What Is a Global Recession?
Let me explain to you what a global recession really means—it's an extended period of economic decline that hits around the world. This involves more or less synchronized recessions in many national economies, where trade relations and international financial systems spread economic shocks from one country to another.
How the IMF Defines It
The International Monetary Fund (IMF) relies on a broad set of criteria to spot global recessions, including a decrease in per capita gross domestic product (GDP) worldwide. According to the IMF, this drop in global output has to align with weakening in other macroeconomic indicators, such as trade, capital flows, and employment.
Key Takeaways
- A global recession is an extended period of economic decline around the world.
- The IMF uses several criteria to analyze the occurrence, scale, and impact of global recessions.
- Global recessions involve synchronized recessions across many interconnected economies.
- The effect of a global recession on individual economies varies based on several factors, including their degree of connection to and dependence on the global economy.
Understanding Global Recessions
You need to know that macroeconomic indicators must weaken for a significant time to qualify as a recession. In the United States, it's generally accepted that GDP must drop for two consecutive quarters for a true recession, based on the National Bureau of Economic Research (NBER), which declares and dates business cycles. For global recessions, the IMF acts similarly to the NBER.
There's no official definition, but the IMF's criteria carry weight due to its global stature. Unlike the NBER, the IMF doesn't specify a minimum time frame. Beyond GDP decline, it examines deteriorations in trade, capital flows, industrial production, oil consumption, unemployment, per-capita investment, and per-capita consumption.
Ideally, we'd just sum GDP figures for a 'global GDP,' but varying currencies complicate this. Some use exchange rates, but the IMF prefers purchasing power parity (PPP)—measuring what one unit of currency buys locally, not its foreign exchange value.
History of Global Recessions
Up to 2020, the IMF identifies four global recessions since World War II: 1975, 1982, 1991, and 2009. In 2020, it declared the Great Lockdown, caused by COVID-19 quarantines and social distancing—this is the worst since the Great Depression.
Contagion and Insulation
The impact of a global recession on a country depends on factors like its trading relationships, which affect manufacturing, and the sophistication of its markets, which influence financial services.
Interconnections in trade and finance can spread shocks from one region into a global recession—this is contagion.
Example of a Global Recession
Take the Great Recession from 2007 to 2009—it was extreme economic distress worldwide. World trade dropped over 15% between 2008 and 2009, with varying scale, impact, and recovery by country.
In the U.S., a major stock market correction hit in 2008 after the housing collapse and Lehman Brothers' bankruptcy. Conditions turned down by late 2007, with unemployment and inflation peaking amid the housing bubble burst and financial crisis.
Improvement came a few years after the 2009 market bottom, but many nations faced longer recoveries, with effects lingering over a decade in developed and emerging markets.
NBER research shows the U.S. would have faced limited shocks if the 2008 recession hadn't started there, due to its limited trade relative to its domestic economy. In contrast, Germany, a manufacturing powerhouse, would suffer regardless because of its extensive global trade links.
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