What is a global recession?
A global recession is a prolonged economic downturn. Trade and international financial networks can cause synchronized recessions across several countries due to economic shocks and the impact of recessions.
The International Monetary Fund (IMF) uses many criteria to define global recessions, such as a decline in global GDP per capita. According to the IMF, this reduction in global output must correspond with a deterioration of trade, capital flows, and employment.
Understanding Global Recessions
Economic indicators must decline for a long time to qualify as a recession. According to the National Bureau of Economic Research (NBER), the national authority on economic cycles, to qualify as a recession in the US, GDP must decline for two consecutive quarters. For global recessions, the IMF is like the NBER.
Because of its worldwide importance, the IMF’s criteria for a global recession are essential. Unlike the NBER, the IMF does not set a minimum duration for global recessions. Unlike some other definitions, the IMF defines recession based on criteria beyond a decrease in GDP. Economic parameters must also deteriorate, such as commerce, capital flows, industrial production, oil consumption, unemployment, per-capita investment, and consumption.
Economists would like to calculate a “global GDP” by adding each country’s GDP. The global use of many currencies makes the task more challenging. Some organizations use exchange rates to compute aggregate production. In contrast, the IMF uses purchasing power parity (PPP), which measures the amount of local products and services one unit of currency can purchase rather than foreign cash.
Global Recession History
The IMF reports four worldwide recessions since World War II: 1975, 1982, 1991, and 2009. Due to COVID-19 quarantines and social distancing, the IMF announced the Great Lockdown, a new worldwide recession, in 2020. This is the worst worldwide recession since the Great Depression.
Contagion, Insulation
The severity of a global recession in a country depends on various variables. For instance, a country’s global trading links affect its industrial industry. However, market sophistication and investment efficiency impact the financial services business.
Countries’ interconnected commerce and banking systems might cause a regional economic shock to cause a worldwide recession. Contagion refers to this procedure.
Example of Global Recession
The Great Recession was a global economic downturn from 2007 to 2009. Over 15% of global commerce fell between 2008 and 2009 during the recession. The downturn’s size, impact, and recovery differed by nation.
In 2008, the U.S. stock market had a significant correction due to the housing market collapse and Lehman Brothers’ bankruptcy. By 2007, economic circumstances had deteriorated, and unemployment and inflation reached catastrophic levels due to the housing bubble collapse and financial crisis.
The situation improved a few years after the 2009 stock market bottom, while other nations took longer to recover. Even after a decade, the impact remains in established and emerging markets.
The NBER found that the 2008 recession would have less impacted the US economy if it had not started there. This is because its commercial links with the globe are tiny compared to its internal economy.
Due to its global commerce, a manufacturing giant like Germany would have suffered regardless of its internal economy.
Conclusion
- A global recession is a prolonged economic downturn.
- The IMF analyzes global recessions by magnitude, frequency, and impact.
- Global recessions affect several economies simultaneously.
- A global recession affects economies differently depending on their dependency on the global economy and other reasons.
