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Q&A: Seven Questions on Turning Points of the Global Business Cycle

International Monetary Fund. Research Dept.
Published Date:
December 2012
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The depth and breadth of the worldwide recession that followed the 2007–09 financial crisis have led to intensive discussions about the phases of the global business cycle—global recessions and global recoveries. The fragile nature of the ensuing global recovery has added a new twist to these discussions because of widespread concerns about the possibility of a double-dip global recession. This article provides brief answers to seven commonly asked questions about the global recessions and recoveries.

Question 1: Why do we care about global recessions and recoveries?

Answer: There are at least three main reasons. First, when a country experiences an isolated recession, this means it is subject to an idiosyncratic shock. The country can then implement a range of countercyclical policies, if it has the policy space, to cope with this shock. However, when a global recession takes place, it means national economies are experiencing a global shock. Such a worldwide shock requires the coordination of national policies to dampen its impact. Having a good understanding of the main features of global recessions can provide a wealth of lessons for the effective coordination of national policies during these episodes.

Second, for surveillance purposes, it is critical to have a good understanding of the nature and intensity of events surrounding global economic fluctuations because national cycles are tightly linked to global cycles in a highly integrated world economy. This is an especially important issue for the IMF to study since multilateral surveillance is one of its main tasks. Third, in light of the highly synchronized and costly nature of global recessions, we obviously need to have a disciplined approach to identify these episodes.

Question 2: Despite their importance, there has been a lot of confusion about the definitions of global recessions and recoveries. What are the main reasons for this confusion?

Answer: First, it is not easy to map the simple rules of identifying national recessions, such as two consecutive quarters of decline in national GDP, to a global context simply because most countries do not have reliable quarterly GDP series. Second, a recession, by definition, implies a contraction in national GDP, but the global economy rarely registers a contraction because countries hardly experience synchronized recessions that translate into an outright decline in world GDP. Given that it is difficult to describe a global recession, it is also a challenging task to have a concrete definition of a global recovery.

Question 3: Before getting into the definitions of these concepts, one obviously needs to identify the turning points of the global business cycle. What are the best methods to do that?

Answer: We employ the two standard identification methods of peaks and troughs of national business cycles. The first one is a statistical method that identifies local maximum and minimum values of the per capita global GDP series over a given period of time. This method implies that a global recession takes place when the growth rate of the per capita global GDP is negative. This is obviously a mechanical rule based on a single indicator of global activity. It is useful to go beyond this mechanical rule and consider a broader definition as it is done at the national level. This brings us to our second method, a judgmental one.

The judgmental method we employ follows the spirit of the approach used by the National Bureau of Economic Research (NBER) and the Center for Economic Policy Research (CEPR) for the United States and the euro area, respectively. In particular, these institutions date business cycle peaks and troughs by looking at a broad set of macroeconomic indicators and reaching a judgment on whether a preponderance of the evidence points to a recession. We apply the judgmental approach at the global level by looking at several indicators of global activity—real GDP per capita, industrial production, trade, capital flows, oil consumption, and unemployment.

Question 4: So, how do you define a global recession and a global recovery?

Answer: The two complementary approaches we described provide an intuitively appealing characterization of turning points of the global business cycle and translate into a concrete definition of a global recession. Specifically, a global recession is defined as a contraction in world real per capita GDP accompanied by a broad decline in various other measures of global economic activity. Since we use annual data, a global recession lasts at least one year. Our definition of a global recovery also closely follows the standard practice in the business cycle literature. The recovery phase is often associated with the first year following the trough of the global business cycle.

Question 5: So, what are the turning points of the global business cycle over the past five decades? And what were the major events that happened during the global recessions you identified?

Answer: Both methods we employ point to the same turning points in the global business cycle. The statistical algorithm picks out four troughs in global economic activity over the past 50 years—1975, 1982, 1991, and 2009—which correspond to declines in world real GDP per capita. The judgmental approach is applied at the global level by looking at several indicators of global activity—real GDP per capita, industrial production, trade, capital flows, oil consumption, and unemployment. The behavior of most of these indicators around the global recessions point to an obvious contraction in global economic activity after it reached a peak in the preceding year.

Specifically, the four turning points we identified coincide with severe economic and financial disruptions in many countries around the world. For example, the global recession of 1975 followed the first oil price shock the world economy experienced. It marked the beginning of a prolonged period of stagflation, with low output growth and high inflation in the United States. The global recession in 1982 was associated with a variety of events, including the rapid increase in oil prices, tight monetary policies in several advanced economies, and the Latin American debt crisis. The 1991 global recession also reflected a host of problems in various corners of the world: difficulties in the U.S. credit markets; banking and currency crises in Europe and challenges faced by the east European transition economies; burst of the asset price bubble in Japan; and the uncertainty stemming from the Gulf War and the subsequent increase in the price of oil. The 2009 global recession followed the worst financial crisis since the Great Depression of the 1930s.

Question 6: What are the main features of global recessions and recoveries?

Answer: The evolution of the main indicators of global economic activity points to a number of similarities across the four global recession episodes. For example, around the global recessions, world output, industrial production, trade, capital flows, and oil consumption often start to slow down two years before the trough. The unemployment rate registers its sharpest increase in the year of the recession. Asset prices and credit on average begin decelerating about two years ahead of the global recessions. Inflation and nominal interest rates fall especially during the year of the global recession.

The latest recession followed a pattern similar to that observed in past recessions, though the contractions in most indicators were much sharper. In fact, the 2009 global recession is by far the deepest recession in five decades. If total (rather than per capita) real GDP is used as the main metric, the year 2009 witnessed the only contraction the global economy experienced since 1960. The severity of the 2009 recession is also indicated by the sharp declines in investment and industrial production.

The global recoveries of the postwar period display the following features. First, a typical global recovery is accompanied by a rebound in activity, which is generally driven by a pickup in consumption, investment, and international trade flows. Second, the global recovery from the 1975 recession was the strongest one in terms of the average output growth in the first three years of the recovery. The global recovery following the 1991 recession was the weakest episode, reflecting in part the sluggish growth in consumption, investment, industrial production, and trade flows. Third, similar to its behavior in national recessions, unemployment remains high in the year after the trough and tends to be more persistent than most other indicators. The weak recovery following the 1991 recession witnessed two years of increase in the unemployment rate.

The first year of the ongoing recovery was the strongest (measured in per capita GDP in PPP terms) among the four episodes. Although the current global recovery exhibits some similarities with the previous three episodes, it is significantly different from the earlier ones in several dimensions. For example, one of the distinguishing features of the ongoing global recovery has been its uneven nature as there have been major differences in the performance of advanced countries and emerging market economies. In particular, emerging economies as a group have enjoyed their strongest recovery to date following the 2009 global recession whereas advanced countries have been experiencing their weakest one.

Question 7: How synchronized are national recessions around episodes of global recessions? And how do national cycles interact with the global cycle during these periods?

Not surprisingly, the fraction of countries in recession went up sharply during the four global recessions. The fraction of countries in recession was about 50 percent in the first three global recessions, but went up to more than 75 percent in the latest episode. Although the period 2006–07 stands out as one in which the number of countries in recession was at a historical low, it has been followed by a sharp reversal in fortune. In 2009, all the advanced economies, except Australia, and roughly half the emerging market and developing countries were in recession. This degree of synchronicity of the last recession to date has been the highest over the past half century.

National business cycles are tightly linked to the global business cycle. They become more sensitive to developments in the global economy during global recessions. There are, however, significant differences across countries; advanced countries appear to be more sensitive to global recessions than developing economies. Countries tend to be more sensitive to the global cycle the more integrated they are to the global economy.

This article is based on the authors’ forthcoming IMF Working Paper, “Global Recessions and Global Recoveries.”

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