What is Global Recession?
A global recession is a severe decline in economic activity that affects multiple countries across the world, generally accompanied by worsening of major economic indicators including Industrial production, trade, capital flows, oil consumption, unemployment rate, per-capita investment, and per-capita consumption.
Due to the tight connection between major economies of the world, economic problems spread quickly across the world. If those economic problems are big enough to bring down the gross domestic product (GDP) of major countries, that results in a global recession.
As per the International Monetary Fund, a global recession is a decline in annual per-capita real world GDP in terms of purchasing power parity. The decline should be perked up by the weakening of one or multiple major economic indicators including Industrial production, trade, capital flows, oil consumption, unemployment rate, per-capita investment, and per-capita consumption. In the U.S., the economy is considered to be in a recession when the economic activity, measured by GPD, falls for two consecutive quarters.
Example of Global Recession
- As per the world bank definition of recession the world has experienced four recessions post World War II. These recessions happened in 1975, 1982, 1991 and 2009. Of these recessions, the 2009 recession was worst in terms of its impact on the world and the decline in the GDP. During the 2009 recession, also called the Great Recession, the economy collapsed led by the fall of the real estate market in the United States, putting all the major economies around the world in some degree of crisis. Widespread defaults in the housing market led to the subprime mortgage crisis.
- In the U.S. housing boom prior to this period, banks lent aggressively to subprime borrowers, disregarding the repayment capacity of those borrowers. Big investment banks bought these loans from banks, packed them into investment securities and sold them to investors across the world. When the borrowers defaulted, the securities based on these loans became worthless and the investors around the globe suffered heavy losses.
- The recession lasted from December 2007 to June 2009 and it severely impacted the developed countries, especially the U.S. The country’s GDP fell by 4.3%, house prices declined by 17.3% and the unemployment rate peaked at 10% in October 2009. The federal reserve had to run multiple bailout programs to keep systemically important entities from drowning and getting closed.
- It also brought down interest rates to near zero and kept them there for a long period to bring back the economy to the pre-recession levels. The impact of the Great Recession varied across the globe. Developed economies saw a decline in their GDPs while emerging economies like China and India continued to see robust growth.
Causes of Global Recession
Global recessions can be caused by multiple factors including, but not limited to, wars, asset price collapse, energy and commodity price collapse, drying demand, reduced consumption, reduced wages and a general decline in consumer and investor confidence. The situation gets aggravated by extreme risk averseness that catches up when the recession unfolds.
Effects of Global Recession
A global recession impacts countries across the world and hurts governments and private enterprises alike and its major effects of are described below.
- Global recession leads to high unemployment and a decline in wages. Workers are laid out as corporations try to save themselves from deepening losses.
- High unemployment and lower wages force consumers to hold back on spends, further aggravating the impact of the slowdown.
- Investors hold back on investments and redeem existing investments leading to the collapse of prices of risky assets.
- Financial institutions face widespread defaults that eat into their net worth and sometimes also lead to bankruptcies.
- Safe-haven assets like Gold see an increase in price as investors chase these assets to safeguard their capital.
- In the aftermath, the regulators plug the loopholes and create new regulations to prevent any future crisis.
Recessions are not generally good as they result in widespread destruction. However, there are also some advantages that should be highlighted –
- Global recessions lead to the neutralization of excesses. Economies build excesses in general courses and get heated up reaching a level that is not sustainable. In this case, Recessions do the requisite course correction.
- It helps the leaders understand the vulnerability of their economies to various factors including commodity prices, lax regulations, etc.
- In its aftermath, recession brings about greater efficiency in the functioning of businesses and the economy.
- Asset prices revert back to normal levels providing investment opportunities to buyers and investors.
Global recession does a lot of harm in the short run and it takes a significant amount of heavy lifting for the economies and businesses to get back in shape. The following are some of the most prominent disadvantages –
- Economic output falls leading to lower wages, high unemployment and a decline in consumption expenditure.
- They leave a significant strain on the balance sheets of governments and monetary authorities as they dole out more and more money to save the economy from collapsing.
- For some countries, the exchange rate sees a significant depreciation, putting their economies at the risk of complete collapse.
- Asset prices collapse and investors incur significant investing losses.
- Inequality and poverty increase leading to social problems in some vulnerable economies.
- Governments become more protectionist, which impacts free trade and investment, leading to a further slowdown in business.
As per the IMF, a global recession happens every 8 to 10 years. Depending on the excesses or other factors that lead to recession, the severity of these recessions varies. Governments and monetary authorities, with some success, try to balance and regulate critical aspects of the business and economy to prevent recessions from happening.
The impact of the global recession varies from economy to economy. Economies that are heavily dependent on foreign trade for their fortunes witness a higher impact while the ones that are self-sufficient witness a lesser impact. Irrespective of the nature of the economic activity, policymakers have to jump into the damage control mode when this recession happens to safeguard their economies from the outbreak.
This has been a guide to what is the global recession and its meaning. Here we discuss an example of a global recession along with causes and effects. You can learn more about financing from the following articles –