What Happens to Real Effective Exchange Rate When GDP Contracts?
What happens to markets, policy, and the economy when real GDP contracts? Historical playbook for recession quarters, with current data.
How Real Effective Exchange Rate Responds
Scenario Background
Real GDP contraction (negative quarter-over-quarter annualized growth) is the most widely-tracked signal that economic activity is shrinking. While two consecutive quarters of contraction is the colloquial "technical recession" definition, the NBER Business Cycle Dating Committee uses a broader framework incorporating income, employment, and industrial production.
Read full scenario analysis →Historical Context
Every NBER-dated recession since 1947 has featured at least one contracting quarter. The 2008-2009 Great Recession saw four consecutive contractions totaling roughly -4% peak-to-trough. The 2020 COVID recession produced a single catastrophic Q2 contraction of -31% annualized, followed by a record Q3 rebound. The 2022 "technical recession" (Q1 and Q2 negative) was eventually not classified as an NBER recession because income, employment, and industrial production stayed firm. The 1973-1975 recess...
What to Watch For
- •Two consecutive negative quarters confirming recession dynamics
- •Unemployment rising 0.5+ percentage points from its cycle low
- •ISM Manufacturing below 45 confirming factory recession
- •Yield curve un-inverting as Fed pivots to cuts
- •Leading Economic Index six-month change exceeding negative 2%
Other Assets When GDP Contracts
Other Scenarios Affecting Real Effective Exchange Rate
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