In the past seven decades or so, the world economy has experienced four global recessions: in 1975, 1982, 1991, and 2009.?
In each of these recessions, 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, as per the World Bank report, were highly synchronised internationally, involving severe economic and financial disruptions in many countries around the world.?
And the most recent one, i.e. 2009 global recession, was by far the deepest and most synchronized episode among the four. Fast forward to the present year 2023, the risk of global recession has been rising day by day. Will a recession happen in 2023 or not is a story that is yet to unfold..
However, having a look at the past four global recessions can give us a fair idea of what led to those adverse circumstances, and perhaps hint at what the future holds.
The global recession of 1975 followed the shock to world oil prices from the Arab oil embargo initiated in October 1973, as per the World Bank report. Although the embargo ended in March 1974, the supply shock and the associated sharp rise in oil prices triggered a substantial increase in inflation and a significant weakening of growth in a number of countries. Monetary and fiscal policy easing, especially by some major advanced economies, helped spur a rebound of growth in 1976.?
However, the Group of Seven countries except for Germany and Japan¡ªCanada, France, Italy, the United Kingdom, and the United States¡ªexperienced persistent and high inflation, and the 1975 global recession was the beginning of a half-decade of stagflation, with low output growth and high inflation.
The global recession of 1982 was triggered by multiple developments, including the second oil shock of 1979, monetary policies' tightening in the US and other advanced economies, and the Latin American debt crisis. Oil prices rose sharply in 1979, partly owing to disruptions caused by the Iranian revolution, and this reportedly helped push inflation to new highs in several advanced economies.?
Partly in response, monetary policies were tightened significantly in several major advanced economies, including Germany, Italy, Japan, the United Kingdom, and the US, thus causing sharp declines in activity and a significant rise in unemployment rates in 1982-83. The rise in global interest rates and a collapse in commodity prices that stemmed from the weakening of global growth made it difficult for many Latin American countries to service their debts, thus resulting in debt crises in the region.?
As per the World Bank report, while the advanced economies were mostly able to begin their recoveries relatively quickly, although unemployment in some cases remained relatively high, the debt crisis contributed to long-lasting growth slowdowns in many EMDEs (emerging market and developing economy), especially in Latin America and the Caribbean (LAC) as well as Sub-Saharan Africa (SSA).
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Another global recession that occurred in the 20th century, is the one of 1991.??The 1991 global recession also resulted from the confluence of a wide range of factors. As per the World Bank report, the 1990-91 Gulf War was associated with heightened geopolitical uncertainty and another sharp increase in oil prices. In the US, widespread weakness of lending institutions, evident since the mid-1980s, ultimately weighed on the housing market, especially during the credit crunch of 1990-91. Also, Scandinavian countries had severe banking crises in the early 1990s, following the liberalization of financial sectors and rapid expansion in credit markets in the 1980s.?
In Europe, as per the report, problems with the European Monetary System¡¯s exchange rate mechanism (ERM) in 1992 were accompanied by sharp declines in activity in many member countries. In the country of Japan, the bursting of an asset price bubble resulted in a recession and a prolonged period of low growth and near-zero inflation. In Central and Eastern Europe as well as the former USSR, the transition to market economies was accompanied by high inflation along with output contractions.
The 2009 global recession followed the worst financial crisis since the Great Depression. The crisis started in mid-2007 in major advanced economies and followed a period of loosening regulation and supervision of financial markets and institutions, asset price and credit booms in many countries, and the rapid expansion of high-risk lending, particularly in U.S. mortgage markets, as per World Bank report.?
The collapse of Lehman Brothers?in September 2008, triggered a full-blown financial and macroeconomic crisis.?
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Although the initial trigger for the crisis was the U.S. mortgage markets, the high degree of interconnectedness between the U.S. and other financial markets is what is believed to have caused the crisis to spread to other advanced economies and some EMDEs (emerging markets and developing economies).?
In 2008, banking crises erupted in many European countries, thus causing financial crises later in the Euro area in 2011-13. These events were enough to cause a sharp asset price decline as well as severe credit crunches, a collapse in global trade, and highly synchronised recessions in a record number of countries around the globe. However, as per the report, with the exception of some of the nations in the Europe and Central Asia (ECA) region, it's fair to say that EMDEs weathered the 2009 global recession comparatively well.
Besides these four global recessions, the World Bank report mentions that the global economy experienced low growth in 1958, 1998, 2001, and 2012. In these four years, the globaleconomy registered its lowest growth rates of the past seven decades, except for the yearsof global recession and the two years before and after each of them.
Last but not least, remember that both the IMF and World Bank have already warned of global recession chances in 2023. Even the economist who had predicted the 2008 financial crisis has warned of recession. JP Morgan CEO too has warned of recession chances rising.?
It remains to be seen whether global economies around the world are able to handle rising interest rates, high inflation, unemployment, banking crises and the resurgence of Covid or if they end up dealing with a recession.
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