Could COVID-19 trigger the next Global Depression?

26 March 2020

With falling stockmarkets, it is looking inevitable that Australia will fall into a recession, along with most other major markets, but could the world fall into depression? 

The Great Depression of 1929 lasted until 1932 and saw worldwide gross domestic product (GDP) fall by 15%. In Australia, the country was hurt by its dependence on agriculture and commodities. 

A recession was classed as two quarters of negative GDP growth over a normal business cycle while a depression was a prolonged downturn in long-term economic activity, usually with a significant rise in unemployment and mass business bankruptcies.  

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Official unemployment for February was 5.2% but since then, Westpac chief economist Bill Evans estimated it could reach 11% by June in light of the people who have lost jobs in the last few days as a result of the shutdown. 

“We estimate that there will be 814,000 in job losses in the June quarter lifting the unemployment rate to 11.1%. 

“The sectors we see most impacted in the June quarter from a jobs perspective are: accommodation and food services; retail trade; arts and recreation services; manufacturing; transport and warehousing; real estate services; construction and professional services.” 

Industry figures said it was unlikely to become a full-blown depression but, comparisons were abounding because it would indeed be the ‘greatest economic dislocation’ since the Great Depression. 

Steve Miller, investment strategy consultant at GSFM, said: “The biggest quarterly fall in GDP in Australia since quarterly GDP data was collected from December 1959 was in the June 1974 quarter at -2%. The first three quarters of 2020 are all likely to see greater falls in GDP than that, probably in the order of 5%-10%, and that is why it is likely to be the most severe economic dislocation since the Great Depression.” 

Rob Sharps, head of investment and group chief investment officer at T. Rowe Price, said: “My view is that a depression remains unlikely because of the likelihood of the finite life of the virus and the significant magnitude of the monetary and fiscal policy response”. 

“This is very different to the Great Depression because it saw no monetary and fiscal stimulus at first. In fact, there was only policy tightening initially which along with an escalating trade war at the time explained why the Great Depression was so deep and so long,” said AMP chief economist Shane Oliver. 

Oliver explained the 1929 Great Depression followed a massive boom that had to be unwound and was worsened by a global trade war and fiscal and monetary tightening. In contrast, the current economy was one of fiscal and monetary stimulus with the aim of minimising damage from the shutdown. 

All agreed that how the Government handled the crisis would be key to surviving and minimising the fallout. 

“What we can hope for is that unlike the Great Depression, which was a period that lasted almost a decade and was only brought to some sort of closure by the onset of WW2, if the authorities can get on top of the issues, and particularly the spread of the disease, then a sharp rebound in the economy and markets is a reasonable prospect in 2021,” said Miller. 

Joachim Fels, global economic adviser at PIMCO, said: “The task at hand for government and central banks has been and continues to be to ensure that the recession stays relatively short-lived and doesn’t morph into an economic depression. 

“This will require a very large fiscal response to support individuals and businesses that are adversely affected by the crisis. Tax relief, transfers to individuals and subsidies to firms will increase current budget deficits significantly.” 

Oliver added: “The key for the RBA and Australian Government and their counterparts globally is to make sure the collateral damage to businesses and households is kept to a minimum through the shutdown period so once the virus comes under control the economy can quickly rebound. 

“This means doing whatever is necessary to minimise business failures, protect incomes and jobs and keep financial markets functioning. 

“We will get a very big hit to GDP and a sharp rise in unemployment due to the shutdowns but hopefully we should bounce back a lot faster once the virus is under control compared to what happened in the depression.” 

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