Global Recession: How Long? How Deep? M. Ayhan Kose Research Department International Monetary Fund Presentation at the Tusiad-Koc University ERF conference on Global Economic Crisis and the Turkish Economy" April 30, 2009 1 This talk is based on the following studies: 1. Global Recessions and Recoveries, Ayhan Kose, Prakash Loungani,, and Marco Terrones 2. What Happens During Recessions, Crunches and Busts? Stijn Claessens, Ayhan Kose, and Marco Terrones 3. Global Prospects and Policies IMF,, World Economic Outlook, April 2008, Chapter 1 2 1
Disclaimer! The views presented here are those of the authors and do not necessarily reflect the views of the IMF or IMF policy. 3 Challenges Facing World Economy Recessions in many countries Collapse of global trade and capital flows Massive difficulties in financial markets A global recession like no other since the WW II 4 2
Objective: Three Questions How deep is the ongoing global recession? Why is it so deep? What is next? 5 Results How deep is the ongoing global recession? By any measure, the ongoing global recession is the deepest one of the postwar period Why is the global recession so deep? It is stemming from difficulties in financial markets and is the most synchronized one. Such recessions tend to be deeper and longer What is next? Growth is projected to reemerge in 2010, but it would be well below potential. The recovery hinges on the health of financial markets and sustained policy support health of financial markets and sustained policy support 6 3
Outline What is a global recession? How deep is the ongoing global recession? Why is it so deep? What is next? 7 What is a global recession? How deep is the ongoing global recession? Why is it so deep? What is next? 8 4
What is a global recession? A significant decline in activity spread across many segments of global economy In the past, a recession in advanced countries could have been called a global recession, but no longer Today, emerging and developing countries constitute a much larger share of global output and growth; much stronger global trade and financial linkages Need to use multiple measures of global economic activity 9 Dynamics of Global Growth Shifting (Percent of Global Growth due to Regions, PPP Weighted) US Euro Area Japan Other Advanced Economies China India ROW 100 80 60 40 20 0 1970s 1980s 1990s 2000s 10 5
How to measure global activity? Benchmark: World real GDP per capita (PPP weighted) Also check whether there is a significant decline in activity spread across many segments of global economy, how? Consider a broad set of global macroeconomic indicators: GDP, industrial production, trade, capital flows, oil consumption and unemployment Global Recessions: 1975, 1982, 1991 and 2009 11 What is a global recession? How deep is the ongoing global recession? Why is it so deep? What is next? 12 6
Global Recessions: 1975, 1982, 1991 and 2009 240 (1960=100; contractions in PPP-weighted global per capita GDP are shaded) 220 200 180 1975 1982 1991 2009 160 140 120 100 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 13 2009 Recession: Like no other! (percent change from a year earlier; contractions in PPP-weighted per capita GDP shaded) 6 4 PPP Weights 2 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009-2 -4 14 7
6 Even deeper with market weights (percent change from a year earlier; contractions in PPP-weighted per capita GDP shaded) 4 PPP Weights 2 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009-2 Market Weights -4 15 8.0 First Contraction in Global GDP (percent change from a year earlier; contractions in PPP-weighted per capita GDP shaded) 6.0 PPP Weights 4.0 2.0 0.0 Market Weights 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009-2.0-4.0 16 8
World GDP During Global Recessions 0.0 (percent change from a year earlier; PPP-weighted global per capita GDP) -0.5-1.0-1.5-2.0-2.5-3.0 1975 1982 1991 Average 2009 17 0 Global Industrial Production (percent change from a year earlier; PPP-weighted global industrial production) -1-2 -3-4 -5-6 -7-8 1975 1982 1991 Average 2009 18 9
Global Trade (percent change from a year earlier; PPP-weighted global industrial production) 6 3 0-3 -6-9 -12-15 1975 1982 1991 Average 2009 19 Global Capital Flows (percent change in the two year rolling window average of total capital flows/gdp) 1 0-1 -2-3 -4-5 -6-7 1975 1982 1991 Average 2009 20 10
Increase in the Global Unemployment Rate 3.0 (change in the level from a year earlier) 2.5 2.0 1.5 1.0 0.5 0.0 1975 1982 1991 Average 2009 21 1 Global Oil Consumption (percent change from a year earlier) 0-1 -2-3 -4 1975 1982 1991 Average 2009 22 11
0.8 Global Consumption (percent change from a year earlier; PPP-weighted global per capita consumption) 0.4 0.0-0.4-0.8-1.2 1975 1982 1991 Average 2009 23 Global Investment (percent change from a year earlier; PPP-weighted global per capita investment) 0.0-2.0-4.0-6.0-8.0-10.0 1975 1982 1991 Average 2009 24 12
What is a global recession? How deep is the ongoing global recession? By any measure, the ongoing global recession is the deepest one of the postwar period Why is it so deep? What is next? 25 Why is the global recession so deep? The global recession stems from a multitude of financial market difficulties Problems in credit markets Sharp losses in asset (housing and equity) markets Recessions associated with financial market problems tend to be deeper and longer 26 13
Deeper Recessions w/ Severe Financial Problems 0 (Cumulative GDP loss, percent, from Peak to Trough) -2-4 -6-8 Recessions Recessions w/ Credit Crunches Recessions w/ Housing Busts 27 5 Longer Recessions w/ Severe Financial Problems (Duration from Peak to Trough, Mean, in quarters) 4 3 2 Recessions Recessions w/ Credit Crunches Recessions w/ Housing Busts 28 14
Why is the global recession so deep? Sharp declines in growth in advanced countries The main customers of goods and services The centers of global financial markets Strong linkages of trade and finance; global production chains The global recession is the most synchronized one to date since the WW II Highly synchronized recessions are often deeper and longer 29 4.0 2.0 2009 Recession Driven by Advanced Countries (Real PPP-Weighted Per Capita GDP Growth during Global Recessions, percent) Advanced Emerging Developing 0.0-2.0-4.0-6.0 1975 1982 1991 2009 30 15
Most Countries in Recession (PPP-weighted percent of countries) 80 70 60 50 40 30 20 10 Advanced economies Emerging and developing economies 1975 1982 1991 2009 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 31 Deeper Recessions When Globally Synchronized 0 (Cumulative GDP loss, percent, from Peak to Trough) -1-2 -3-4 -5-6 Recessions Syncronized Recessions 32 16
Longer Recessions When Globally Synchronized 5 (Duration from Peak to Trough, Mean, in quarters) 4 3 2 Recessions Syncronized Recessions 33 What is a global recession? How deep is the ongoing global recession? Why is it so deep? It is stemming from difficulties in financial markets and is the most synchronized one. Such recessions tend to be deeper and longer What is next? Global Prospects: 2009-2010 2010 (Based on the projections in the IMF s WEO,, April, 2009) 34 17
Global Prospects: 2009-2010 2010 Global growth is projected to decline 1.3 percent in 2009, a 1¾1 percentage point downward revision from the January WEO Update Advanced economies to suffer deepest recession since the WW II Growth in virtually all countries to decelerate sharply from rates observed in 2003 07 07 Global growth is projected to reemerge in 2010, but at 1.9 percent well below potential 35 Prospects for recovery depend on Returning the financial sector to health Sustained macroeconomic policy support External financing for emerging economies Stable commodity prices 36 18
World economy to contract in 2009, but recover in 2010 5.0 (percent change in total PPP-weighted world GDP growth) 4.0 3.0 2.0 1.0 0.0-1.0-2.0 2008 2009 2010 2011 37 5.0 4.0 But the global growth in 2010 below potential (percent change in total PPP-weighted world GDP growth) World Trend 3.0 2.0 1.0 0.0-1.0-2.0 2008 2009 2010 2011 38 19
Advanced economies in deep recession in 2009 8.0 6.0 (percent change in total PPP-weighted world GDP growth) 2008 2009 2010 4.0 2.0 0.0-2.0-4.0-6.0 World Advanced Emerging Developing 39 Especially, US, Euro Area and Japan 8.0 6.0 (percent change in total PPP-weighted world GDP growth) 2008 2009 2010 4.0 2.0 0.0-2.0-4.0-6.0-8.0 US Euro Japan Emerging &Developing 40 20
Downside Risks to the Outlook Uncertainty remains unusually large Downside risks continue to dominate: Adverse feedback loop between financial and real sectors intensifies because political economy is hostile to bank recapitalization Sharp increase in public debt issuance causes negative market reaction Deflation in some advanced countries and corporate distress in some emerging economies 41 Being Rationally Optimistic: Upside Risks Right policy measures can restore confidence, revive demand, and restart a virtuous growth cycle There are signs that the free fall in manufacturing and retail sales may have stopped A typical global recession tends to last a year 42 21
Results How deep is the ongoing global recession? By any measure, the ongoing global recession is the deepest one of the postwar period Why is the global recession so deep? It is stemming from difficulties in financial markets and is the most synchronized one. Such recessions tend to be deeper and longer What is next? Growth is projected to reemerge in 2010, but it would be well below potential. The recovery hinges on the health of financial markets and sustained policy support 43 Questions & Comments M. Ayhan Kose akose@imf.org 44 22