4 assessing global weakness the great recession

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with substantially diverse types of activity dynamics to provide a robust tracking of its strength. 4 Assessing Global Weakness The Great Recession carried out severe and long-lasting negative consequences for world economy. Recently, the IMF has called the attention for synchronized global slowdown in eco- nomic activity since many of the largest economies are exhibiting decelerations in their output growth pace ( IMF , 2019 ) and different institutions consider that the coronavirus crisis has put the economy at the verge of a recession. Therefore, inferring the state of the world economy on a timely basis is of great importance. In a recent study, Ferrara and Marsilli ( 2018 ) propose a framework to produce short-term forecasts of the global economic growth by also using factor models, which are fitted to economic indicators from different advanced and emerging economies. Although, the authors rely on a linear approach, since they only focus on nowcasting, and not on inferring the state of the global economy. The framework proposed in this paper has been shown to provide accurate and timely assess- ment about the weakness of the economic activity in some of the largest advanced and emerging economies. In this section, we propose a simple way to combine all those assessments into a single index that proxies the weakness of the world economy and that can be updatable in real- time. The purpose of the proposed index is threefold; (i) measuring the weakness of the world economy, (ii) identifying the main underlying sources of global weakness, and (iii) providing risk assessments of global downturns associated to different intensities. 4.1 Dynamics and Sources of Weakness To provide a comprehensive view of the evolving heterogeneity of the economic weakness across different regions, the information on their corresponding probabilities of low activity are plotted in world maps for selected periods. Chart A of Figure 3 shows the global situation for 2008:11, around the middle of the last global recession. As expected, all the regions under con- sideration reported a probability of low activity close to one, exhibiting a high synchronization in a ‘bad’ state. Instead, Chart B plots the global situation for 2010:01, the beginning of the year with the strongest annual world GDP growth since the Great Recession (5.4 percent). This ECB Working Paper Series No 2381 / March 2020 17
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is also a very homogeneous period, however, in this case all the regions reported a probability of low activity close to zero, exhibiting a high synchronization in a ‘good’ state. However, not all time periods are accompanied by such a high degree of synchronicity. In general, there is substantial heterogeneity regarding the state of the economy across regions. An example of that is shown in Chart C, which plots the situation for the last period in our sample, 2020:02. Notice that some regions, such as the Euro Area, currently show a position substantially weaker than others that face a stronger activity. However, the most striking feature of this map is the high weakness of the Chinese economy, induced by the coronavirus crisis. An advantage of this map
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  • Fall '19
  • Economics, Recession, Late-2000s recession, GWI

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