A global recession occurs when the economies of several large countries slow down sharply and/or experience outright contraction. Historically, they have always been preceded by significant weakening in growth in the previous year or years (see the chart below). Consensus forecasts for the world economy over 2022-23 suggest that the risk of a global recession is low, but the track record suggests otherwise.
Most global recessions result from a shock to demand, usually stemming from geopolitical tensions or policy missteps. For example, the 1975 global recession was triggered by the oil shock resulting from the Arab oil embargo and subsequent rise in prices. The 1982 global recession was prompted by the tightening of monetary policies in advanced economies and a debt crisis in Latin America.
Other global recessions result from a financial market meltdown, such as the one that began in 2007. The collapse of Lehman Brothers and the failure or near-collapse of a number of other financial firms triggered a panic in global financial markets, which drove investors to pull funds out of banks and investment funds, causing these institutions to reduce their lending activity. Companies and households also became less willing to spend as their confidence in the financial system deteriorated.
The 2008 global recession was exacerbated by the impact of domestic demand slowdowns in major trading partners. In addition, the rapid increase in US interest rates crowded out capital flows to developing economies as investors redirected funds to assets considered “safer.” The NBER explains that the densest of global supply chains magnify the effects of uncertainty and tighter credit conditions.