Out of the Ballpark

• Author: M. Ayhan Kose; Prakash Loungani; Marco E. Terrones
• Position: Senior Economist; Advisor; Deputy Division Chief in the IMF’s Research Department
• Pages: 25-28

Page 25

By any measure, the ongoing global recession is the deepest and the most synchronized of the postwar period

THE U.S. baseball season culminates in a championship called the World Series, reflecting a time when the United States was the world when it came to baseball. Likewise, in the 1960s, a recession in the United States could just as well have been called a global recession. The United States accounted for a large share of world output, and cyclical activity in much of the rest of the world was dependent on U.S. conditions.

What constitutes a global recession today? Although advanced economies like the United States used to account for roughly 75 percent of world output in the 1960s, their share is now only about 55 percent. As a result, the coincidence between business cycles in advanced economies and global business cycles can no longer be taken for granted. At the same time, however, the countries of the world are more integrated today through trade and financial flows than they were in the 1960s. This creates greater potential for spillover and contagion effects, increasing the odds of synchronous movements and a global business cycle.

Surprisingly, there is no commonly accepted definition of a global recession. Under the definition we propose here—a contraction in world real per capita gross domestic product (GDP) accompanied by a broad decline in various other measures of global economic activity—there have been four global recessions in the post–World War II period: 1975, 1982, 1991, and 2009. The current recession is easily the most severe ofPage 26 the four: output—depending on the measure—is projected to fall between four and six times as much as it did on average in the three other global recessions, and unemployment is likely to increase twice as much. The collapse in world trade this year dwarfs that in past global recessions. And no previous global recession has had so many countries in a state of recession simultaneously. Put simply, in baseball parlance, this global recession is out of the ballpark.

“If total, rather than per capita, real GDP is used, 2009 would be the only year since 1960 in which there has been a contraction in the global economy.”

Let’s date

In deciding when a particular country is in recession, economists often use statistical procedures to date the peaks and troughs of a key indicator of economic activity, such as the country’s real GDP. Applying the same idea at the global level since 1960, we use annual data on world real per capita GDP, using purchasing-power-parity (PPP) weights, from 1960 to 2010 (see Box 1). The estimates for 2009–10 are based on the latest IMF growth forecasts (International Monetary Fund, 2009). A per capita measure is used to account for the vast differences in population growth rates across countries. Emerging and developing economies tend to have faster GDP growth than industrialized economies, but they also have higher population growth.

Box 1

Valuing world GDP: PPP versus market rates

Countries report economic data in their own currencies. To make a cross-country comparison of those statistics (for example, GDP), the data must be converted into a common currency. Most economists do the conversion using either market exchange rates, usually the U.S. dollar rate, or purchasing-power-parity (PPP) exchange rates. The market approach converts currencies into the exchange rate prevailing in the open market. PPP calculates the rate at which the currency of one country would have to be converted into another to buy the same assortment of goods and services. PPP, which is harder to calculate, reflects the fact that goods and services that are not traded internationally tend to be cheaper in low-income countries than in higher-income...