was mixed, implying that these episodes did not display the features of a global recession. For example, the main activity indicators did not suggest a broad-based weakness in the global economy in 1998. In 2001, although industrial production fell and the rate of global unemployment picked up slightly, both global trade flows and oil consumption increased. Equity prices declined substantially in 2001, and prices of commodities fell significantly in both episodes. During the global downturn of 2012, while some activity indicators did not show much weakness, global capital flows slowed, equity prices collapsed, and inflation declined.

The U.S. economy played a key role in global recessions and downturns. Although the four global recessions between 1975 and 2009 coincided with recessions in the United States, not every U.S. recession was associated with a global recession, since the United States experienced six additional recessions during 1950-2019, including recessions in 1958 and 2001 that coincided with global downturns. But it grew strongly during the 1998 global downturn and, to a lesser extent, during the 2012 global downturn.

# 3. Before the recession: A seemingly golden era

During 2001-07, the world economy appeared to be enjoying a golden era of growth. During this period, average output growth reached its highest pace since the early 1970s. Not only was growth buoyant, but inflation appeared to have been tamed in what was termed “the Great Moderation” (Figure 3). EMDEs were expanding rapidly as global supply chains and financial institutions expanded around the world.

A confluence of favorable circumstances fueled global trade and commodity demand. Advanced economies enjoyed a cyclical upturn after the global downturn of 2001, with output growth strengthening from 1.5 percent in 2001 to 2.6 percent in 2007. China was also growing rapidly as it integrated into global trade networks and supply chains, with its output almost doubling from the time of its World Trade Organization (WTO) accession in 2001 until 2007 (Koh and Yu 2019a).

Prolonged accommodative monetary policy in major advanced economies and rapidly growing savings in some large EMDEs helped maintain low global real interest rates and encouraged capital flows to EMDEs. Partly as a result of search for yield, gross capital inflows to EMDEs excluding foreign direct investment (FDI) swelled nearly seven-fold (from 1 percent of GDP in 2001 to 6.5 percent of GDP in 2007). FDI flows to these economies also expanded rapidly, almost doubling relative to GDP during the same period, and remittance flows to these economies rose by one-and-a-half times.

This benign external environment supported EMDE financial markets and domestic demand. EMDE equity market valuations, as measured by the MSCI index, more than quadrupled during 2002-07; EMDE bond spreads, as captured by the emerging market bond index (EMBI), and sovereign credit default swap (CDS) spreads in major EMDEs more than halved between January 2005 and June 2007. Benign financing conditions supported strong investment growth, and private consumption was supported by strong employment and income growth. Except in Europe and Central Asia (ECA), EMDE banks