The fallout from the COVID-19 pandemic and the ongoing war in Ukraine has led to a significant economic slump in 2022. Prices for some common commodities are reaching record levels, economic growth is slowing and inflation is rising.
As a result, “recession will be hard to avoid” for many countries, World Bank President David Malpass said in June. Not since the 2007-2009 financial crisis – the largest slump after the Great Depression of 1929 – has there been a global economic event of this scale. But what is a recession and how do we decide if one is happening?
The definition of a recession
There is no official, globally recognized definition of a recession.
In 1974, the US economist Julius Shiskin described a recession as “two consecutive quarters of declining growth”, and many countries still adhere to that.
However, the US has since opted to use a more open definition. The National Bureau of Economic Research (NBER) looks at a variety of factors when deciding whether or not America is in recession. The institution defines the event as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”
The definition of a global recession
Like national recessions, a consensus on the definition of a global recession has yet to be reached. The World Bank’s main indicator of a worldwide downturn is multiple major countries’ economies contracting at the same time, as well as other evidence of weak global economic growth.
The world economy has gone through four major downturns over the past seven decades: in 1975, 1982, 1991 and 2009. Recessions typically last for about a year in advanced economies, according to the IMF. The NBER’s data supports this: from 1945 to 2009, the average recession lasted 11 months.
Signs of a recession
Besides a prolonged decline in gross domestic product (GDP), one of the most obvious measures of a recession is unemployment rate. When this begins to rise, it can trigger a domino effect of economic consequences as demand for goods and services slows down. During the last global recession, unemployment hit 9.5% in the US, according to the Bureau of Labor Statistics.
US unemployment rates over the last 70 years (NBER-dated recessions in grey). Image: NBER/Bureau of Labor Statistics
Although employment is currently high in many major economies, sentiment is low on the consumer confidence index, another key indicator. This is due to factors such as the cost of living crisis leading to less spending, which can subsequently cause the economy to contract and tax revenues to decline.
Stock markets are also likely to struggle during recessions. As consumer confidence and spending decreases, companies may be forced to lay off workers, which can lead to poor investment performance and panic in the market. In the 12 recessions following World War II, the US index of stocks – the S&P 500 – contracted by a median of 24%, according to Goldman Sachs.
How do recessions end?
Central Banks can lower short-term interest rates. This can increase consumer confidence and stimulate spending, as the cost of borrowing is lower, meaning the cost of buying items such as cars and homes is also less.
To keep unemployment at bay, governments can introduce policies such as tax cuts to help consumers, or launch infrastructure programmes, including construction of roads and railways.
Recessions end when growth resumes again, no matter how slowly this happens. During the great recession of 2008, for example, governments introduced a number of quantitative easing measures, pumping trillions into the global economy in an attempt to resuscitate it. Following this unprecedented level of stimulus, markets began to recover, although lingering scars like higher unemployment and lower average income levels remained many years later.
