Authors Ayhan Kose and Marco Terrones explore the last four global recessions through text, charts, and multimedia interviews and features (photo: IMF)
COLLAPSE AND REVIVAL BOOK
“The bottom line is that a global recession hits everybody at the same time. That is why in the current fragile growth environment, it is especially critical for policymakers to understand where we are in the global cycle,” says co-author Ayhan Kose in an interview with IMF Survey.
A recurring message from the history of global recessions is that these often-devastating downturns are unavoidable features of the global business cycle. Understanding the workings of the global business cycle is essential because policymakers need to prepare for recessions and, by acting together, reduce their social and economic costs, says Kose, Director of the World Bank’s Development Prospects Group, who together with Marco Terrones, Deputy Division Chief at the IMF’s Research Department, wrote the book, “Collapse and Revival: Understanding Global Recessions and Recoveries.”
Kose: A global recession hits everybody at the same time.
IMF Survey: National recessions are relatively easy to describe. But how would you define a global recession?
Kose: We tried to draw a parallel between the definitions of national and global recessions. A global recession refers to a contraction in real world output per capita. At the same time, to have a global recession, this contraction needs to be accompanied by a broad, synchronized decline in various other measures of global economic activity, including global industrial production, trade, capital flows, employment, and energy consumption.
Global recessions are relatively rare, as the world has experienced only four such events since 1960: in 1975, 1982, 1991, and 2009. Without a doubt, the 2009 recession was the most devastating.
IMF Survey: Why was the 2009 recession so deep and highly synchronized?
Kose: Per capita global output shrunk by 1.8 percent in 2009. This is by far the deepest fall compared to the average of -0.7 percent decline of the four episodes. In addition, global trade collapsed, capital flows and industrial production registered significant declines, and 23 million people lost their jobs.
One of the most salient features of the 2009 recession was the unprecedented synchronization of national recessions: it hit almost all advanced economies and a very large number of emerging and developing economies.
When a number of countries experience recession at the same time, the global slump tends to be deeper. And when everybody is suffering, it is difficult to sell your goods to others because there is a global shock. The bottom line is that a global recession hits everybody at the same time. That is why in the current fragile growth environment, it is especially critical for policymakers to understand where we are in the global cycle.
Lessons learned
What are the basic policy lessons from the four global recessions? There are many, but Ayhan Kose and Marco Terrones point to the following as the most important takeaways:
• Policy space: the larger the better during global recessions. Countries with sufficient room for maneuver in their fiscal or monetary policies may be able to stimulate activity more effectively.
• Policies for macro-financial stability: be aware of risks. A close monitoring of cycles in financial markets should be an integral part of macroeconomic surveillance and policy design in a highly integrated global economy.
• A balanced growth strategy: necessary for the long haul. Such a strategy has to be supported by both domestic and external demand, and a diversified export base.
• Policy coordination: essential during global recessions. With strong cross-border trade and financial linkages, when countries face a global shock, they need to respond by coordinating their policies.
Each of the four episodes we discuss in the book has its own lessons with respect to policies, with certain similarities and differences. In a highly integrated global economy, the increasing synchronization of domestic downturns makes it important for nations to talk to each other about their policies so they are able to respond to different types of shocks. In this context, the G20 and the IMF-World Bank meetings provide very important forums to develop a better understanding of the state of the global cycle and to exchange ideas about policies that help mitigate the impact of adverse developments on activity, as we discuss in the book.
IMF Survey: In one of the videos accompanying the book, some commentators argue the global economy is in secular stagnation. Do you see it happening and what are the risks of falling back into a global recession?
Kose: If we are considering a prolonged period of weak growth as a sign of secular stagnation, Japan and some countries in Europe are suffering from it. However, the U.S. economy is not in the same group as it has been growing at a reasonably healthy rate and producing a significant number of jobs. Let’s remember the fact that many advanced economies accumulated significant amount of private debt prior to the crisis. They have been going through a painful period of deleveraging that has impeded growth. A number of these economies have serious structural problems that will require comprehensive reforms.
Are we good at forecasting global recessions? The answer is no. Having said that, the latest forecasts indicate the global recovery will continue in 2016 so a global recession is not in the cards for this year. But there are significant downside risks around this forecast. A major risk is that a number of emerging markets, including China, have been slowing since 2010 and might see even slower growth this year. The collapse in oil prices has been hitting oil exporters hard. There are financial risks associated with the divergence of monetary policies in advanced economies and with the rapid accumulation of corporate debt in some emerging markets.
IMF Survey: Among the causes of the sluggish recovery you list uncertainty. What is the role of uncertainty and what can governments do about reducing it?
Kose: When you look at the four global recession episodes, you notice an increase in uncertainty in each episode. The 2009 episode was an extraordinary recession that led to a very aggressive policy response by central banks and governments. That brought with it a period of heightened policy uncertainty, seen especially in the context of fiscal policy and financial sector policies in the United States, and around the question of how to respond to the euro area debt crisis. The elevated policy uncertainty combined with macroeconomic uncertainty adversely affected consumption and investment. It is fair to say that, especially in the early stages of the global recovery, uncertainty was one of the sources of weak growth. As discussed in the book, when you have a recession that comes with heightened uncertainty, that recession tends to be deeper.
Governments and central banks need to clearly articulate their policies to overcome the problem of uncertainty. That is easier said than done as the design of policies brings many challenges. For example, it is difficult for businesses to clearly see the direction of monetary policy or its effectiveness given the types of unconventional tools used since the crisis. These tools were certainly necessary but they also led to new communication challenges for central bankers. Policies should ultimately inspire confidence, not be a source of uncertainty themselves.
The authors, Kose (left) and Terrones.
