A global recession is a sharp decline in economic activity that affects many countries at once. The last one lasted from 2009 to 2011, and was the deepest and most synchronized of all of its predecessors. It was triggered by a combination of factors, including a massive housing bubble that depressed household wealth and spending, and a public health crisis that led to voluntary and official lockdowns and social distancing measures, which reduced business and consumer spending.
A major factor in a global recession is rising unemployment, which reduces the amount of money consumers have to spend on goods and services. In addition, falling productivity can lead to lower gross domestic product (GDP), which leads to lower tax revenue for governments.
The good news is that while global growth has slowed in recent months, most economists don’t expect a global recession to occur this year. But the warning signs are mounting: The US 10-year minus 2-year Treasury yield spread is inverted, which historically signals a recession within 12 months; and the OECD expects world GDP to grow at its slowest pace since 2009.
While there’s no clear definition of what constitutes a global recession, the most obvious signal is a sustained drop in gross domestic product (GDP). If a major economy’s GDP starts to decline, it will have a knock-on effect on other economies’ GDP and can send a ripple through financial markets that can stall economic recovery. Policymakers must be prepared to respond with a suite of demand- and supply-side measures. Monetary policy should seek to restore price stability, while fiscal policy should prioritize medium-term debt sustainability and provide targeted support for vulnerable groups.
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