What to Know About Recessions, as Virus Threatens One

The rapidly spreading coronavirus threatens the health of world economies, too. The odds of a U.S. recession within the next year are at the highest level since the end of the last downturn in 2009. Germany, the economic engine of Europe, and the U.K. were both on the precipice of a downturn even before the virus struck, with 0% growth in the fourth quarter of 2019. China, the world’s second-largest economy and the place where the pandemic originated, is likely to have contracted in the first quarter for the first time in decades amid production halts and quarantine measures, ultimately weighing on the global economy.

1. What is a recession?

The dictionary definition is a period when economic output contracts for two straight quarters. The National Bureau of Economic Research’s Business Cycle Dating Committee, which makes the official U.S. determination, uses a different approach, considering factors such as inflation-adjusted GDP, employment, industrial production and income. The International Monetary Fund, in designating recessions on a global scale, looks at several indicators including a decline in inflation-adjusted per-capita GDP that’s backed up by weakness in industrial production, trade, capital flows, oil consumption and unemployment.

2. Is a recession inevitable?

Eventually, yes — recessions follow expansions, and vice versa. The real questions are when the recession hits, how long it lasts and how severe it is.

3. What triggers recessions?

The so-called Great Moderation, a roughly 25-year period of relative stability around the globe beginning in the mid-1980s, spawned the view that modern-day recessions don’t happen without an unexpected economic shock like a sharp increase in oil prices — a cause of U.S. downturns of the 1970s and 1980s — or accumulated imbalances like the massive buildup in the subprime-lending industry that preceded the Great Recession of 2007-2009. A global pandemic that stifles travel, shutters businesses, cancels sports events and sends stock markets into freefall certainly has the potential to be that kind of economic shock.

4. Will the coronavirus trigger a global recession?

Economists see a rising risk of a worldwide recession, with the debate shifting to how long and deep the slump will be. The economies of Japan, Germany, France and Italy were already shrinking or stalled before the virus outbreak, and as of March, China was on course for what could be its first quarterly contraction in decades. As the virus spreads, the threat grows of a phenomenon economists refer to as a feedback loop — a vicious cycle in which a country that starts to recover domestically then suffers diminished demand from abroad as other nations succumb, prolonging the downturn. The International Monetary Fund has counted only four global recessions tracing back to 1960, compared to the 11 counted in the U.S. since World War II by NBER.

5. Will it trigger a U.S. recession?

As of March 10, a Bloomberg Economics model suggested a 53% chance that the almost-11-year U.S. expansion will end within a year, with some economists expecting the economy to contract in the second quarter, which ends on June 30. The port of Los Angeles, one of the nation’s largest, saw a 23% decline in shipments in February. Uncertain times may lead to widespread hiring freezes and job losses — especially among those that work in transportation or the hospitality industry. All of that means the main engine of the U.S. economy, consumer spending, may crumble. Not everyone agrees. The U.S. Treasury secretary, Steven Mnuchin, said on March 15 that he expects the coronavirus pandemic will slow growth but not tip the U.S. economy into recession.

6. When will we know?

Even if we’re in a recession right now, an official declaration may be months away. NBER typically takes about a year to make the call on when a U.S. expansion ends and a recession begins. A recession could be obvious in the data and widely accepted as reality before any declaration, though.

7. What makes a recession mild or severe?

Its duration, for one thing. The 2007-2009 recession lasted 18 months, making it the longest since the Great Depression. The recession of 1980, by contrast, lasted just six months. Other measures of a recession’s severity are how much the economy contracts and how bad unemployment gets. The worst recessions tend to be those paired with some sort of collapse in the financial system, as happened in the U.S. in 1929 and 2008. Another driver of a recession’s severity is how broadly the economy suffers a contraction. The relatively short and mild 2001 recession, for instance, was largely confined to the tech sector, with modest fallout to the rest of the economy.

8. Does a long expansion portend a severe recession?

Federal Reserve Bank of Cleveland researchers found little evidence that duration of an expansion influences how bad the subsequent recession. They did, however, find reason to think severe recessions (like the one that ended in 2009) spawn strong expansions.

9. So will the next recession be a bad one?

It’s impossible to know. On the positive side, should the coronavirus lead to a recession, American households are in a good spot. They’re carrying less debt and an increase in mortgage refinancing has put more cash in consumers’ pockets. Additionally, unlike the last U.S. recession, which stemmed from a systemic imbalance, the coronavirus is an economic shock. However, the magnitude of that shock is unknown. It could lead to no recession, a short and shallow recession or something much darker.

10. Can anything be done now to ease the next recession?

Central banks are already racing to stop a recession either by cutting interest rates, intervening in markets, buying corporate assets or helping banks to keep lending to businesses. The People’s Bank of China has injected billions into the economy, and the Bank of Japan boosted asset purchases to stabilize markets. The U.S. Federal Reserve cut its benchmark interest rate to near zero. But this time the onus may be on governments in part because central banks have used up a lot of their interest-rate ammunition over the last decade. “The response should be fiscal, first and foremost,” European Central Bank President Christine Lagarde said.

The Reference Shelf

  • A QuickTake explainer on what central banks can and can’t do about the virus slowdown.
  • Bloomberg’s U.S. recession tracker.
  • Why a European recession is seen as inevitable.
  • The National Bureau of Economic Research on the dating of U.S. business cycle expansions and contractions.
  • The American Institute for Economic Research examined “the changing nature of recessions.”
  • Bloomberg Opinion columnist Tyler Cowen on why it’s so hard to design an economic response to the virus.

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