The last time there was a global
recession was in the late 2000s.
The scale and timing of that Great Recession,
as it’s now known, varied from country to country.
But on a global level, it was the worst financial
crisis since the Great Depression.
Now a decade on, some people are worried the next
worldwide downturn may be just around the corner.
While there is no universally accepted definition
of a recession, a technical recession is a
decline of Gross Domestic Product, or
GDP, for two consecutive quarters.
That means the value of
all the goods and services
produced in a country went
down for six months straight.
But the U.S. National Bureau
of Economic Research,
which tracks the start and
finish of each U.S. recession,
says a recession can begin
even earlier than that.
The bureau measures and collects monthly
data for four other areas in addition to GDP:
real income, employment,
manufacturing and retail.
If these economic indicators
decline, it’s likely GDP will too.
Now, a recession is not the same as stagnation,
that’s simply a period of low or zero growth.
Nor is it a depression, which is a more
severe decline that lasts several years.
Between 1960 and 2007, there were 122
recessions in 21 advanced economies.
This may sound like a lot, but those economies were
really only in recession for around 10% of the time.
Each recession is unique, but they
often share several characteristics.
Recessions usually last about a year, and
a country’s GDP typically falls around 2%,
although in some severe cases,
that decline can hit five percent.
Investments, imports and industrial production normally
drop, and financial markets frequently face turmoil.
All this can have a very negative
impact on a country’s population.
Many people lose their jobs and
if they can’t afford their mortgages,
they lose their homes
and house prices drop.
They also have less money to
spend in shops and restaurants.
That means businesses make less
money, and many go bankrupt.
So is there a way to spot
a recession before it hits?
Some economists focus on the number of people
employed in the manufacturing sector.
In the world of manufacturing, orders
are often booked months in advance.
When a factory or company gets fewer
orders, they’ll stop hiring new workers
and potentially lay off some
existing workers too.
This is a good sign other parts of
the economy will slow as well.
Other experts examine the government bond
market, to see how willing investors are
to lend money to governments
over a long period of time.
When investors are concerned the economy might
be slowing down, they often sell their shares
in public companies, and instead loan their
money to governments by buying bonds.
That’s because bonds are usually
seen as a less risky investment.
So those are the warning
signs of a recession.
But what actually causes them?
A healthy economy has lots
of money flowing through it.
Company owners are putting money into their
business and hiring more people.
Consumers are spending money
on their products and services.
But if businesses and consumers
stop spending that money,
less money flows through the
economy and growth begins to slow.
A few factors can block
that flow of money.
One of those is
high interest rates.
When rates are high, people get more money
for putting their savings in a bank account,
but they also end up having
to shell out more to get a loan.
This can encourage people and businesses to save
more and borrow less, causing their spending to fall.
Consumer confidence is a way to measure
people’s psychological approach to money.
Economists track this closely.
Low levels of consumer confidence means
people are worried about the economy,
and that can cause them once again to hold on
to their money, rather than invest or spend it.
A stock market crash for example
is one of the most sure-fire ways
to shake up consumer
confidence across the board.
But inflation may be
the biggest factor.
It causes the prices of goods
and services to increase.
If your paycheck isn’t growing alongside it, that
means you’ll have to cut back and buy fewer things.
When this happens, people and businesses once
again tend to reduce spending and save more.
And an economic slump that starts in one
country can spread beyond its borders,
creating a domino effect.
Let’s explore an example, the 1997 financial
crisis in East and Southeast Asia.
It began in Thailand when the value of the
country’s currency, the Thai Baht, collapsed.
Investors had lost
confidence in the country,
and that lack of confidence
contaminated the rest of the region.
Travelers face strict limits on the amount of
currency they can take out of the country.
Other Asian currencies like the Malaysian ringgit
and Indonesian rupiah began to lose value too.
Soon, investors around the world had become
reluctant to lend money to any developing country.
More recently, the trade war between the U.S. and China
has also affected many other parts of the world.
These two economic superpowers produce
and sell about 40% of all global output,
and economists worry the knock-on
effects from their continued conflict
could create the next major
international recession.
Take Germany for instance.
Its economy is largely
built upon exports.
It makes money by building machinery and equipment
and sending it abroad to other countries like China.
But if China anticipates less demand for its
products from the U.S. because of the trade war,
it’s going to order less of that machinery
from Germany to make them.
Germany is the biggest economy in the Eurozone,
which means if it goes into a recession,
the rest of Europe will
likely suffer too.
Some experts say that the financial crisis in
2008 ushered in a new era of deglobalisation.
That means nation-states are less
focused on international trade,
and more focused on their
domestic economic agendas.
They say all this could lead
to more frequent recessions.
And because of that, these experts
believe we should reconsider
what constitutes economic
success in developed countries.
Total debt burdens will rise.
Populations will fall, as will the
productivity of our workers.
And so it’s unrealistic, they say,
to think that growth rates
can continue to rise in the way they did
in the second half of the 20th century.
They suggest an alternative approach is to
focus on economic satisfaction and contentment,
with a number like per
capita income growth.
This essentially measures how much
money the average person makes.
While the warning signs are there for another
global recession, geopolitical tensions and
deglobalization makes it even more
difficult to predict the future.
But one thing’s for sure, we’re living
in a new age of uncertainty.
