Global Recession Meaning Examples Causes Effects Timelines

Global Recession Meaning

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Though a global economic recession can be good as the effect on some nations with an excess of resources balances the level of wealth across the other economies, the economic activity throughout the world gets hampered greatly. Since the 1950s, the world has witnessed four major worldwide recessions, including the global recession in 2008.

Key Takeaways

A global recession occurs when the recession period for the economies, connected through trade or transaction, extends for a longer time.If the economic turmoil that nations go through is major enough to affect their GDP, it leads to a global recession.Per capita GDP decline, disasters, job losses, decreased purchasing power, drying demand, etc., are some causes of the global economic recession.It leads to the rise in the unemployment rate, tightened credit availability, controlled consumer spending, a decline in asset prices, etc.

Global Recession Explained

Global recession, as the name suggests, affects the entire globe. Therefore, if affected by the recession, any strong economy with trade relations and other connections with other nations will likely impact the connected economies gradually.

A recession marks a severe decline in economic activities, leading to financial turmoil in an economy. When it extends for a longer period, it affects other countries due to the trade connections they share worldwide. In addition, the internationally-controlled financial systems also affect the global players as and when they come in contact with each other during the recession.

Let us have a quick look at the global recession history chart or timeline below:

Though the economic recession has its cons, it can be fruitful in establishing or retaining the wealth balance between the economies. When a particular nation has an excess of wealth and resources and others lack it to a considerable level, it creates a disbalance in the global economy. Global economic recessions help neutralize the excess of things that some nations have, stabilizing and balancing the financial position of the rest of the countries worldwide.

Causes

Multiple factors can cause global recessions, including, but not limited to, wars, asset price collapse, energy and commodity price collapse, drying demand, reduced consumption, reduced wages, and a general decline in consumer and investor confidence. Moreover, the situation gets aggravated by extreme risk aversenessRisk AversenessThe term “risk-averse” refers to a person’s unwillingness to take risks. Investors who prefer a low-return investment with known risks to a higher-return investment with unknown risks, for example, are risk-averse.read more that catches up when the recession unfolds.

According to the International Monetary Fund (IMF), annual per capita gross domestic product (GDP) declines cause recession. However, for the deteriorating GDP to cause a global economic crisis, it must be accompanied by a significant decline in the factors influencing an economy, including trade, production, per capita exchanges, and transactions.

The National Bureau of Economic Research (NBER) studies factors to determine if a country is slipping into recession. These factors include real income adjusted for inflation, employment, manufacturing, real GDP, and retail sales with respect to inflation. The economy is considered active if these factors are efficient and show no signs of decline. Else, the chances of recession are detected.

Effects

From tightening the credit availability to raising the unemployment rate, recession affects any nation adversely. And when it’s a global recession, the impact is witnessed in multiple nations altogether.

The global economic recession leads to high unemployment and a decline in wages. Workers are laid out as corporations try to save themselves from deepening losses. As a result, the higher unemployment rate and lower wages force consumers to hold back on spending, further increasing the impact of the slowdown.

In addition, investors hold back on investments and redeem existing investments leading to the collapse of prices of risky assets. As a result, the financial institutions face widespread defaults that eat into their net worthNet WorthThe company’s net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company’s share capital (both equity and preference) as well as reserves and surplus.read more and sometimes lead to bankruptcies. Moreover, safe-haven assets like gold witness an increase in price as investors chase these assets to safeguard their capital.

Given the impact of global economic turmoil, the regulators identify the loopholes and create new regulations to prevent future crises.

Example

The 2009 recession was the worst in terms of its impact on the world and the decline in the GDP. The recession lasted from December 2007 to June 2009, severely impacting developed countries, especially the US. The country’s GDP fell by 4.3%, house prices declined by 17.3%, and the unemployment rate peaked at 10% in October 2009.

The 2009 recession, also known as the Great Recession, led by the fall of the real estate market in the United States, affected all the major economies worldwide in some way. In addition, widespread defaults in the housing market caused subprime mortgageSubprime MortgageA subprime mortgage is a loan against property offered to borrowers with a weak or no credit history. Since the risk of recovering is high, the interest rate charged on such mortgages is higher so that the lender can recover a maximum amount at the beginning of the loan.read more crisis, leading to the complete collapse of the economy.

In the US housing boom before this period, banks lent aggressively to subprime borrowers, disregarding the repayment capacity. Big investment banks bought these loans from banks, packed them into investment securitiesInvestment SecuritiesInvestment securities are purchased by investors, with or without the assistance of a middleman or agent, solely for the purpose of investment and long-term holding. These are recorded in the financial statements as non-current investments and comprise fixed income and variable income bearing securities.read more, and sold them to investors worldwide. When the borrowers defaulted, the securities based on these loans became worthless, and investors around the globe suffered heavy losses.

Is Global Recession Coming?

Though the global recession is detected with respect to an economy’s real income and other related factors, the process of identifying economic recession is not always the same. For example, global recession 2022, as it is often referred to, does not show any signs of such decline but is said to be indicating the upcoming recession.

While the global economic recessions of 1975, 1982, 1991, 2009, and 2020 seemed to display those signs, the next global recession, as indicated by 2022, lacks those indications. The official global growth recorded in 2022 is 3.6 percent, which contradicts what is expected. On the other hand, the records reveal the economic recovery, somewhat similar to the recovery indicated in the second half of 2021.

Though it is crucial to say if the next economic recession is set to hit the globe, it is expected for every nation to be prepared to tackle the impact.