Global Recessions
"Global recession" has been a recurrent topic of debate over the past decade, reflecting the breadth and severity of the 2007-09 global financial crisis, the halting nature of the recovery, and recently, fears that the global economy was on the edge of another downturn. In 2009, the interest was understandably focused on the severity of the global recession and its devastating consequences. Attention shifted to the signs of a flourishing global recovery in 2010-11, but hopes that this would be sustained were soon curtailed by the possibility of another global recession due to the euro area debt crisis. Financial pressures in the euro area eased in late 2012, but in 2015-16 fears of a global recession reemerged partly because of financial market turbulence in China. Since mid-2018, concerns about a global recession have returned as the world economy experienced a synchronized slowdown largely driven by extraordinary weakness in trade and manufacturing amid elevated trade tensions and heightened policy uncertainties (Figure 1).
Figure 1. Frequency of "global recession" in web search and news
Despite the interest in global recessions, the term does not have a widely accepted definition. It is difficult to map the most practical definition of national recessions – at least two consecutive quarters of decline in national output – to a global context, not only because reliable quarterly data for global output are unavailable without a significant lag, but also because the global economy rarely registers a contraction: 2009 was the only year in the post-war period to register a decline in annual global output.
A better understanding of global recessions requires an appreciation of the growing importance of emerging market and developing economies (EMDEs) and of cross-border trade and financial linkages. First, the increasing role of EMDEs means that it is no longer sufficient to monitor cyclical fluctuations in advanced economies, the United States in particular, to understand the global business cycle. Advanced economies on average accounted for about 80 percent of global output and 75 percent of global growth over the period 1950-1990 (Figure 2). However, by the 2010s, the average share of the advanced economies in world output had declined to around 60 percent and their contribution to world output growth had fallen to about 40 percent (in market exchange rates). As a result, business cycles in advanced economies have become a much less reliable proxy indicator for the global business cycle. This implies that a better understanding of the global business cycle requires going beyond the usual set of advanced economies to a much broader group that also includes EMDEs.
Figure 2. Contributions of country groups to world output and growth
Second, cross-border trade and financial linkages have become stronger over the past seven decades. In the 1950s, global trade openness – measured by the sum of exports and imports of goods and services in percent of global GDP – was on average less than 20 percent (Figure 3). By the 2010s, it had increased to more than 55 percent. Global financial openness, defined as the sum of foreign assets and liabilities in percent of GDP, also increased, from around 50 percent in the 1970s to almost 400 percent in the latest decade. These stronger linkages have increased the feedback, in both directions, between business cycles in advanced economies and those in EMDEs. They also ultimately raise the odds of more pronounced, and more synchronous, movements in the global business cycle.
Figure 3. World trade and financial integration
Against this background, this paper examines the main features of global recessions and the ensuing recoveries and expansions. Specifically, it addresses three questions. First, what happens during global recessions and recoveries? Second, how do global recessions and recoveries vary across different groups of countries, particularly advanced economies, EMDEs, and low-income countries (LICs)? Third, what happens during global expansions and how does the current global expansion compare with previous ones?
The paper builds on an extensive literature on various aspects of global and national business cycles. A branch of this research documents the growing importance of global business cycles in explaining national cycles. A second branch focuses on the roles played by trade and financial linkages in the cross-border transmission of business cycles. A third branch studies the turning points of the global business cycle and its phases.
Our study is closely related to Kose and Terrones (2015; KT going forward), which presented the first detailed account of global recessions. KT mostly focused on global recessions and recoveries using annual data for 163 countries over 1960-2012. They presented a detailed review of the relevant literature, analyzed how financial crises lead to recessions, and examined the interactions between global and national cycles. KT's work builds on Rogoff, Robinson, and Bayoumi (2002), which briefly examined whether the 2001 worldwide downturn was a global recession. Rogoff, Robinson, and Bayoumi (2002) focused on movements in per capita GDP growth to identify episodes that could be labeled as global recessions. They emphasized the importance of statistical and judgmental approaches to identify the turning points of the global business cycle.
This paper extends the literature in four dimensions. First, it covers a longer time span of annual series (1950-2019) and a larger set of economies (180). Second, it is the first study that presents an analysis of the phases of the global business cycle with quarterly output series of 106 countries over the period 1960:1-2019:3. Third, it expands on the set of macroeconomic and financial variables that KT analyzed to present a broader perspective on the evolution of the global business cycle. Specifically, it analyzes the behavior of confidence, uncertainty, and measures of global financial conditions that have recently attracted increasing attention in research and policy circles. Fourth, it presents a detailed analysis of global expansions and puts the current global expansion in context by comparing it with previous such episodes.
This study, like KT, employs global real GDP per capita to track movements in the global business cycle. This variable is a primary indicator of global well-being that takes into account variations in population growth rates over time and across countries.
Turning points of the global business cycle are identified by means of two methods widely used in the analysis of national business cycles: a statistical method and a judgmental method. The former defines a global recession as taking place when there is a decline in annual global real GDP per capita. The judgmental method, similar to the method used for the United States by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), considers whether there is strong evidence for a broad-based decline in multiple key indicators of global economic activity in a given year. This paper focuses on six main global activity indicators: real GDP per capita, industrial production, trade, capital flows, oil consumption, and employment. These two methods together provide an intuitively appealing characterization of the turning points of the global business cycle and translate into a concrete definition of a global recession.
For the purposes of this study, and following KT, a global recession is defined as a contraction in global real GDP per capita accompanied by a broad decline in various other measures of global activity. The definition of a global recovery also closely follows the standard definition used in the context of national business cycles. The recovery phase is the period after the trough and defined here as the one- or three-year period following the trough of the cycle. The recovery is thus the earlier part of the expansion phase, which refers to the whole period between two recessions.
Main findings of this paper are as follows.
Global recessions. In the seventy years since 1950, the world economy has experienced four global recessions: in 1975, 1982, 1991, and 2009. In each of these episodes, there was a contraction in annual real per capita global GDP and broad-based weakness in other key indicators of global economic activity. These episodes were highly synchronized internationally, involving severe economic and financial disruptions in many countries around the world. The 2009 global recession was by far the deepest and most synchronized episode among the four.
Global recoveries. A global recovery usually involves a broad-based rebound in macroeconomic and financial activity. Among the four episodes, the strongest recovery occurred after the 1975 recession. Thanks to large, prompt, and globally coordinated policy support, the recovery following the 2009 recession was the second strongest episode.
Impact across country groups and regions. The impact of global recessions varied across different groups of countries. Average per capita growth declined more in advanced economies than EMDEs during global recessions. LICs on average suffered larger declines in per capita growth than the average EMDE. The East Asia and Pacific (EAP) and South Asia (SAR) regions even continued expanding during global recessions. However, the other four EMDE regions, particularly those with more reliance on exports of industrial commodities, experienced per capita output declines.
Relatively good performance of EMDEs through the latest global recession. As the epicenter of the financial crisis, advanced economies felt the brunt of the 2009 global recession. In contrast, EMDE output growth remained positive during the recession, and EMDEs delivered a stronger recovery post-2009 than after any of the three previous episodes. LICs were able to continue growing during the most recent global recession whereas their per capita growth had plummeted in the previous episodes.
Global expansions. The duration of the global expansions varied, with a minimum of six years (following the 1975 recession) and a maximum of 17 years (following the 1991 recession). The latest global expansion registered average per capita growth comparable with that of previous episodes. The post-2009 expansion was the weakest of the four in advanced economies, as many of them struggled to overcome the legacies of the global financial crisis. Among the EMDEs, the recovery of per capita output growth has been exceptionally robust, despite a gradual slowdown after 2012.
Policies. Monetary and fiscal policies often became expansionary going into global recessions, and they typically supported the ensuing global recoveries. Following the 2009 global recession, monetary policy remained highly accommodative for most of the 2010s, with advanced economy central banks introducing a wide range of unconventional measures to ease credit. However, after the initial implementation of large, coordinated, fiscal stimulus programs during 2008-09, advanced economies withdrew fiscal support, out of concerns for the growth of public debt, and government expenditures fell after 2010. By contrast, EMDEs have generally employed expansionary fiscal and monetary policies during the current expansion, while adjusting the settings of their monetary policy instruments in response to cyclical conditions.
The remainder of this paper is organized as follows. Section 2 introduces the database and methodology. This is followed by a discussion of the identification of the turning points of the global business cycle and a summary of the main events associated with each global recession. Section 4 documents the main features of global recessions, recoveries and expansions. The last section concludes with a discussion of results and future research directions.