What Is a Global Recession?

A global recession is an extended period of economic decline around the world. The International Monetary Fund (IMF) uses a broad set of criteria to identify global recessions, including a decrease in per-capita gross domestic product (GDP) worldwide. According to the IMF’s definition, this drop in global output must coincide with a weakening of other macroeconomic indicators, like trade, capital flows, and employment.

Key Takeaways

  • A global recession is an extended period of economic decline around the world.
  • The IMF uses purchasing power parity to analyze the scale and impact of global recessions.
  • The effect of a global recession on individual economies varies based on several factors.

Understanding Global Recession

It’s important to note macroeconomic indicators have to wane for a significant period of time to classify as a recession. In the United States, it’s generally accepted that GDP must drop for two consecutive quarters for a true recession to take place. However, the IMF does not specify a minimum length of time when examining global recessions.

While there’s no official definition of a global recession, the criteria established by the IMF carries significant weight because of the organization’s stature across the globe. In contrast to some definitions of a recession, the IMF looks at additional factors beyond a decline in gross domestic product (GDP). There must also be a deterioration of other economic factors, ranging from oil consumption to employment rates.

Ideally, economists would be able to simply add the GDP figures for each country to arrive at a “global GDP.” The vast number of currencies used throughout the world makes the process considerably more difficult. Though some organizations use exchange rates to calculate the aggregate output, the IMF prefers to use purchasing power parity (PPP)—that is, the number of goods or services that one unit of currency can buy—in its analysis.

According to the IMF, there have been four global recessions since World War II, beginning in 1975, 1982, 1991 and 2009. This last recession was the deepest and widest of them all. Since 2010, the world economy has been in a process of recovery, albeit a slow one.

The impact and severity of the effect of a global recession on a country varies based on several factors. For example, a country's trading relationships with the rest of the world determine the scale of impact on its manufacturing sector. On the other hand, the sophistication of its markets and investment efficiency determine how the financial services industry is affected.

According to research, the United States would have suffered limited shocks to its economy, if the 2008 recession had not originated within its borders. This is mainly because it has limited trading relationships with the rest of the world. On the other hand, a manufacturing powerhouse like Germany would have suffered regardless of the robustness of its internal economy because it has vast number of trade linkages with the rest of the world.

Example of Global Recession

The Great Recession was an extended period of extreme economic distress observed around the world between 2007 and 2009. Trade plunged by 29% between 2008 and 2009 during this recession. The scale, impact, and recovery of the downturn varied from country to country.

The US markets experienced a major stock market correction in 2008 after the housing market collapsed and Lehman Brothers filed for bankruptcy. Economic conditions quickly followed suit as major indicators like unemployment and inflation hit critical levels. The situation improved a few years after the stock market bottomed in 2009, but other nations experienced much longer roads to recovery. Over a decade later, the effects can still be felt in many developed nations and emerging markets.