After several years of moderate but sustained worldwide GDP growth, the spectre of a global recession in 2016 can no longer be completely discounted. Brazil and Russia are already suffering from eviscerating economic down-turns and the growth rates of many other emerging economies, including China, have subsided to well below trend. Although the advanced economies are still growing roughly at trend, the world economy in aggregate is now slowing and the IMF is among many to warn about a sharp increase in downside risks.
The good news is that global recessions are very rare. On the IMF’s preferred definition (ie negative growth in global GDP per capita – the blue line in the graph), there have only been four such events in the entire post war period, in 1975, 1982, 1991 and 2009. The bad news, though, is that when they do occur, they are catastrophic for financial markets and unemployment.
As Lawrence Summers has pointed out, economists are not good at predicting recessions a year in advance. Famously, Paul Samuelson said the stock market had predicted “nine of the last five recessions”. Economists, on the other hand, have predicted none of them. Recessions happen suddenly, sometimes out of a clear blue sky, and forecasters hardly ever build a severe recession into a “main case” forecast more than a quarter or two in advance. Read more