There are four episodes of material global cyclical weakness since 1961. The IMF’s definition of a global recession is a contraction of Purchasing Power Parity adjusted World real GDP per capita accompanied by a decline in at least one additional global macroeconomic indicator such as per-capita investment, per-capita consumption, industrial production, or trade flows. Since World War II, the world has seen only four global recessions on this definition — in 1975, 1982, 1991, and 2009.The 1973-1975 sharp decline in growth was due to the first oil crisis.
Global growth has been converging down to its potential rate. How likely is it that the slowdown continues and becomes a global cyclical downturn?
There have been four global recessions since 1961, triggered either by oil price shocks or by financial crises
Geopolitical instability in the Middle East undoubtedly contributed to the decision of Arab members of OPEC to quadruple the price of oil. The 1979-1982 growth decline was driven by the second oil crisis. The Iranian revolution of 1979 was in part responsible for the slowdown in global oil production that year. Although global oil supply declined only by about four percent, the price of crude more than doubled.
The slowdown that started in 1988 was triggered by Black Monday, when stock markets around the world crashed on Monday, October 19, 1987. The 1989 savings and loan crisis further weakened the U.S. and global economy. The (somewhat milder) global slowdown — not a global recession according to the IMF criteria —that started in 2000 was triggered by the implosion of the dot-com tech bubble. Finally, the Great Financial Crisis of 2007-2009 triggered the most severe global recession since 1961, and indeed since the Great Depression of the 1930s. One lesson from this is that it takes a significant adverse supply shock (with a material impact on aggregate demand) or financial calamity to trigger a global recession. The four global recessions since 1961 were not the result of ‘endogenous’ fluctuations in economic activity. All were triggered by severe shocks.
Presently, there are indeed manifest financial weaknesses in the three largest
economies (the health of corporate balance sheets in the U.S. flattered by unnaturally low credit spreads, across the board excessive leverage in China, and chronic weakness in the banking sector in the Eurozone), but there are few if any confident forecasts of an imminent financial crisis.
Could rising geopolitical risks in a constellation of key petro-states become systemic via a supply shock? We think this time is different.