Although global recessions are rare, the recent global financial crisis was a reminder that it is always possible to have a global economic contraction. A downturn is defined as two consecutive quarters of declining economic activity. While a global downturn may be painful for individuals and businesses, it doesn’t necessarily lead to the same devastating consequences as the Great Depression of 1929.
However, the current global slowdown is a serious concern for many leaders. In fact, a global recession has already started. Whether or not it becomes a global economic downturn depends on the pace at which growth slows and on how much uncertainty there is.
When uncertainty swells, companies become less likely to invest, and consumers spend less. This stalls economic activity and reduces demand for goods and services, which can lead to a slump in productivity and GDP. During a global downturn, the effects may last for months or even years.
The causes of a global downturn can vary from one country to the next, but there are some common factors. A key one is the oversupply of goods, which can occur when demand peaks and then starts to decline. When this happens, companies can find themselves producing more than they can sell, leading to layoffs and a slowdown in business.
A global recession can also be exacerbated by high levels of debt and tighter global monetary conditions. This can have knock-on effects in the form of lower growth in high-income economies, higher borrowing costs for low-income countries, and reduced investment flows to developing markets.