2 min read.Updated: 17 Mar 2020, 11:54 PM ISTBloomberg
The rapidly spreading coronavirus threatens world economies. The odds of a US recession within the next year are the highest since the end of the last downturn in 2009. China is likely to have contracted in the first quarter.
What’s a recession and what determines it?
The dictionary definition of recession refers to a situation when economic output contracts for two straight quarters. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) that makes the US determination uses a different approach, considering factors such as inflation-adjusted GDP, employment, industrial production and income. The International Monetary Fund looks at several indicators including a decline in inflation-adjusted per-capita GDP backed up by weakness in industrial production, trade, capital flows, oil consumption and unemployment.
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 US downturns of the 1970s and 1980s—or accumulated imbalances like the massive build-up 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 free fall has the potential to be that kind of economic shock.
When will we know and is it a fait accompli?
Even if the US was in a recession, an official declaration may be months away. NBER takes about a year to make the call on when a US expansion ends and a recession starts. A declaration may be months away. A recession could be obvious in the data and accepted as reality before any declaration. The questions are when the recession hits, how long it lasts and how severe it is.
Economists see a rising risk of a global recession, with the debate shifting to how long and deep it will be. The economies of Japan, Germany, France and Italy were shrinking even before the virus outbreak. Growth in India was also falling. China was on course for its first quarterly contraction in decades. As the virus spreads, the threat grows of a phenomenon called a feedback loop, in which a country that starts to recover then suffers diminished demand from abroad as other nations succumb, prolonging the downturn.
What could be done if a recession happens?
Central banks are racing to stop a recession either by cutting interest rates, intervening in markets, buying corporate assets or helping banks 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 US Federal Reserve on Sunday cut its benchmark interest rate to near zero. This time the onus may be on governments as central banks have used up a lot of their interest-rate ammunition over the last decade.
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