief of the World Economic Studies Division Research Department.

Policy decisions taken in the aftermath of the crisis contributed to shielding countries from a deeper downturn. China’s large fiscal stimulus during 2008–11 had favorable spillovers on trading partners, the IMF says. Stronger banking regulation appears to have lowered the risk of another meltdown. The financial system is less leveraged and better supervised, and the likelihood of new government bailouts appears to have diminished, the economists say.

As memories of the crisis fade, the IMF urges policymakers to resist calls for looser regulation.

“As the financial system continues to evolve and new threats to financial stability emerge, regulators and supervisors should remain attentive to risks,” the economists say.

“A rollback of reforms could spawn opportunities for regulatory arbitrage and lead to a race to the bottom in regulation and supervision. This could make the global financial system less safe and could jeopardize financial stability,” they say.

The Fund calls for continued vigilance in areas such as fintech and cybersecurity, prudential regulation and asset management. “Risks can migrate to new areas,” the IMF says.

The accumulation of public debt and the erosion of fiscal buffers in many economies are a warning sign. Globally, the median general government debt-GDP ratio stands at 52%, up from 36% before the crisis, according to IMF estimates. The extended period of record-low interest rates in advanced economies has increased financial vulnerabilities, the Fund says. Unconventional actions such as the Federal Reserve’s bailouts of individual institutions are no longer available.

“The ability to respond to the next crisis depends crucially on addressing such side effects of the exceptional policy efforts of the last 10 years,” the IMF says.