The IMF’s latest World Economic Outlook is downbeat on recovery prospects, based partly on an analysis of business cycles in 21 economies since 1960, showing that recessions associated with financial crises or with a strong global element tend to be longer and followed by weaker upswings.

The IMF’s findings, however, are at odds with longer-term historical evidence that “deep recessions are almost always followed by steep recoveries” – a regularity known as the “Zarnowitz rule” after the distinguished US business cycle analyst Victor Zarnowitz (quoted by former IMF Chief Economist Michael Mussa in a recent paper).

The table below, documenting the six largest declines in US industrial output between 1880 and 1960, illustrates Zarnowitz’s observation. The 1929-32 slump clearly stands out in terms of severity and duration. The other five recessions / recoveries show considerable similarity – contractions were deep but lasted no more than 14 months, while subsequent recoveries were strong, with peak output regained within 19 months.

These five recessions include downturns associated with a severe financial crisis (e.g. 1907-08) and / or globally-synchronised weakness (e.g. 1920-21).

The 18% fall in Group of Seven (G7) industrial output since its peak in February 2008 is in the middle of the range of these five severe US recessions (excluding the 1929-32 slump). The US historical experience suggests that the output fall – 12 months in duration as of February, the latest data point – should be approaching an end. If the recovery were also to follow the US historical pattern, output would regain its February 2008 level by late 2010 at the latest. This would imply a growth rate of output during the recovery phase of about 11% per annum – far higher than suggested by the IMF’s gloomy forecasts.

Indicators supporting a V-shaped recovery include surging G7 real money growth and a widening gap between retail sales and production, suggesting a potential big boost from the stocks cycle. Credit conditions, however, remain restrictive, though have started to ease, a process that could gather pace if investor risk appetite returns.