The fact that financial excesses were associated with significant sectoral resource misallocation, especially into construction, further hindered the pace of recovery. The duration of the downturn has also itself exacerbated the damage to output. Long-term unemployment has risen, with “hysteresis” effects estimated to have reduced potential growth.
This in turn appears to have induced some negative sentiment about long-term growth: for example, businesses currently perceive themselves to have limited excess capacity, despite a large estimated output gap. Such uncertainty feeds back into weaker demand today through expectations and confidence channels. Investment, while gradually picking up, still remains well below pre-crisis levels.