What to Know About Recessions as the World Heads Into One

(Bloomberg) -- With the sudden cessation of economic activity across the globe, talk about the next recession has shifted -- from whether and when, to how long and how bad. The coronavirus pandemic has stifled travel, shuttered businesses, canceled sports events and sent stock markets into freefall. Life-saving containment measures have sharply curbed economic output, providing a shock many believe will trigger a global downturn.

1. What is a recession?

The dictionary definition is a period when economic output contracts for two straight quarters. The National Bureau of Economic Research’s Business Cycle Dating Committee, which makes the official U.S. determination, uses a different approach, considering factors such as inflation-adjusted GDP, employment, industrial production and income. The International Monetary Fund, in designating recessions on a global scale, looks at several indicators including a decline in inflation-adjusted per-capita GDP that’s backed up by weakness in industrial production, trade, capital flows, oil consumption and unemployment.

2. Is the U.S. entering a recession?

Almost certainly, yes. Many economists say output likely shrank in the quarter ending March 31, and there’s widespread agreement that the contraction in the second quarter, April through June, could be the most dramatic in records going back to 1947. Morgan Stanley’s expectation that gross domestic product will fall a jaw-dropping 30.1% in the second quarter was topped by Goldman Sachs Group Inc., which estimates the U.S. economy will shrink by 34%. (It’s worth noting that U.S. Treasury Secretary Steven Mnuchin said on March 15 that he expected the coronavirus pandemic would slow growth but not tip the U.S. economy into recession.) NBER typically takes about a year to make the official call on when a U.S. expansion ends and a recession begins, though this time it may not wait that long.

3. How about the global economy?

Bloomberg Economics is forecasting a global recession in the first half of 2020, noting that “for some important parts of the world the contraction has already begun.” It foresees the global economy shrinking by 1.8% year-on-year in the first half of 2020, compared with growth of about 3% in 2019. Kristalina Georgieva, managing director of the International Monetary Fund, says the world economy is already in a recession that could be worse than the 2009 downturn. Before 2020, the IMF had counted only four global recessions tracing back to 1960, compared to the 11 designated in the U.S. since World War II by NBER.

4. How long will this last?

That’s becoming the question of the moment. There was some hope that the downturn wouldn’t last beyond the first two quarters of this year, a rosy scenario that assumes fast and effective work in getting the coronavirus under control. More recently, economists have been losing hope in such a “V-shaped recovery,” in which lost output is quickly restored. The ultimate fear is a protracted malaise that has some flavor of a depression.

5. What is a depression?

It’s generally interpreted as a severe downturn that is measured in years, not quarters. There’s been just one in the last 100 years, the Great Depression of 1929-1933. The 2007-2009 recession lasted 18 months, making it the longest since the Great Depression, inspiring the name the Great Recession.

6. What makes a recession mild or severe?

Besides duration, other measures of a recession’s severity are how much the economy contracts and how bad unemployment gets. The worst recessions tend to be those paired with some sort of collapse in the financial system, as happened in the U.S. in 1929 and 2008. Another driver of a recession’s severity is how broadly the economy suffers a contraction. The relatively short and mild 2001 recession, for instance, was largely confined to the tech sector, with modest fallout to the rest of the economy.

7. Does a long expansion portend a severe recession?

That’s a question of particular interest in the U.S., where the economic expansion has lasted almost 11 years. But Federal Reserve Bank of Cleveland researchers found little evidence that duration of an expansion influences how bad the subsequent recession. They did, however, find reason to think severe recessions (like the one that ended in 2009) spawn strong expansions.

8. So will the next recession be a bad one?

In terms of the depth of the downturn, it might well be worse than the recession of 2007-2009. But the speed of the recovery could be swifter, since this recession will reflect a shock (the virus) rather than the buildup of underlying economic imbalances. Also on the positive side, American households are in a good spot. They’re carrying less debt, and an increase in mortgage refinancing has put more cash in consumers’ pockets.

9. Can anything be done now to ease the next recession?

Central banks around the world are cutting interest rates, intervening in markets, buying corporate assets or helping banks to keep lending to businesses. The People’s Bank of China has injected billions into the economy, and the Bank of Japan boosted asset purchases to stabilize markets. The U.S. Federal Reserve cut its benchmark interest rate to near zero. But this time the onus may be on governments in part because central banks have used up a lot of their interest-rate ammunition over the last decade. “The response should be fiscal, first and foremost,” European Central Bank President Christine Lagarde said.

The Reference Shelf

• A QuickTake explainer on what central banks can and can’t do about the virus slowdown.
• Will the recovery look like a V, a U, an L, or Nike’s swoosh?
• Why a European recession is seen as inevitable.
• The National Bureau of Economic Research on the dating of U.S. business cycle expansions and contractions.
• The American Institute for Economic Research examined “the changing nature of recessions.”
• Bloomberg Opinion columnist Tyler Cowen likens “the coronavirus recession” to World War II.

©2020 Bloomberg L.P.