Gauging Recession Risks

Defining a recession and determining in real time whether or not an economy is experiencing in recession remains a hotly debated topic. Less contentious is the significance to the world economy of the US entering recession. Although China's explosive growth in recent decades has underpinned a shift in the balance of economic power and influence, the health of the US economy and cost of dollars remain key drivers of the global economic and financial cycles. With that in mind, we have taken a look at the likelihood of recession for the major developed and emerging economies when the US has experienced an economic contraction.

• To get a preliminary sense of recession coincidence, Fig 1 below indicates when an economy experiences negative economic growth in a particular quarter, with the mapping highlighting both the frequency of negative growth quarters and coincidences of recessions across economies. The global financial crisis and pandemic stand out as key triggers of near universal recessions across developed and emerging markets, while there are also a clear cluster of negative growth quarters for developed markets in the early 1980s and early 1990s during periods of aggressive monetary policy tightening.
• Specific recession definitions vary from the rule of thumb 'two quarters of negative growth' to measures that consider per capita income and more sophisticated dating procedures used by the NIESR and others. For the purpose of this exercise and to aid comparability, we define a recession as being two quarters of negative economic growth.
• Using quarterly data from the OECD for 38 countries (shown in the map below), we find that across all economies the likelihood of any particular quarter being identified as a recessionary quarter (using our definition) is 8% and is similarly 8% for developed economies and 7% for emerging economies.
• However, when the US experiences a recessionary quarter, the likelihood of any other economy also being in recession (using the entire data set) rises to 44% (44% for developed markets and 43% for emerging markets). Finally, given that recessions are not perfectly aligned, we look the frequency of recessions within one year of the US recording a recessionary quarter. On this measure, the likelihood of recession over the subsequent year rises to 60%.