Recessions: Past and Future

Since the 1960s the world went through 4 “recessions” (see Chart; I use quotation marks, because in no case there was negative growth at the world level, although the cycles are clear): in 1974/75, 1980/82, 1991/93, and 2001/02. Each one of those was associated with a recession in the US (but there were two US recessions in the early and late 1960s, which although somewhat visible in the height of the bars, did not pull down world growth like those from the 1970s onward). The Chart includes the latest projected growth for 2008 from the IMF (in market exchange rates; those who read my other blogs probably remember that I do not particularly like the PPP aggregated world growth rates; witness also the recent drastic adjustment in China’s PPP GDP). If 2008 growth ends up being lower than the one plotted in the Chart, of course the trend (HP power 4, lambda 6.25) will point more clearly downwards. Just by looking at the Chart you are tempted to say that it is clear that we are due for a downturn in the world business cycle (in fact, in late 2006/ early 2007 when Nouriel began to argue about the coming US and global slowdown, I just plotted this Chart -with less observations of course- and concluded that he was going to be right).

Here I take a quick look at the past 4 world recessions/decelerations, to see if there are things we can extrapolate to characterize the coming world recession/deceleration


For the following tables I calculate the average value of several variables for the 3 years previous to the crisis (Xt3), during the crisis (Xc), and in the tables I show the change in both (Xc-Xt3). For instance, using GDP growth, if it was on average 3% in the 3 previous years, and declined to -2% on average during the years of the crisis, then the reported variable is -2% -3%= -5%. The variables are GDP growth per capita, prices of commodities, interest rates, and the US multilateral REER.

In terms of GDP growth (per capita), growth rates appear very much synchronized (no decoupling), except in the case of the early 1990s recession for LAC. But then the region has had its recession earlier and was rebounding from those lows. This also pulled up growth rates for the aggregate of low and middle income countries, but the other regions (not shown) were not decoupled.

image004_08.gif The next Chart shows indices of nominal prices for groups of commodities, plus (in the lower line) the index of export prices for developing countries (low and middle income countries as defined by the World Bank). The behavior of commodity and export prices can be separated into two main cases. In the first two recessions, most (but not all) prices were increasing: we had the oil shocks and generalized inflationary pressures. In the last two events, prices were declining (with only one exception: oil in 2001/02 which had been hammered earlier by the sequence of developing countries crisis in late 1990s).

image006_07.gif The behavior of interest rates can also be separated similarly in two main cases. In the recessions/decelerations of the mid 1970s and early 1980s, inflation was an issue (see previous Chart) and there was a tightening of monetary policy (more in the 1980s than in the 1970s). During the 1990s and 2000s events, on the other hand, where basically an overinvestment cycle was unwinding (first housing, then technology), interest rates were cut. image008_05.gif Finally, changes in the multilateral US REER (calculated by the Fed) are shown in the next Chart. The US dollar was depreciating in the 1980s, about even in the 1990s, and appreciating in the 2000s. The US external deficit was closed during the recessions of early 1980s and early 1990s (through a mix of recession and devaluation, at least in the 1980s), but it expanded even further through the early 2000s recession and afterwards (due to the mild nature of that US recession and the US dollar appreciation). Another development related to the US dollar was that the appreciation of the 2000s contributed to the sharp decline in commodity prices (measured in US dollars).

image010_04.gif The problem to characterize the coming world recession is that, of course, we have now both inflationary pressures (which requires monetary tightening, as in 1970s and 1980s), and the unwinding of an investment cycle, not only in the US (which requires monetary easing, as in 1990s and 2000s, which is reinforced by the fragility of the banking/financial system in the US and other countries). But we have the Fed going one way and the ECB going in the opposite direction (it does not help either that good, old Alan keeps on acting as if he were one of those retired NFL coaches and players that comment the playoffs from the TV booth, second guessing the guys on the field who are actually playing the game).

If a recession hits the US can the currently fast growing developing countries pull the world along? The next Chart shows the proportion of world GDP of developing countries (at market rates) over the last decades. After the crises of the 1980s they recovered the share of the 1960s and 1970s of about 25% of the world economy. The bad news are that they are still small in the world economy to be much of an economic locomotive; the only partial hope is that in the early 1960s and late 1970s, when they had about the same share and were growing at somewhat similar rates as now, the world decoupled from the US. But overall it seems that Nouriel will be right: no decoupling.


Overall, the world lacks an institutional mechanism to have a cooperative adjustment and burden-sharing, and we all certainly are, and will be, worse off because of that.

5 Responses to "Recessions: Past and Future"

  1. Vitoria   January 24, 2008 at 6:14 pm

    Eugenio, 1)Don’t you think that ‘decoupling’ is possible if the recession is not severe in the US? 2) Which countries/regions will be more affected by the US hard landing?3) Even assuming that China will grow 10% in 2008 the whole will be in a recession?

  2. Lance Smith   January 24, 2008 at 6:16 pm

    Do you think that Latin America will be better off now than in the 1990s or not? The ‘good luck’ idea claims that growth in the region was mainly due to high commodity prices. Is it the time to test this theory?Thanks

  3. Eugenio Diaz Bonilla   January 28, 2008 at 7:09 pm

    Thanks Vitoria and Lance for your comments. I am using your comments to answer them:VITORIA1)Don’t you think that ‘decoupling’ is possible if the recession is not severe in the US? 2) Which countries/regions will be more affected by the US hard landing?EDBIf it is no severe, of course the impact on LAC will be less. Besides its severity, however defined, the other issue is the “composition” of the slowdown/recession. We need to look at growth of US demand (not US growth in general; US exports may be growing, but that, at least on impact, will reduce growth elsewhere), commodity prices (differentiating agricultural products, metals and energy, that as I argued before, have behaved differently during the current cycle), evolution of US dollar (which affects commodity prices) and risk aversion and pricing. The form the slowdown/recession takes and its depth will affect the possibility of decoupling and what countries/regions may be more affected. VITORIA3) Even assuming that China will grow 10% in 2008 the whole will be in a recession?EDBThe world has not had negative growth during the 4 “recessions” I mentioned in the blog. They were significant slowdowns with an important percentage of countries showing negative growth, but never in the aggregate. It came close in the early 1980s, when about 55% of the developing countries had negative growth rates, the largest percentage of in recession since the 1960s, but did not turn negative for the world as a whole. LANCEDo you think that Latin America will be better off now than in the 1990s or not? The ‘good luck’ idea claims that growth in the region was mainly due to high commodity prices. Is it the time to test this theory?EDBEconomic outcomes in developing countries are always a combination of external and internal conditions. As I argued in another blog, I do not believe that properly measured, differentiating across types of commodities and using real prices, the current conditions are so much better from previous world business cycles in terms of growth and commodity prices (with differences between agricultural prices and metals/energy). At the same time, governments followed, in general, better fiscal, monetary, debt and exchange rate policies. From that perspective, I think LAC is in better shape now than in the 1990s. But, if we have international conditions worse than in the 1990s (such as those prevailing in the 1980s for instance), the economic performance during those bad times may be disappointing.

  4. Anonymous   November 14, 2008 at 10:20 am

    in my opinion the terror n severe effect of global recession will be over maximum within six months.

  5. Anonymous   March 4, 2009 at 4:47 pm

    How do you think a recession effects the demand for life and health insurance and pension schemes?