History lessons show recession warning lights on amber

Abstract

▀ Global recessions are unusual events and the current expansion has not been excessively long. But some features of the latter stages of past expansions, such as a period of low macro volatility, scope for policy mistakes and debt vulnerabilities, are present or have risen. This does not mean the expansion is on its last legs, but the risks of recession or big slowdown have grown. ▀ Since 1960, there have been 4 global recessions (defined as a fall in per capita global GDP). Global recessions are associated with large shocks that hit several economies at once. Recent recessions have been associated with one or more of the following: economic overheating, policy errors, external inflation shocks or a financial crisis. ▀ It is easy to argue that policymakers learn from their mistakes and that recessions due to policy errors are now less likely. But some past mistakes reflected inaccurate real‐time data or incomplete information – a problem which still exists. Policymakers must also grapple with, among other things, uncertainty about the amount of spare capacity in many economies, the effects of withdrawing unconventional policy and swelling populism; these factors imply ample scope for future policy mistakes. ▀ A rise in the volatility of GDP from a low base, which reveals over‐confidence and/or excess leverage, has also been a feature of some past recessions. Economic volatility is currently low, though this has not stopped the G7 private sector deleveraging over the past decade. But debt remains high and credit risks in EM have grown. There is also less scope for governments to act as the spender of last resort than in the past. ▀ Oil price surges have also occurred either before, or in the early stages of, past global recessions. Declining oil intensity and anchored inflation expectations mean that oil shocks are less of a worry than a decade ago, but another shock could add to policy uncertainty and volatility, making the global economy vulnerable to other shocks.