Despite the COVID-19 pandemic, rising inflation and aggressive policy rate hikes by central banks, many analysts are reluctant to call a global recession just yet. This consensus view has weakened recently as the US-China trade spat has defused and the Fed’s policy outlook seems less aggressive. However, the risk of a recession remains significant.
The most common definition of a recession is two consecutive quarters of slowing GDP growth. During most recessions, growth in industrial production and investment fall sharply while consumer demand for goods and services slows. Typically, the drop in demand leads to higher unemployment and lower average earnings growth.
As a result, the number of borrowers unable to repay their debts rises. This is a key reason why the last global recession began in the United States with a surge in mortgage defaults. A recession usually lasts about a year and is often accompanied by falling house prices, stock market volatility, and currency turmoil.
Dense global supply chains magnify the effects of economic shocks, which can ripple through economies. As companies lose access to export markets, they will pause investments and reduce spending. Unpaid invoices will bloat accounts receivable, and companies may be forced to lay off employees. Ultimately, the lack of demand for products and services can lead to bankruptcy as businesses fail to meet their debt service obligations. This is what happened in the Great Recession of 2008-2009. It was triggered by the collapse of the housing market in the US and a jump in the share of mortgages that were at high risk of default.
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