Covid-19 Recession vs. The Great Depression

May 23, 2020

Covid-19 Recession vs. The Great Depression

So far, the Great Depression’s damage to the economy, employment, and stock market was ultimately much worse than what has been inflicted by COVID-19. But with the uncertainty of how much death and damage COVID-19 will ultimately cause, will the damage get much worse?

The effect of COVID-19 on the global economy has been faster and more dire than the 2008 global financial crisis (GFC) and even the Great Depression. In those two previous episodes, stock markets collapsed, credit markets froze up, massive bankruptcies followed, unemployment rates soared, and GDP contracted.

However, all of that took around three years to play out, and in our current crisis, similarly severe macroeconomic and financial outcomes have materialised in just a span of three weeks. The effect of COVID-19 on Singapore’s economy has already exceeded SARS. It has also been announced that Singapore will enter a recession this year.

Is COVID-19 not another Great Depression?

A recession is defined as two consecutive quarters of economic contraction, which is called negative economic growth, while a depression is defined by negative economic growth and rising unemployment over a sustained period of time.

The worrying percentages were seen during the Great Depression-unemployment rising to above 30% or the U.S. GDP contracting 20%. These are the basis of a conclusion for those who are expecting a repeat of the Great Depression. They will be looking at the magnitude of the percentages.

We have also learned lessons from the Great Depression. For many years, economists and economic historians have studied the mistakes made during the Great Depression. The consensus is that errors in the fiscal and monetary policies made in the 1930s have resulted in turning a bad situation into something that is far worse. The Fed’s initial reduction in the money supply and then doing too little to prevent bank failures in the early 1930s were one of the most notable mistakes. There was also no fiscal expansion by the government until the New Deal went into effect in 1933.

Today, our economies are not similar to those in the Great Depression. Markets recover faster and ‘noises’ in the economies and markets are drowned out easily.

However, not even during the Great Depression and World War II did the bulk of economic activity shut down, as it has in China, the United States, Europe, and even Singapore today.

Will it be an even greater depression?

Until the pandemic is stopped, it is likely that economies and markets around the world will continue their free fall. Singapore will enter into a recession this year because of the blow from the COVID-19 pandemic, resulting in job losses and lower wages with “significant uncertainty” over how long and intense the downturn will be, the central bank said. Thus, even if the pandemic is more or less contained, overall growth might still not return by the end of 2020.

Let’s also not forget that viruses can mutate. It has been months since therapeutic interventions that many were counting on seemed to turn out to be less effective than hoped. This leads to economies contracting again and markets also crashing again.

Moreover, the fiscal response could be ineffective if the monetisation of massive deficits starts producing high inflation. If this is so, many countries will not be able to undertake such borrowing in their own currency. When this happens, who will bail out governments, corporations, banks, and households in emerging markets?

What can we do?

Investors: What you do depends on your cash position, cash burn rate, and how long you think it will take for stocks to rise again. If you need the cash to survive, sell. If you can keep going without selling your stocks, stick to DCA and keep investing every month.

For those worried about their jobs, take the time to invest in yourself. Show your employers that you can come out of COVID-19 stronger and wiser by upgrading.

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