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.