1 At the conference, Professors Carmen and Vincent Reinhart presented the results of a broad-based study of output growth and other economic variables during the ten years before and after economic crises (40–70 countries in connection with major global crises, and 16 individual country crises). 2 The findings are very clear: economic activity has a tendency to be much weaker in the decade after a financial crisis than in the decade beforehand. There are probably a number of explanations for this:  1  See http://www.kansascityfed.org/publications/research/escp/archive.cfm. 2  See Reinhart, Carmen M., and Vincent R. Reinhart (2010): After the Fall, http://www.kansascityfed.org/publicat/sympos/2010/reinhart‐paper.pdf. BIS Review 130/2010  1    GDP growth is often abnormally strong and, to a degree, unsustainable in the prelude to a financial crisis.   Financial crises are preceded by debt accumulation and followed by a long process of deleveraging.   Risk appetite subsides after a financial crisis, and what Keynes called “animal spirits” are tempered for a prolonged period of time.   Production capacity is destroyed in a financial and economic crisis.   Finally, economic policy becomes more complex, and there is more risk of error. Of course, these developments are not inevitable, and the ultimate outcome depends also on policy choices. For example, it is clear that a number of mistakes played a key role in shaping the disaster that unfolded following the crash of 1929.
In spite of the market’s grave concerns about the debt situation in many smaller European countries, and in spite of rising CDS spreads on those same countries and the tendency towards contagion and a herd mentality in the market, Iceland’s CDS spread has declined and is now considerably below those in the European countries whose debt problems have received the most press coverage. But output growth is slow in coming, and in that regard, Iceland is far behind most other countries whose GDP began to grow late last year. At the moment it is quite difficult to interpret the signs, which are quite changeable in the current post-crisis turbulence. For example, quarterly GDP figures and various other statistics are quite volatile, changing from one revision to the next – a problem that is global in scope at present. As a result, the Central Bank was sceptical when figures from Statistics Iceland indicated that GDP had begun to grow in the fourth quarter of 2009. The most recent numbers, which indicate a contraction, are more accurate, although I would not be surprised if the contraction proved somewhat smaller in the final figures. Most indicators suggest that we have hit bottom and that GDP will begin to grow in the latter half of this year, but I do not expect that growth to be strong. In order for GDP growth to gain any real momentum, investment must rise from its current historical low.