A global recession is a period of economic decline that affects many interconnected economies. A recession occurs when consumer spending and investment decline, leading to a decrease in economic activity. When the economic downturn is severe enough, it can lead to a severe loss of employment, higher unemployment rates and lower output (GDP). The definition of a recession varies across countries, but generally GDP must drop for a certain length of time for a country to experience one. A global recession is the most severe form of economic downturn and is often the result of financial or market disruptions, such as stock market crashes or mortgage defaults.
In the worst global recessions, unemployment can reach double digits and output declines by several percentage points. These periods of economic contraction can last for years and even decades, which can create lasting damage to the economy.
Economic factors that can cause a global recession include monetary policy mistakes, wars and pandemics, rapid credit expansion and economic bubbles. Monetary policy mistakes can occur when central banks artificially keep interest rates low, which encourages people and businesses to borrow too much. These excess borrowings can be risky investments, and when they start to fail, the resulting collapse in investment can exacerbate economic downturns.
Wars and pandemics can also create a climate of uncertainty. When consumers and businesses don’t know what the short or long term trends will be, they tend to be less likely to spend money and invest in new projects.