Global recessions tend to happen roughly every eight to ten years. They are economic events that can have devastating impacts on economies and businesses. Unlike local recessions, global recessions affect people all around the world. If you run a business, it’s important to understand these recessions and how the possibility of one might impact you.
In this guide, we’ll break down what exactly a global recession is. We’ll also look into the causes, effects, and history of recessions around the world.
What is a Global Recession?
A global recession is an extended period of economic slowdown that affects many different countries around the world. Global recessions happen when national economies face periods of economic decline at the same time. When these periods sync up, the many smaller recessions form a global event.
A recession is generally defined as two or more quarters that face successive economic declines. There may not be a specific definition of what a global recession is, but this idea, as well as the definition by the International Monetary Fund (IMF), is generally accepted. Global recessions are classified by the IMF using various criteria. This includes a decline in per capita gross domestic product (GDP) around the world. The IMF believes that this decline in the global output must take place alongside other areas of a weakening economic landscape, such as increased unemployment, weakening trade, and lower capital flows.
What Causes a Global Recession?
There are many different factors that come together to cause a global recession. One of the main ones is rising interest rates. Higher interest rates have many knock-on effects, which can weaken economic activity across different countries. Any out-of-the-ordinary events that could affect global trade or macroeconomic conditions can also cause global recessions. This could include events like war or shortages of certain resources. Stock market crashes could also result in global recessions.
For example, the 2008 global recession was caused by a housing bubble and bad money lending practices. The Covid-19 pandemic resulted in a sudden loss of economic activity, resulting in a recession. The Russia-Ukraine war has also impacted energy and commodity prices, which could trigger a global recession.
Basically, any scenario where economic growth or demand slows down, or when consumer confidence slows, could result in a recession.
History of Global Recessions
There have been five events of global recession since World War II. These events occurred in:
The latest global recession was declared by the IMF and named “the Great Lockdown”. Since the Great Depression, the 2020 global recession was the worst one on record.
These recessions can last anywhere from a few months to a few years. However, the general length of a global recession is just over a year.
What is the Impact of a Global Recession?
A global recession will generally result in high rates of unemployment, reduced economic activity, and lowering wages. When a recession hits, many companies will let go of staff in order to power through the recession. Job prospects will also decline during these periods. There are many knock-on effects related to this. Debts can pile up and manufacturing slows down – which results in further reductions in trade. As soon as an economy is affected by a recession, all areas of that economy will feel the effects.
Global recessions can also result in changing trading relationships between different countries. This depends on what sectors the recession hits hardest in different countries, and how these countries decide to combat the recession.
Possible Solutions for Global Recessions
Governments employ various strategies in order to try to combat the effects of a global recession. These strategies include:
- Injecting money into the economy through tax cuts or increased spending in an attempt to increase economic activity
- Banks could lower interest rates to encourage more spending and borrowing
- Governments could introduce reforms, such as investing in certain areas of the economy or easing trade barriers, in an attempt to increase economic activity
- Debt restructuring could help any countries or businesses that are struggling with excessive debt
Global recessions can be scary, but it’s important to understand that they’re temporary events. Economies and businesses do bounce back, especially if they’re proactive about addressing the recession as it hits. As a business owner, it’s important to understand the causes of global recessions and know when to identify them, as these recessions will have an impact on local and global economies.