The pandemic cannot be viewed in isolation, writes Barry Standish, but as an unexpected contagion of a world economy already in the ICU
The pandemic cannot be viewed in isolation, but as an unexpected contagion of a world economy already in the ICUThe economic and humanitarian devastation being wrought by the Covid-19 crisis across the world is being treated by the media and policymakers as an exceptional event.
It helps set the scene to draw on the lessons and magnitude of major recessions and depressions over the past century, starting with the Great Depression, which began in 1929. This caused untold human tragedy by reducing incomes in the US by between 6% and 12% annually as that shock played itself out.
It is this rich cocktail of economic contraction and contradiction that was the macro-economic environment in which the coronavirus pandemic found itself So what do these historical examples have in common with what we are experiencing now? It was clear by the end of last year that most countries were on the verge of recession. The evidence can be seen in falling or negative GDP growth supported byvarious indicators, including business confidence, consumer confidence, the purchasing managers index and the Baltic dry index .
Enter governments with necessary policy responses and stimulus packages. In the US these are currently estimated at $2.4-trillion and it appears that this will be funded through QE. This should be seen in contrast to the $3.5-trillion QE between 2009 and 2014 after the financial crisis. Current eurozone plans include €750bn with an opaque funding mechanism. This must be compared to the €3.5-trillion QE between 2009 and 2019.
As a footnote, any forecast of the direct economic impact of the pandemic is going to be wrong. There may, however, be some merit to making a minimum estimate. A simple “back of an envelope” calculation can be done on a sector-by-sector basis. Imagine a five-week lockdown in which the main sectors contract, over a quarter, by, for example, 45% in mining, 35% in manufacturing and 35% in tourism.
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