Normal recessions admit of some well tried out solutions that invariably turn things around predictably. The current recession is far from normal. The turnaround will not be simple.
More normal recessions can be countered by conventional monetary and fiscal measures. According to the IMF, the crisis has left deep scars which will affect both supply and demand for many years to come. On the supply side, in many advanced countries, the financial system has become dysfunctional and will take some time to go back to its previous state. Financial intermediation, the process of allocating resources, will be impaired.
Emerging markets will witness a paucity of capital inflows.
Of the demand side, factors having a bearing on growth and employment will remain crucial for some more years. Second, all the positive forecasts of growth are predicated on a combination of fiscal stimulus by government and inventory rebuilding by firms.
At some point fiscal stimulus will be phased out. Inventory restocking will also come to an end. Hence the importance of continuing with the extraordinary measures.
