How will you know if a country is in recession? A cheat sheet

Oct 30 (LiveMint) – The word ‘recession’ is haunting on a global level more than one would like to count. The markets are in a seesaw-like momentum as global economic prospects are difficult to gauge with risks continuing to linger — keeping recession fear hanging over the loop.

Recession is not a new notion and definitely not a new enemy that the world has faced. History is there to tell the tale of a recession that swept many big and small economies by their feet and created havoc. But how does a layman understands a country is leading into recession?

A global recession is much more difficult to understand then compared to a recession occurring in a country. That’s because a global recession is more complex and does not have a similar pattern to the previous recessions.

But to gauge the recession of a country has many parameters. Some of them are higher unemployment, lower wages and incomes, corporate earnings declining, two-consecutive quarterly decline in GDP, and rise in business closures. Also, recession can be tracked through the plunging consumer confidence.

Earlier, in a blog on October 12, Atlantic Council, the American think tank, explained that when consumers hear gross domestic product (GDP) growth is shrinking, they lose confidence and spend less—which hurts businesses that then cut wages and lay off employees, most often low-income workers.

Also, the think tank highlighted that low confidence traps consumers in a loop. They need to spend money in order for the GDP to grow, but they also need to be confident in the country’s GDP growth before spending money.

However, the think tank also believes that a singular focus on GDP, and its role in shaping economic and political decisions, is outdated. It points out that GDP only measures market transactions, and does not factor in a country’s well-being or social progress.

That being said, developed countries in particular need to prioritize previously subordinated goals like climate resilience, health care access, education, happiness, life satisfaction, or the reduction of inequality over GDP growth.

Meanwhile, IMF also believes a focus on GDP alone is narrow, and it is often better to consider a wider set of measures of economic activity to determine whether a country is indeed suffering a recession. Using other indicators can also provide a timelier gauge of the state of the economy.

The recession has made its way to shattering major economies on several occasions and one of the longest and most famous ones was the Great Depression of the 1930s. Also, in the past four decades, there have been recessions in the 1970s, 1980s, 1990s, and even early 2000s on a global level. However, there have been several disputes over certain 19th-century recessions, especially in the US.

Some of the latest 2000s recessions are:

Data from Atlantic Council in their blog on July 28 this year, showed that Britain officially entered recession on January 23, 2008, when the Office of National Statistics posted that the country’s economy dipped through the last two quarters of 2008. Also, there was a second dip during first and second quarter of 2009. Another episode of recession came during Covid-pandemic with the UK reporting decline in GDP figures during the first two quarters of 2020.

Even the US faced a recession in late 2007 that continued till mid-2009. On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in December 2007. Later, on September 20, 2010, the bureau determined that the recession ended in June 2009. During the Coronavirus pandemic, the NBER on June 8, 2020, declared that the country entered into a recession in February 2020. However, on July 19, 2021, NBER determined that a trough began in April 2020.

While in Europe, a 15-month recession was witnessed from Q2 2008 to Q2 2009. Further, a second drop in the economy occurred from Q4-2011 until Q1-2013 announced on November 15, 2012. Notably, Europe suffered a recession way before the pandemic could hit the economy. On September 29, 2020, the Euro Area Business Cycle Dating Committee announced that a recession began in Q4 2019. On November 9, 2021, the committee identified that the trough occurred in Q2 2020.

Although China did not witness any recession between 2008 to 2009. However, the country did report a -10.5% GDP rate in Q1 of 2020 due to being the epicentre of the pandemic. Notably, there was no official announcement made of a recession and successive quarters demonstrated negative GDP growth in China thereafter.

The data is from the American think tank blog.

What is different in 2022?

The world is struggling with inflationary pressure. Inflation which is one of the factors for the ups and downs in consumer confidence is at a multi-years high in major economies. This is the biggest elephant in the room that has pushed major central banks including RBI as well to take an aggressive approach to monetary policy tightening. US Federal Reserve, European Central Bank, and many others have increased their key rates which further led to an upside trend in deposits and lending.

Then there is geopolitical tension due to Russia and Ukraine war, energy crises, supply-chain disruption, and the lingering COVID-19 pandemic that has taken a toll on economies.

In its World Economic Outlook announced this month, IMF said, “global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook.”

That being said, IMF forecasts global growth to slow from 6% in 2021 to 3.2% in 2022 and further to 2.7% in 2023. It added, “This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.”

Moreover, IMF predicts global inflation to rise from 4.7% in 2021 to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% by 2024.

Also, IMF said, monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.

In September 2022 quarter, many major countries witnessed a revival in their GDP growth. China posted a GDP rate of 3.9% in September 2022 quarter from -2.7% in June 2022 quarter. While the US and Singapore also recorded a growth rate of 2.6% and 1.5% in the September 2022 quarter from -0.6% and -0.2% in the previous quarter.

Major economies in Europe region like Germany recorded a broadly flat GDP rate of 0.3% from 0.1% rate in the previous quarter, while France witnessed a dip to 0.2% in September 2022 quarter from 0.5% in the previous quarter. Euro Area’s GDP rate is flat at 0.8%. Netherlands’ GDP growth is at 2.6% by end of the June 2022 quarter, as per trading economics data.

Furthermore, India’s GDP rate is -1.4% by end of the June 2022 quarter, while Japan’s growth rate is 0.9% by the same period.

These are some of the G20 nations’ economic growth.

On markets outlook ahead, Mitul Shah – Head of Research at Reliance Securities said, “Inflation continues to remain sticky, both, in the domestic and the US economy. India’s growth remains strong and expected to be one of the fastest growing economies in the world, while global recession and downgrading of growth persisted for major economies. The market is looking at US Fed monetary policy meeting scheduled for 2nd November. Commentary on festive demand, inflation outlook and rate hike will be keenly watched in the near term.”

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Source: NewsAsia