Just How Bad Was the 2009 Global Recession? Really, Really Bad

Have Global Markets Bottomed Out?
  • Slump was most severe of four since 1960, IMF book says
  • Fiscal tightening undercut monetary policy, researchers find

The global recession that followed the financial crisis was the most severe in half a century, an unusually synchronized shock that paralyzed trade and left 23 million more people out of work.

Yet the response by policy makers hasn’t been up to the task, with central banks bearing too much of the burden. And the world may be on the edge of another recession, even though it hasn’t recovered from the last one.

Those are the conclusions of a new book on business cycles released Tuesday by the International Monetary Fund.

“The 2009 episode was the most severe of the four global recessions of the past half century and the only one during which world output contracted outright -- truly deserving of the ‘Great Recession’ label,” write Ayhan Kose, director of the World Bank’s Development Prospects Group, and Marco Terrones, deputy division chief at the IMF’s research department.

“The possibility of another global recession lingers in light of the persistently weak recovery, even though damage from the previous one has yet to be fully repaired.”

The 272-page book, “Collapse and Revival: Understanding Global Recessions and Recoveries,” underscores the challenges policy makers face as they try to jumpstart a sputtering recovery more than six years after the global financial crisis.

A slowdown in emerging markets driven by weak commodity prices forced the IMF this month to cut its outlook for global growth in 2015 to 3.1 percent, which would be the weakest rate since 2009, from a July forecast of 3.3 percent.

Kose and Terrones try to answer a question that has become more pressing as nations become more integrated: How do you define a global recession? For individual countries, the rule of thumb is two consecutive quarters of falling output. That convention is difficult to apply to the world economy, which rarely contracts. 

Citigroup Forecast

In predicting a global recession next year, Citigroup Inc. Chief Economist Willem Buiter recently forecast that world growth would slow to “well below” 2 percent in 2016.

Kose and Terrones define a recession as a contraction in inflation-adjusted output per capita accompanied by a broad, synchronized decline in various measures, such as industrial production, unemployment, trade and capital flows, and energy consumption.

By that standard, there have been four world recessions since 1960, starting in 1975, 1982, 1991 and 2009. In only the last case did the global economy shrink.

The 2009 downturn was “by far” the deepest, Kose and Terrones found. It was also the broadest, with almost all advanced economies and a large number of emerging and developing countries contracting. About 65 percent of countries fell into recession, the highest among the four slumps.

World output bounced back after the last recession faster than any of the other episodes. But the recovery has been weak and uneven, with advanced economies experiencing their weakest rebound and emerging markets enjoying their strongest.

Underwhelming Recovery

The authors cite several possible reasons for the underwhelming nature of the recovery, including elevated levels of economic and policy uncertainty and the tendency for financial crises to trigger deeper recessions.

Kose and Terrones also point to a lack of coordination between fiscal and monetary policy. In past recoveries, countries moved “decisively” to increase government spending. Yet in 2010, driven by market and political pressures, governments instead cut spending, even as central banks such were using unconventional measures such as bond buying to encourage borrowing.

Nobel-Prize winning economist Milton Friedman likened recoveries to a guitar string, arguing that the harder the string is pulled, the faster it returns. The present recovery is putting that theory to the test.

“The guitar string seems to have been pulled down so hard that it snapped,” Kose and Terrones say.

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