What Is a Global Recession?
A global recession is an extended period of economic decline that affects multiple countries globally. Such a recession typically involves synchronized economic downturns across national economies, driven by interconnected trade relations and international financial systems that transmit economic shocks from one country to another.
The International Monetary Fund (IMF) uses a comprehensive set of criteria to identify global recessions, primarily focusing on a decrease in per capita gross domestic product (GDP) worldwide. This global output contraction must also coincide with a weakening of other macroeconomic indicators such as trade, capital flows, and employment.
Key Takeaways
- A global recession marks an extended period of economic decline across numerous countries.
- The IMF relies on several criteria to assess and define the scale of global recessions.
- Global recessions are characterized by synchronized economic downturns in many interconnected economies.
- The impact of a global recession varies among individual economies, influenced by their degree of global integration and dependence.
Understanding Global Recessions
For an economy to be classified as being in recession, key macroeconomic indicators must decline for a significant period. In the US, this typically means a GDP drop for two consecutive quarters, according to the National Bureau of Economic Research (NBER), which is the authority for declaring and dating business cycles. For global recessions, a similar role is played by the IMF.
Though no official global recession definition exists, the IMF’s criteria are widely respected due to its global influence. Unlike the NBER’s relatively straightforward time criteria, the IMF evaluates a broader range of deteriorating economic factors, including trade volumes, capital flows, industrial production, oil consumption, unemployment rates, per-capita investment, and per-capita consumption.
Rather than simply adding the GDPs of all countries, which is complicated by the use of different currencies, the IMF employs purchasing power parity (PPP). This approach measures the amount of local goods or services that one unit of currency can buy, offering a more comparable analysis than using mere exchange rates.
Historical Perspective
Prior to 2020, the IMF identified four global recessions post-World War II, occurring in 1975, 1982, 1991, and 2009. In 2020, the IMF declared a new global recession, infamous as the Great Lockdown, sparked by widespread quarantine and social distancing measures during the COVID-19 pandemic. This recession was the most severe since the Great Depression.
Contagion and Insulation
The impact of a global recession varies between countries, influenced by various factors. A nation’s trading relationships can determine the recession’s impact on its manufacturing sector, while the sophistication and efficiency of its financial markets affect its financial services sector.
Global recession spread often involves economic shocks in one region influencing global downturn, a process known as economic contagion.
Example of a Global Recession
The Great Recession, spanning from 2007 to 2009, was an intense period of economic hardship worldwide. Global trade declined by over 15% between 2008 and 2009. The scale, recovery speed, and impact varied by country.
In the United States, a significant stock market correction followed the 2008 housing market collapse and Lehman Brothers’ bankruptcy filing. The economic conditions had already soured by late 2007, with key indicators such as unemployment and inflation reaching critical levels due to the housing bubble burst and financial crisis.
While the U.S. economy gradually recovered after the market’s 2009 bottom, many other nations faced longer recoveries. Over a decade later, reverberations can still be felt in several developed and emerging markets.
NBER research indicates that had the 2008 recession not originated in the U.S., it would have experienced limited shocks due to its relatively small trading relationship with the global economy. However, countries like Germany, which rely heavily on international trade, would have suffered regardless of their internal economic robustness.
Related Terms: recession, gross domestic product, trade relations, financial systems, capital flows, business cycles, economic shock.
References
- International Monetary Fund. “Recession: When Bad Times Prevail”.
- National Bureau of Economic Research. “Business Cycle Dating Procedure: Frequently Asked Questions”.
- International Monetary Fund. “Purchasing Power Parity: Weights Matter”.
- International Monetary Fund. “The Great Lockdown: Worst Economic Downturn Since the Great Depression”.
- U.S. Securities and Exchange Commission. “Statement on Proposed Lehman Brothers, Inc. Acquisition by Barclays”.
- National Bureau of Economic Research. “Trade and the Global Recession”, Pages 29-30.
