Will the post Covid-19 crisis be a worse crash than 2008?

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Will the post Covid-19 crisis be a worse crash than 2008?

Covid-19 has had a massive impact on the global economy and unfortunately, we may have only seen the tip of the iceberg. It’s difficult to predict the full effects of the pandemic but according to World Bank forecasts, the global economy will shrink by 5.2 per cent this year, representing the deepest recession since the Second World War.

So, is this crash looking worse than 2008, probably the most recent recession in most of our lifetimes and the one that brought the phrase ‘credit crunch’ back into common parlance?’

What happened in 2008?

Currently, experts seem to agree that the prognosis is worse this time around – economic publication Foreign Policy, for example, compared the 2008 recession to a heart attack and the post-Covid crash to a full body seizure.

The 2008 crash is generally accepted to have stemmed from the housing markets – deregulation of financial products led to banks engaging in hedge fund trading with derivatives, which in turn created a necessity for more mortgages to fund such derivatives. This filtered down to consumers, who were offered subprime and interest-free products that were unaffordable. Obviously, this is a simplistic version of events and repercussions were huge – in the UK banks collapsed when they were unable to secure short-term funding and in the US investment bank Lehman Bros collapsed claiming the dubious accolade of the largest bankruptcy filing in US history.

The crash had an enormous impact, particularly on the property and financial services markets, at one point in September 2008, £90 bn was wiped off the value of Britain’s biggest companies in a single day, and according to the Government Accountability Office, the economic crisis cost the US economy more than $22 trillion.

The downturn of 2020

The ramifications of Covid-19, however, could be even more far reaching – research from the Congressional Research Service suggests global trade could fall by as much as 13 per cent. Unemployment statistics released so far also paint a worrying picture – in the US 51 million filed for unemployment insurance in a 17-week period between mid-March and mid-July, while in Europe over 30 million people, in Germany, France, the UK, Spain and Italy, had already applied for state support of their wages by the end of April.

Forecasts about the exact impact vary, and are constantly evolving, but analysts unanimously agree that the pandemic will have a significant impact on business investment, economic growth and consumer spending.

Global debt is a worry – the International Monetary Fund estimate that global fiscal support in response to Covid-19 will be more than $9 trillion, approximately 12 per cent of GDP. Government debt and private debt would take the total debt to over $200 trillion, a global increase of over 35 per cent in a single year – after the 2008 crash debt rose by only 20 per cent.

Banks themselves are also facing huge amounts of debt – the balance sheet of the European Central Bank rose by almost 2 trillion EUR this year and is already more than 52 per cent of the eurozone’s GDP, while the Federal Reserve’s balance sheet stands at 32.6 per cent of the US GDP and the Bank of England stands at 31.1 per cent. According to JP Morgan and Bank of America, this huge increase in balance sheets has pushed stock markets higher at a time when 80 per cent of listed companies have abandoned their business targets and analysts are slashing targets.

Will bounce back be quicker than 2008?

So, what is the prognosis for recovery from the post-Covid crash and is it likely to be as protracted as the 2008 crisis?

Theoretically, recovery should be swift as businesses reopen because the crisis has been brought about by a planned, partial economic shutdown rather than a fundamental flaw with the financial and property markets as was the case in 2008. The recovery from the last recession was considered unusually slow and this was attributed to a range of factors, including the possibility that growth could have been slowing long before the financial crash, faster population aging and a persistent decline in capital stock.

By contrast, a report published by chartered accountancy body, ICAEW, in June suggests that the UK economy could return to growth in the second half of the year if lockdown restrictions continue to be eased. Not all forecasters are as optimistic though – in terms of the UK, The Office for Budget Responsibility has published three scenarios, with even the best case predicting that economic recovery will take until next year. In the OBR’s worst-case scenario, GDP plunges by 14.3 per cent this year, unemployment spikes higher than it did in the 1980’s and the economy does not reach its pre-virus peak till 2024. The European Commission has also conceded that the economic impact of coronavirus will be more significant than anticipated in its Summer Economic Forecast. It is now predicting that the euro area economy will contract by 8.7 per cent this year and grow by 6.1 per cent in 2021.

Currently, it’s too soon to be sure of the economic impact of Covid-19 in the long-term – there are still variables to consider including the possibility of a second-wave, prompting further lockdown restrictions and the impact of UK-EU trade talks. Among experts and analysts though, the general consensus seems to be that while this crisis has had a deeper impact that the 2008 crash, there is a good chance of a swifter recovery.

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