The world is staring at depression, though only for a short period
It is official! We are in a global recession.
That the global health crisis has morphed into a global recession was driven home last weekend by the International Monetary Fund Managing Director Kristalina Georgieva. This round would be worse than the previous recession during the financial crisis of 2009, she warned.
A day before Goldman Sachs economists led by Jan Hatzius said the world needed to brace for a global recession of “historic proportions – worse than the deep recessions of early 1980s and the aftermath of the 2008-2009 Global Financial Crisis.” Several other economists and experts pitched in with their own analyses of the depth and spread of the impending recession over the weekend.
A McKinsey Global Institute analysis said the economic impact of virus-suppression efforts could be the biggest in nearly a century. In Europe and the United States, this is likely to lead to a decline in economic activity in a single quarter that proves far greater than the loss of income experienced during the Great Depression.
Depression talk
What is stark in all these commentaries, and perhaps rightly so, is their alarmist tone and tenor. So much so, the conversation is even veering towards predicting a march towards a Global Depression, the reference being the world’s largest economy the US, and the concomitant drag on other economies.
Typically, a recession is when an economy is in contraction for two consecutive quarters. A depression is a prolonged economic recession characterized by widespread job losses and depletion of economic activity resulting in degrowth across sectors and nations. According to the Business Cycle Dating Committee of the US National Bureau of Economic Research there have been 33 recessions since 1854 but only one Depression which lasted the whole of ten years beginning 1929.
Almost 100 years hence the world seems to be staring at yet another situation that has all the makings of a global depression.
According to global ratings agency Morgan Stanley global growth for full-year 2020 will register a decline of 0.6% signaling the weakest peacetime growth since the 1930s. Much of this metric is guided by how economic bellwether, the US behaves. While US GDP grew a moderate 2.1% in the fourth quarter last year, this year it is expected to turn negative up to 6% in Q1 under the impact of COVID-19. Going further in the 2nd quarter, it is predicted to be down by anywhere between 24% and 30% taking the recession well into the next year.
Markets and jobs
Just like in 1929 when a stock market crash triggered the depression, the Dow Jones Industrial Average (DJIA) was hammered down 20% in just 15 days representing the fastest such decline. Earlier last week, on fears of an extended and uncontrolled pandemic, it was further down 35% a far cry from the nearly 30,000 points in mid-February – the highest in its 100-year history.
The other most visible impact of the widespread lockdowns is on livelihoods and sustenance. In the week ending March 21 some 3.3 million people filed for unemployment benefits for the first time reflecting widespread layoffs in the US. Latest estimates put US joblessness in the 2nd quarter at over 32% or 47 million workers. This would be the highest rate since 1948 and even higher than the 25% rate seen during the Great Depression of 1929. And with the US getting into an extended lockdown till end-April, and apparently in no control of the situation, the extent of damage is anybody’s guess.
India saw the highest rate of unemployment since October 2019 at 7.78% in February this year reflecting the impact of an economy growing at its slowest pace in more than six years. Coming on top of this, the true impact of COVID-19 on employment would surface in the coming days, particularly on the micro, small and medium sector which employs nearly 120 million people or nearly 40% of India’s total workforce, and the unorganized sector which has been dealt a death blow.
While, institutions like the IMF reckon an economic rebound could be seen in 2nd half of 2021, and those like UNCTAD feel the impact on Asian economies like India and China would not be as dire as on the Western economies, the drag quotient of the later would nevertheless take its toll.
That perhaps is the reason why analysts are predicting a deep and prolonged recessionary phase ahead pushing the world closer to a depression. Unlike in the previous edition, the next round of depression or great recession will be caused by reasons beyond just the stock market crash.
According to Boston Consulting Group economists Philipp Carlsson-Szlezak, Martin Reeves and Paul Swartz a prolonged COVID-19 could drive up the number of real economy bankruptcies, which will make it even harder for the financial system to manage. A financial crisis would starve the real economy of credit. And even though central banks and exchequers are used to having a policy response to dealing with financial crises, they have no playbook for large scale real economy disruptions, they added in paper. “There is no off-the-shelf cure for liquidity problems of entire real economies.”
Stimulus impact
The key to returning to normalcy would depend on the speed and extent of stimulus packages governments roll out in response. While Donald Trump has announced a $2.5 trillion package to put money into American’s hands, the G20 has pledged $5 trillion to spur the global economy. Likewise many other governments have rolled out their own rescue packages. But the success of this would depend on how long governments are able to keep their powder dry. Many may not have deep pockets to sustain through a prolonged pandemic.
Commenting on the situation, Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business and a former advisor in the Clinton administration allured to the “trifecta of risks – an uncontained pandemic, insufficient economic policy arsenals and geopolitical white swans – will be enough to tip the global economy into persistent depression and meltdown.” Apart from a sustained pandemic, events beyond mere economics like the US elections or the Middle East situation, could nudge the world deeper into a mess.
Unfortunately, however, actions by major world governments do not give the confidence they are in control of the situation. The measures at best seem lethargic if not outright misguided. Some of them have been late in responding to COVID-19 or have resorted to measures that have backfired in the first instance. There is no guarantee their fiscal or policy responses to the economic threat also do not backfire.
Notwithstanding the prognosis of a depression at worst, or perhaps an extended recession at best, it is predicted the pain, though severe, may not be an unmitigated phenomenon given the fact that repeated recessions have provided policy makers and businessmen enough experience to take corrective actions.