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A Global Economy Without a Cushion

From 1990 to 2008, annual growth in world trade was fully 82% faster than world GDP growth. Now, however, reflecting the unusually sharp post-crisis slowdown in global trade growth, this cushion has shrunk dramatically, to just 13% over the 2010-19 period, leaving the world economy more vulnerable to all-too-frequent shocks.

NEW HAVEN – With the benefit of full-year data, only now are we becoming aware of the danger the global economy narrowly avoided in 2019. According to the International Monetary Fund’s latest estimates, world GDP grew by just 2.9% last year – the weakest performance since the outright contraction in the depths of the global financial crisis in 2009 and far short of the 3.8% pace of post-crisis recovery over the 2010-18 period.

On the surface, 2.9% global growth doesn’t appear too shabby. But 40 years of perspective says otherwise. Since 1980, trend world GDP growth has averaged 3.5%. For any economy, including the world as a whole, the key to assessing growth implications can be found in deviations from the trend – a proxy for the so-called output gap. Last year’s shortfall from trend (0.6 percentage points) brought growth uncomfortably close to the widely accepted global recession threshold of approximately 2.5%.

Unlike individual economies, which normally contract in an outright recession, that is rarely the case for the world as a whole. We know from the IMF’s extensive coverage of the world economy, which consists of a broad cross-section of some 194 countries, that in a global recession about half of the world’s economies are typically contracting, while the other half are still expanding – albeit at a subdued pace. The global recession of a decade ago was a notable exception: by early 2009, fully three-quarters of the world’s economies were actually shrinking. That tipped the scales to a rare outright contraction in world GDP, the first such downturn in the overall global economy since the 1930s.

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