From Global Depression To Downturn, With Recession in Middle

A century of economic turbulence shows that sharp and regular downturns are a given, widespread recessions are few and may not mean the end of the world, and long drawn-out depressions are ‘Black Swan’, once in several lifetimes, events

By Alam Srinivas

• The last time the world witnessed a Depression was in the 1930s, when it took a decade for the various economies to recover and get back on their feet
• The economic and social impacts at national and individual levels are crucial, especially as 2023 is billed as another year of recession
• A period of negative global GDP growth was predicted in 2019, just before the virus ate away at our political, economic, social and health entrails
• Global tech companies, which benefited immensely during COVID pink-slipped hundreds of thousands within months. Jobs vanished as unemployment reared its ugly head yet again

Well, this is what baffles, mystifies, maddens and enrages people. The experts confidently say there are huge differences between a global downturn, recession and depression. The first is a period of “low growth”, and the major indicators show contradictory behaviour. The second is a scenario with contraction (negative growth) in GDP, and “synchronised” disruptions across the world. Every worthwhile indicator shows a huge dip. The last time the world witnessed a Depression – Pray that it never happens again – was in the 1930s, when it took a decade for the various economies to recover and get back on their feet.

ECONOMIC & SOCIAL IMPACT

But for the millions, who live through these frightful, shocking and ghastly times, the similarities matter. In each instance, they lose jobs and livelihoods. Their savings, arduously amassed over years and decades, vanish in a matter of hours, days and months. The prices of assets that they own, stocks or real estate, plummet and go into a freefall. People find it tough to arrange two square meals for their families. The immediate future seems dark and dreadful, with no signs of hope. For those who suffer and go through any of these crises, it seems like the end of the world or at least the end of the lives that they had known.
Such distinctions between economic and social impacts at national and individual levels are crucial, especially as 2023 is billed as another year of recession. Sadly, it arrives without a respite, after an all-encompassing crusade against the COVID calamity. In fact, a period of negative global GDP growth was predicted in 2019, just before the virus ate away at our political, economic, social and health entrails. The irony is that the new wave of recession can be dubbed as a post-COVID one, i.e. its roots lie in the manner in which nations rightly went overboard to combat the infection, and largely succeeded in their efforts.
In short, nations went on a binge in their stimulus packages in a bid to put some money in the pockets of the poor and small business owners, who suffered the most in the recession of 2020-21. Lower interest rates encouraged people to borrow more. Too much money in the system overheated the economies, and led to huge rise in prices. An added factor was the resurgence in demand after the initial mayhem. Some of the surplus money found its way into assets like stocks, which stoked their values, which skyrocketed. Suddenly, one couldn’t afford goods, services and assets, and growth faltered amidst inflation.
Companies that had sacked millions in 2020, and confined millions to their homes due to the growing work-from-home culture went through the same process again in 2022. Paradoxically, global tech companies, which benefited immensely during COVID and even went on a hiring spree, pink-slipped hundreds of thousands within months. Jobs vanished as unemployment reared its ugly head yet again. The global business jet, which crashed, but took off in no time, found itself in turbulent skies. Anxiety, panic and shock gripped the world, not due to the fear of the biological virus, but because of the toxic economic microbes.

A report (July 2022) by Goldman Sachs stated, “We see the risk that the economy enters a recession the next year at 30% in the US, 40% in the Euro area, and 45% in the UK.” Compare this with the earlier average of “roughly 15%” for the advanced economies since the 1960s. Since the 1990s, the chances of the US entering a recession averaged 12%, as opposed to 23% between 1855 and 1990. Worse, between the 1960 and 2022, the average for each of the developed nations, and across decades, “has not varied much”, added the same report. Now, the recession risks in these countries were twice or thrice the past figures.

If one takes a closer look at the recessions – four between 1950 and 2019 and the COVID one – energy plays a critical role. The first two were engineered by the oil shocks, and the third had its beginnings in the first Gulf War. Post-COVID, the twists and turns were influenced by global crude oil prices. A factor in the forthcoming recession is the war between Russia and Ukraine, which disrupted energy flows and prices

“We find that, given the current inflation level of 8% and unemployment below 4%, historical evidence suggests a very substantial likelihood of recession over the next year or so,” said a recent blog (Harvard.edu) by Alex Domash and Lawrence Summers. They argued that in the case of the US, when quarterly inflation crosses 5%, the probability of a recession is 60%, which swells to 70% if unemployment also drops below 4%. “Since 1955, there has never been a quarter with average inflation above 4% and unemployment below 5% that was not followed by a recession (in the US) within the next two years,” wrote the authors.

Obviously, if America stutters, even as Europe stumbles, and India and China stammer – given the current scenario – the global economy will be dumbfounded. The combination can be lethal: America is the growth engine for the West, Europe has not recovered from the 2008-09 crisis and the Asian giants have the power to pull the world out of deep economic ditches. For millions of us, who are likely to face the sharp stabs this year, it is an opportune time to understand the dynamics and nuances of a recession, and how it compares to a downturn. In effect, can we survive this one better than the last time?

GLOBAL DOWNTURNS

Let’s start with bad news. A growth crisis, in some form, and not just as a downturn or recession, comes along once every few years. According to one definition, between 1950 and 2019, and not counting COVID and post-COVID disasters, there were 17 periods when world’s real GDP growth (measured in terms of purchasing power parity or buying power of different currencies) went below 2.5%. That is once every four years! The period becomes shorter if one adds the two major recessions in 2020 and 2023. If the threshold is reduced to 1% (from 2.5%), the occurrence happens once in less than five years.
If one decides that our lives should be measured by major crises, i.e. downturns and recessions, the world faced eight of them between 1950 and 2019. The four recessions, states a World Bank report (March 2020), took place in 1975, 1982, 1991, and 2009. The first one was triggered by the “Arab oil embargo” in 1973. The developed G-7 nations, apart from Germany and Japan, experienced stagflation (low growth, high inflation). The second, in 1982, too had its epicentre in the Middle East. It was caused by the second oil shock (1979), aided by tight monetary policies in the US and Europe, and the Latin American debt crisis.

Several regional reasons contributed to the 1991 recession. The Middle East featured prominently, as the downfall began with the First Gulf War (1990-91). In the US, the housing bubble exposed the weaknesses of the lenders. Or was it vice versa? There was a banking crisis in Scandinavia, and European nations battled with issues related to exchange rates among themselves. There was an asset price bubble burst in Japan, and the former USSR nations went through painful transitions to market economies. Most know about 2009, and how the mortgage contagion spread from the US to Europe to other parts of the globe.
Four global downturns are defined by the World Bank as years when the “global economy registered its lowest growth rates of the past seven decades, except for the years of global recession and the two years before and after each of them”. Thus, they were not as bad as the recession years, but they were worse off than mini-crises. They took place in 1958, 1998, 2001, and 2012. Eight recessions and downturns in 70 years imply a frequency of one in less than nine years. Add the COVID and forthcoming post-COVID recessions, and the ratio is one in just over seven years. There we go – the veritable seven-year itch!

ROLE OF POLICY MAKER

So, instead of blaming the policy makers, who may not be fully in control of extreme situations, the middle classes and businesses can prepare for the downsides during the periods of prosperity. Of course, the rich can take care of themselves, and the poor, who struggle on a daily basis, have no control over their lives. This is where the governments can step in. They can shed their arrogance and bombast during the good times, and cushion the economies for the inevitable bad ones that will arrive, irrespective of their actions, every seven years or so. Remember, the worst is always lurking around the corner.
“The life of a finance minister is not easy…. When everything goes well with the economy, we all share in the joy. However, when things go wrong, it is the finance minister who is called upon to administer the medicine. Economic policy, as in medical treatment, often requires us to do something, which, in the short run, may be painful, but is good for us in the long run. As Hamlet, Prince of Denmark, had said in Shakespeare’s immortal words, ‘I must be cruel only to be kind,” lamented Pranab Mukherjee, a former finance minister in his 2012 Budget speech. Not if she is smart enough to be slightly cruel to be kind at all times.

Of the four recessions between 1950 and 2019, the global economy “rarely” registered a prolonged contraction. The World Bank report states that “2009 was the only year in the post-war period to register a decline in annual global output”. One can add that 2020-21 was another such year, but it was an extreme case

Now, it’s time for the good news. While it is predictable that some (or large) sections will be hurt during downturns and recessions, and many may find it difficult to get back on their feet. Yet, if you had taken steps for a soft landing, as a person or business, the going may not be tough. The reason: the World Bank study concludes that “most indicators of global activity started expanding in the first year of recovery” during the four recession. “The average growth rate of global output in the first year (or the first three years) of recoveries was close to the average growth in a typical (normal, non-crisis) year,” adds the report.

POST RECESSION RECOVERY

Clearly, the life of a recession is extremely short, especially in the post-World War II era. This was even borne out during, what’s called, the Great (COVID) Recession of 2020. Of the four recessions between 1950 and 2019, the global economy “rarely” registered a prolonged contraction. The World Bank report states that “2009 was the only year in the post-war period to register a decline in annual global output”. One can add that 2020-21 was another such year, but it was an extreme case. In a counterintuitive manner, the recovery in most nations was faster and sharper than what was anticipated by experts.
Several upheavals, including a few of the above-mentioned downturns, are largely regional in nature. Their impact is not felt across the globe. For example, “not every US recession was associated with a global recession (downturn)” and vice versa. The US economy grew “strongly” during the 1998 downturn, and “to a lesser extent” in the 2012 one. Between 1981 and 1989, the Latin American debt crisis, which translated into an international one, “engulfed 20 countries”, most of them in Latin America. The worst-affected nations in the 1997 East Asian currency crisis were Thailand, Malaysia, and South Korea.
What is interesting is what happens during the post-recession recovery period. The subsequent prosperity is not shared equally by the various geographical regions. After the first three post-war recessions of 1975, 1982 and 1991, states the World Bank report, “Advanced economies were the engines of… recoveries….” However, the emerging market and developing economies, i.e. nations like India and China, apart from others in Asia and South America, “accounted for the lion’s share of global growth after the 2009 global recession….” This was true in 2021, when India emerged as the fastest-growing large economy.

While the contribution of the western world to global growth was 75% in 1976-78, 1983-85, and 1992-94, it dropped precipitously to 35% in 2010-12. Obviously, the slack was taken up by the emerging economies, especially the two Asian giants. East Asia, South Asia, and Latin America were the major drivers of global growth in 2010 and 2021. More remarkable is the fact that low-income countries rebounded strongly after the 2009 recession. It was the first time that they were able to “deliver positive per capita GDP growth, partly because of a sharp increase in their exports,” reveals the World Bank report.
If one takes a closer look at the recessions – four between 1950 and 2019 and the COVID one – energy plays a critical role. The first two were engineered by the oil shocks, and the third had its beginnings in the first Gulf War. Post-COVID, the twists and turns were influenced by global crude oil prices, which lunged below zero (theoretically), and zoomed northwards. A factor in the forthcoming recession is the war between Russia and Ukraine, which disrupted energy flows and prices. Hence, the winners and losers during recovery phases are partly determined by whether a nation is an energy producer or energy guzzler.

However, the real victors are those who prepare for the worst during the best of times, those who live in the present, but know what to expect in the future. For the crises are inescapable. They will come, when they have to, do what you can. They are inbuilt and ingrained in the manner in which the policy makers deal with an emergency. Their solutions are destined to lead to immediate successes, huge spikes in growth and wealth creation, and fated to inadvertently and unintentionally result in the next catastrophe. One can be forewarned and forearmed. Amnesia or short-term memory is your worst possible enemy.