When consumer spending slows, the supply of goods and services tends to wane. Companies cut production, and unemployment rises. People stop buying and start saving more, which leads to slower economic growth. Then the debt-to-income ratio for companies and households starts climbing, which may lead to banks becoming reluctant to lend money. The result is a global recession, with the worst effects felt in the most advanced economies.
A recession is usually triggered by an unexpected event that creates uncertainty about the long-term economic outlook. For example, wars and pandemics can make it difficult to predict consumer trends. In addition, when a country’s inflation rate climbs too fast, the government raises interest rates in an attempt to lower it. The higher rates eat away at consumer spending, which is the key driver of economic growth.
Unemployment also increases during a global recession, and that can lead to a chain reaction where more workers lose their jobs, which makes consumers less willing to spend. This reduces the amount of income tax that governments collect, leading to budget shortfalls and a decline in overall spending.
The last global recession began in 2008 and lasted until 2009. That episode was caused by many factors, including a housing bubble, the collapse of the Lehman Brothers bank, and the credit crisis. The ensuing Great Recession had particularly severe impact in North America, Europe, and Japan. However, other nations suffered much milder downturns.