Impact of Recessions on Consumption, Production, and Trade

Impact of Recessions on Consumption, Production, and Trade

Source: Adapted from Notteboom, T., A. Pallis and J-P Rodrigue (2021) “Disruptions and Resilience in Global Container Shipping and Ports: The COVID-19 Pandemic vs the 2008-2009 Financial Crisis”, Maritime Economics and Logistics, https://doi.org/10.1057/s41278-020-00180-5

Recessions can have a severity ranging from light, where economic decline (e.g. GDP) may last a short period of time (a few months), to severe, where economic decline is steep and may last several years (commonly a depression). This severity will imply various levels of decline in consumption, trade, and freight rates:

  • Consumption (demand). The level of impact on consumption is related to the value of goods. Basic goods (also labeled essential goods such as food) and luxury goods tend to be the most resilient, so their respective supply chains are impacted marginally by recessions. However, it is for durable goods (e.g. cars, appliances), discretionary goods (e.g. electronics), and capital equipment (e.g. ships and port infrastructure) that recessionary forces can have significant impacts in lowering their respective demand. During recessions, consumers lose a significant share of their discretionary spending capacity, implying the postponement in spending, particularly for durable goods. Corporations, seeing a decline in the demand, reduce their spending on capital equipment accordingly. Further, to reduce risks, they also reduce their inventory levels.
  • Trade and production (supply). Changes in production, transportation, and trade (supply) are taking place along a sequence of events. The first of these events concerns future indexes such as stock market valuations, commodity prices, and freight rates, indicators that quickly react to changing market conditions. Interpreting these indicators (repricing of inputs and assets and the anticipated drop in demand), manufacturers are incited to curtail their production and the related demand for parts and raw materials. These adjustments occur differently in different sectors, depending on whether they supply discretionary goods or capital equipment. Afterward, container volumes and global trade confirm the subsequent collapse of the material economy with a substantial decline in merchandise trade.

The causes of recessions vary but are usually associated with economic cycles of malinvestments (such as the financial crisis of 2008-2010), asset inflation (financial bubbles), or the outcome of a disruptive event such as a pandemic (e.g. COVID-19). An unfolding sequence implies that future (forward-looking) indexes collapse first. Afterward, container volumes and global trade confirm the material economy’s subsequent collapse with the substantial decline of merchandise trade. All of this indicates a global economy that is increasingly integrated as sequences affect several markets at once.