Dating the ‘world business cycle’

Abstract

By mid-2008 the world was witnessing the unfolding of a relatively rare macroeconomic phenomenon, namely, the onset of what one might call a synchronized international – or ‘world’ – recession. But what exactly is a ‘synchronized world recession’? This article proposes a practical definition of a ‘synchronized world recession’ and a putative set of historical post-WWII dates for a ‘world business cycle chronology’. Further, using a constructed ‘world coincident index of economic indicators’ and an associated ‘world leading index of economic indicators’, this article demonstrates that evidence was available from early in the second half of 2007 that the world was indeed sliding inexorably towards its fourth synchronized world recession since WWII (although, interestingly, already its second of the twenty-first century!).

Keywords:

• world business cycle
• synchronized international recession
• business cycle dating
• forecasting business cycles

JEL Classification::

• E32
• E37

Notes

¹ The indicators comprise output, sales, employment and income measures. A turning point is a date at which an economic indicator changes from a cyclical upswing into a downswing (a peak) or from a cyclical downswing into an upswing (a trough).

² The full list of countries: Australia, Austria, Canada, China, France, Germany, India, Italy, Japan, Mexico, New Zealand, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, the UK and the US.

³ A coincident index is a composite of component coincident indicators – each of which is a partial measure of the state of the business cycle – and provides one summary measure of the current state of the business cycle in any given measurement period. A leading index is similarly a composite of component leading economic indicators – movements in each of which lead the business cycle – and provides in any given measurement period one summary indicator of the likely future state of the business cycle.

⁴ GDP data expressed in constant price terms and expressed in USD. The emerging twenty-first century powerhouse of China was, by 2009, almost as large as Japan, while the other surging twenty-first century economy, India, was, in 2009, still only about a third of the size of China.

⁵ Apart from this issue of the use of GDP as its sole measure of the occurrence of a recession, the lack of coverage of any of the increasingly important emerging economies in the IMF study is also of significant concern, especially as we proceed further into the twenty-first century.

⁶ In more recent times the IMF has argued that a useful definition of a ‘world recession’ based on world GDP (in PPP terms) might be based on ‘world GDP’ growing by less than 3%. However, this produces far too many ‘world recessions’ over the last 30 years to be very credible. Furthermore, requiring an absolute decline in annual ‘world GDP’ would also fail to produce any ‘world recessions’ since the Great Depression of 1930 to 1933 (refer to The Economist, 6 November 2008).

⁷ We prefer using the Bry–Boschan procedure to the ‘two consecutive quarterly declines in GDP’ rule since the latter can and often does lead to anomalous conclusions where, say, three or even four quite large quarterly contractions may be interspersed with very small positive growth quarters. To infer that a national – or the world – economy was not in a recession simply because of the absence of two consecutive quarters of negative growth throughout such a period would be nonsensical.

⁸ The country's historical annual ratios of GDP (PPP) to GDP were calculated and the country's quarterly GDP series was then adjusted by the annual GDP (PPP) to GDP ratio, thus producing an interpolated quarterly GDP (PPP) series for the country which was consistent with the country's annual GDP (PPP) series.

⁹ This six-country index is different from ECRI's pre-existing 19-Country CI, which includes all the economies monitored by ECRI including China.

¹⁰ The weights for versions two and three were fixed weights based on each country's average real GDP and GDP (PPP), respectively, averaged over the 5-year period from 2002 to 2006.

¹¹ The weighting period was from 2002 to 2006. See Data Appendix (a) for complications relating to Chinese industrial production data.

¹² See the Data Appendix (b) for details of issues relating to employment series for China and India.

¹³ Chinese and Indian unemployment series represented only registered unemployment, a very small portion of overall unemployment for these countries. Indian and Chinese unemployment rate series were therefore estimated using an analogous regression approach as was used to estimate an Indian employment series described in the Data Appendix (b).

¹⁴ Part of the Chinese retail sales series also needed to be seasonally adjusted (Data Appendix). Also, there was no retail sales series for India so an analogous regression approach to that used to estimate an Indian employment series, and as described in the Data Appendix (b), was used to obtain an estimated Indian retail sales series.

¹⁵ See the Data Appendix (c) for complications involving Japan, India and China.

¹⁶ Note that we believed it was appropriate to slightly modify the dates selected by the second approach. Specifically, only the second approach identifies two separate recessions in the early 1980s (February to August 1980 and August 1981 to November 1982). This is similar only to the experience of the US economy in the early 1980s – all the other economies considered in this article experienced at most a single recession during that period. Thus, in our judgment, there was only a single ‘synchronized world recession’ in the early 1980s.