The current recession is exceptional in that it coincides in several countries with a credit crisis and a sharp decline in house prices. Because the recession followed a financial boom amid low and stable inflation, the indebtedness and negative wealth creation of both businesses and households are very large. Furthermore, the financial sector has sustained heavy blows. This is sometimes referred to as a ‘balance sheet recession’, reflecting the unfavourable ratio between assets and liabilities on balance sheets.
Research has shown that recessions which coincide with severe financial crises last far longer, bring a much steeper fall in production and lead to much steeper cumulative loss of income than do ‘ordinary’ recessions or recessions coinciding with less severe financial crises (see Chart).