Deconstructing global economic stagnation

An economic stagnation is defined as an economy with persistently low economic growth – typically lower than 2%. They are generally characterised by a significant slowdown in industrial production and innovation, increased unemployment levels and a drop in earnings and, thus, consumer spending. Over the last 60 years, major economies have only been in stagnation 3% of the time.

Sudden shocks (say a rise in oil prices or fall in demand for key exports) or major events (such as war, famine or pandemic) could spark a stagnation. For a global stagnation to occur, it is likely that two circumstances would need to be in place. Firstly, that several nations are hit by an event so serious it would require coordinated government financial intervention. And secondly, that this happens at a time when government finances have already been drastically depleted.

It’s easy to feel a sense of futility as a stagnation looms on the horizon with seemingly very little to stop it once the wheels are in motion. Worse still, if stagnation persists or the lack of growth continues to chart downwards, it can tip into recession. Analysing historic economic cycles shows that a recession is 30% more likely after a period of stagnation, involving even deeper unemployment, an increase in personal debt as salaries don’t match expenditure, and falling investment and GDP which, without stimulus measures, could descend into a full economic crisis.

While prospects vary by country, in January 2024, 56% of Chief Economists surveyed by the World Economic Forum (WEF) expected the global economy to weaken in 2024 as governments and central banks battle with inflation and geoeconomic fragmentation^[1]. Similarly, the International Monetary Fund (IMF)’s World Economic Outlook forecasted global growth slowing to 2.9% in 2024, down from 3% in 2023 and well below the historical average of 3.8% (between 2000-2019) ^[2].

^{[1] https://www.weforum.org/publications/chief-economists-outlook-january-2024/}   

^{[2] https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023}  

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To guard against potential periods of economic downturn on the horizon, it is vital to recognise the signs and be ready to act. The following timeline illustrates how governments, businesses and communities could find themselves impacted by an economic slowdown that cascades globally:

A weak economy 

An event of national or global significance puts a huge strain on national finances with bail-out funds exhausted and interest rates at an all-time low. The fall-out from the event weakens the economy and means consumers start to spend conservatively.

Timeframe: Months/Years

Company collapse

A company that contributes significantly to the national economy - through both its financial success and as an employer and supplier - loses a major contract, causing significant and unforeseen financial shock. This rocks confidence both in the viability of the company and the sector it operates in.

Timeframe: Weeks/Months

Shockwaves

Financial markets begin to respond to the uncertainty – pulling financing or subjecting investments to much greater scrutiny. The sector sees a rapid drop in investment and confidence, which then spreads to other sectors and countries, turning into a regional crisis.

Timeframe: Weeks

Reaction

With losses building across international markets, investors switch strategies, sparking a financial collapse which spreads across the global banking system. Major industries that depend on this finance shut down and growth slows worldwide. Some banks go into arrears.

Timeframe: Weeks

Escalation

The public act to protect their interests. Consumers look to secure their savings, and many cut back on spending to limit their debt in the event of potential future job losses. These become inevitable however as businesses go bust, taking auxiliary services with them.

Timeframe: Weeks

Slowdown and halt

With the global economy in crisis mode and available finance low to non-existent, economic growth slows or even reverses, and low interest rates and austerity measures become entrenched.

Timeframe: Months/Years

The severity of events 

Our scenario explores three potential levels of severity, listed in the table below. Each varies depending on the level of economic fragility already experienced, the size and nature of the event that initiated stagnation and the number and economic condition of countries caught up in the event.

Historical references

The scenario has been based on an historical analysis of economic events. Historic examples of significant regional or global downturns include:

• 1970s-80s, ‘Eurosclerosis’: A period of stagnation in Western Europe thought to have been brought about by over-regulation by governments including rigid labour markets and industry protection. This resulted in periods of high unemployment and poor job creation.
• 1973, “Stagflation”: A phenomena present in many major markets at the time, though chiefly felt in the UK and the USA, it is a period characterised by persistent high inflation, high unemployment and stagnant demand in the economy.
• 2008-09 “Global Financial Crisis”: Initiated by the sudden collapse of a major financial institution in the US, financial contagion quickly spread around the global economy and led to a loss of more than $2 trillion in global economic growth between the second quarter of 2008 and first quarter of 2009[1]. The unravelling crisis required billions of dollars of government support and led to a decade of austerity in many countries. It has been said that the recovery from the financial crisis has been so slow that the period following it in many ways represents a prolonged stagnation.
• Japan’s “Lost Decades”: Loose monetary policy in the late 1980s’ resulted in soaring equity markets and real estate valuations. Rising interest rates saw the bubble burst, a stock market crash and the start of the debt crisis. Japan has suffered from economic stagnation since the end of its pre 1990s boom. Japan continues to suffer poor economic performance while economists still debate the underlying cause.

Scenario effects

Under the scenario, central banks and governments could be extremely limited in the support they can provide due to the pre-existing state of their national finances. This could result in austerity measures becoming entrenched in order to stave off recessionary impacts.

The effect of the scenario on inflation could vary depending on the preceding economic climate and trigger events. For example a supply-side shock such as a rapid increase in food or energy prices would increase production costs in affected sectors, potentially leading to increased cost of goods, job losses, and depressed economic growth.

While periods of stagnation do not always result in a recession, they are still generally characterised by a significant slowdown in industrial production and innovation, a drop in earnings and consumer spending, and increased unemployment levels. The financial industry could be significantly impacted from the lack of economic momentum, alongside retail, materials, and energy markets exposed to cash flow challenges due to slowing revenues, financing issues or supply chain disruptions following the failure of suppliers.