9th March 2016
Those investors hoping to banish fears that the global economy is headed for a more pronounced slowdown will not have enjoyed the latest round of business sentiment data. JP Morgan’s global composite PMI fell to a 40-month low of 50.6 in February, with both manufacturing and services activity slowing markedly across most regions.
When markets are stressed and growth momentum is waning, recession talk becomes more common. That begs the question of how a global recession should be defined. The most widely used definition is two consecutive quarters of negative growth. However, that is inadequate. On a Purchasing Power Parity basis, global GDP has not contracted in any single year since 1980, though 2009 was very close.
In addition, because potential growth in emerging markets tends to be higher than in the advanced economies, episodes of negative growth are comparatively rare. Indeed, for those advanced economies like Japan and Italy where potential growth is barely above zero, the negative technical threshold will be breached too often to be useful.
Our own starting point is to relate the definition of a recession to what we are trying to measure: substantial and broad-based shifts in economic momentum that increase disinflationary forces and force widespread policy responses.
To quantify this insight we have developed a hybrid approach that incorporates three criteria.
The first relates to the size of the aggregate shock, and requires the year-on-year (y/y) growth rate of global GDP on a PPP basis to be at least 0.75 percentage points (ppts) below trend.
The second relates to breadth, and requires either half of the world’s 20 largest economies to be growing more than 1ppt below trend in y/y terms, or the unemployment rate in half of the countries increased by more than 1ppt from its trough. For countries without robust unemployment data, we use the deviation of employment growth from trend instead. On this definition, there have been three global recessions since 1980 – 1982, 1992, and 2009 – though 2001 was very close (see Chart 1).
Importantly, while global growth is currently sluggish, and three countries meet our criteria, activity would have to decelerate sharply for 2016 to be added to our list of global recession years.