Will This Be The Next Great Depression?

Written by Samira Salwan


In an economic downfall that seems unprecedented economists are scrambling to find historical parallels. A frequently quoted comparison to our current recession is the Great Depression, but is this comparison warranted?

It is vital to fully understand the situation during the Great Depression in order to make an adequate comparison. In the wake of the 1929 stock market crash, there was a monumental decline in consumer spending and confidence in the economy was severely inhibited.


This led to a seemingly endless unemployment cycle. Due to the decline in spending, aggregate demand decreased and businesses made less profit. Firms were then forced to lay off workers who would cut down their spending, further reinforcing the cycle. This cycle continued for almost 10 years until the implementation of President Franklin Delano Roosevelt’s historic New Deal which introduced fervent regulatory measures and public work projects.

GDP growth, low unemployment, and stock market growth are core tenets of a strong economy. As such, analysing whether this economic downturn will plateau as a recession (widespread downfall that lasts for several months) or will grow to become a depression (a severe decline lasting for numerous years) must be done with respect to the aforementioned factors.

Gross Domestic Product (GDP) Decline

The economic fallout resulting from the global pandemic has meant that growth benchmarks will not be met. Oxford economics has forecasted that there will be a global economic contraction of roughly 3% this fiscal year, down from their previous forecast of a growth of 2.5%.


The International Monetary Fund estimates that 170 countries will experience negative per capita income growth, with emerging markets and Least Economically Developed Countries (LEDCs) being hit the hardest. However, these figures pale in comparison to the GDP declined in the Great Depression. The average GDP decline from 1929 to 1933 was 6.5% per annum.






Unemployment

Rampant unemployment was a hallmark of the Great Depression and forecasts predict that unemployment could be even worse in the Coronavirus Recession. Consumer-facing businesses - such as retail, hospitality, and transport - are going to be the industries that are most impacted by the pandemic.


It is predicted that 14 million jobs will be lost in the leisure and hospitality sectors alone. However, the detrimental impacts of the recession will spread to other sectors and the federal reserve bank of St Louis President states that the US unemployment could hit 30%, which is 10% higher than the unemployment during the Great Depression.

Stock Market

This recession has caused the fastest 30% market decline in US history. The Great Depression, in comparison, saw a 33% drop over 2 months; this milestone was crossed 31 days into the Coronavirus Recession.


However, the defining feature of the Great Depression was its excruciatingly long timeframe. This recession’s decline may not hold up in the long term as we have already seen a 25% incline.

This recession has had the worst economic fallout since the Great Depression. While there are a number of eerie similarities - even the lead up to the Great Depression was characterized by a similarly divided society and soaring stocks - governments play a pivotal role in shaping the long term effects of this recession.


Governments have reacted swiftly to the crisis and have enacted expansionary fiscal policies that total to $8 trillion. Many believe that the sheer volume of federal expenditures and quantitative easing being injected into the global economy will offset the economic challenges we are faced with.

Others tell a cautionary tale, warning governments that protectionist trade policies and nationalist approaches to foreign policy will tank our global economy. Peter Schiff, CEO of Euro Pacific Capital and prominent economist, has gone as far as to call this economic upheaval a ‘greater depression’ and predicts a GDP decline of more than 25%. What makes this view even more damning is the timing of the recession. A recession has long been forecasted for this year, citing overall business pessimism and widespread lagging growth as major causes of concern.


When these factors are combined with an added natural disaster, prospects for depression seem high. Additionally, it is important to note that governments are not acting exclusively for the economy, with many nations prioritizing eradicating the pandemic over the prevention of further disruption to the economy.

While some metrics point to a potential depression, others contradict this outcome. Only time will tell what the severity of this economic downturn will be.





References:


1) https://m.timesofindia.com/business/international-business/imf-anticipates-worst-economic-growth-fallout-since-great-depression/amp_articleshow/75068201.cms 2) https://www.theguardian.com/business/2020/mar/21/100-years-on-another-great-depression-coronavirus-fiscal-response 3) https://www.britannica.com/event/Great-Depression 4) https://www.forbes.com/sites/sarahhansen/2020/03/24/the-great-depression-vs-coronavirus-recession-3-metrics-that-will-determine-how-much-worse-it-can-get/ 5) https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/ 6) https://www.forbes.com/sites/phillipbraun/2020/04/10/why-covid-19-wont-trigger-another-great-depression/#45c1cc758ba9 7) https://www.ccn.com/5-economists-who-say-this-recession-will-be-the-next-great- depression/


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