Introduction
A Recession can be defined as a period in which there is a significant decline in economic activity that is spread across an economy and lasts for more than a year. When various countries simultaneously face a recession then this period can be termed as a global recession or a world recession. During the recession period, the value of assets declines, and the unemployment rate decreases. A Recession is the grimmest time for an economy. Since the second world war, the world has faced a recession four times (1975, 1982, 1991, 2009).
Let’s try to understand the reasons behind past global recessions. One of the most severe and well-known economic downturns was the Great Depression (1929-1939). It was caused due to a speculative bubble in the stock market and an overextended credit market. This led to an increase in unemployment rates. During this phase, there were numerous bank failures due to the loss of assets and panicked withdrawals, there was also a significant decline in industrial production and trade, and there was widespread poverty and hardships for millions of people.
After the Great Depression, the world faced the first global recession after the Second World War in the year 1973-1975. It was the oil crisis caused by the oil embargo imposed by OPEC (Organization of Petroleum Exporting Countries) nations during the Arab-Israeli war. This led to soaring oil prices, inflation, and economic stagnation in many countries. This global recession was followed by the Latin American Debt Crisis (1982-1990) which was triggered by debt defaults by several Latin American Countries. This resulted in a regional economic downturn and significant impacts on global financial markets.
The most recent global crisis is the Global Financial Crisis (2007-2009), also called the subprime mortgage crisis. This crisis was triggered by the bursting of the housing bubble in the United States. Lending to high-risk borrowers (Subprime borrowers) for mortgages with adjustable interest was the major cause of the crisis. Banks bundled these subprime mortgages into complex financial products called mortgage-backed securities (MBS) and sold them to investors. This impacted the global financial markets and resulted in a global recession.
Causes Of Global Recessions
There are various causes of global recessions that can be summarized into three points, which are:
Overheated Economy
Asset Bubbles
‘Black Swan’ Events
Overheated Economy
When economists talk about the economy overheating, they mean that demand in the economy is growing faster than the ability of the supply side of the economy to satisfy it. This can be caused due to reduced production or less availability of workers. A hot spike in the economy alongside a dip in the unemployment rate could signal that the economy may be overheating.
Asset Bubbles
An asset bubble is an economic term used to describe a situation in which the price of an asset rises much higher than its intrinsic value. During a bubble, there is a significant disparity between the true value of an asset and the inflated price that buyers pay for it. You can have bubbles in all asset classes, such as stocks, real estate, oil, and gold.
When an asset bubble is about to burst, there are often warning signs that you can easily observe. Understanding these signs and observing them can help you avoid losing money in an upcoming accident. One of the most popular indicators is a sharp increase in prices. This shows that investors are becoming increasingly optimistic about the future value of assets.
This inflated price does not correspond to the fundamental analysis of the asset, which suggests that it is overvalued. Another sign that the bubble is about to burst is when it becomes difficult to sell assets at current prices. This could be because people are starting to realize that the market has become overinflated or because lenders are starting to worry about borrowers’ ability to repay.
Black Swan’ Events
Global occurrences known as “black swan events” are so uncommon that conventional economic models are unable to forecast them. They have a considerable influence and inspire historians and economists to develop theories about how they might have been predicted or how they might have resulted from earlier events. They are known as “black swan events” because the unexpected finding of black swans in Australia had a major influence on zoology. Economic “black swan” incidents occur when a system attempts to control risk through legislation or other means.
Conclusion
While the term “inevitable” may imply an absolute certainty, it is essential to recognize that economic outcomes are influenced by numerous complex and interconnected factors. While global recessions are not guaranteed to occur at regular intervals, there are several reasons why they may be seen as more likely or challenging to prevent entirely:
Business Cycles: Market economies naturally experience economic cycles, including periods of expansion and contraction. Recessions are an inherent part of these cycles.
Complexity of Global Economy: The global economy is highly complex, involving multiple countries, industries, financial systems, and supply chains. The interdependencies can amplify the impact of local economic shocks into global downturns.
Unforeseen Events: Unpredictable events like pandemics, natural disasters, or geopolitical tensions can disrupt economies, leading to recessions.
Financial Crises: Excessive risk-taking, speculative bubbles, and financial imbalances can trigger crises that have a cascading effect on the global economy.
Inequality and Vulnerability: Disparities in wealth distribution and vulnerability of certain sectors or regions can exacerbate the impact of economic downturns.
Policy Limitations: While governments and central banks can employ various policies to stabilize economies, they might face constraints in their effectiveness or implementation.
Technological Disruptions: Rapid technological advancements can lead to structural changes in economies, potentially causing disruptions and job displacements.
Trade and Supply Chain Disruptions: International trade tensions and supply chain disruptions can affect global production and consumption, impacting economies worldwide.
Global Monetary System Challenges: Issues related to exchange rates, currency crises, or unsustainable debt burdens can have global repercussions.
While global recessions are not inevitable in the strictest sense, the complexity and uncertainties inherent in the global economy make them difficult to prevent entirely. Governments, policymakers, and international organizations continually strive to minimize the likelihood and impact of economic downturns through prudent economic management and coordinated efforts.
Written by – Priyanshu Ratna
Edited by – Saba Godiwala
