The collapse of economic activities due to the coronavirus and its subsequent impacts is reportedly leading towards a worldwide recession. But what exactly is a recession? What is an economic slowdown? Can a virus cause a recession?
Crux of the Matter
The state of the world economy is highly uncertain across the world with national health emergencies being declared due to the outbreak of the China-originated Coronavirus. The share markets are plunging down to record lows; central banks are issuing interest cuts and trying to understand the impact of this pandemic to try to safeguard their economies from a recession.
There is a lot still unknown about the coronavirus and amidst this, the world economies are deteriorating which is making it difficult for businesses to sustain in the volatile market conditions. The virus has not spared any sector; it has already resulted in losses of more than $150 billion in sectors like tourism, airlines and hotel industry.
What is Recession and What Causes It? A recession can be defined as two back-to-back quarters of negative economic growth which is measured by gross domestic product (GDP). Real changes and structural shifts are major causes of economic recessions. It may include a sudden rise in oil prices due to a geopolitical crisis. There are different prevalent theories which try to explain causes using monetary factors. Financial factors like overexpansion of credit and financial risk during the good economic times preceding the recession can also lead to recession. One of the major reason for any economic slowdown is inflation which is defined as a rise in the prices of goods and services over a period of time. The higher the rate of inflation means that a consumer will be able to purchase a lesser quantity of goods with the same amount of money as before. In such a complex environment businesses are forced to cut down on expenditures which may result in decline of GDP and laying off workers to manage costs. Lay-offs would lead to increasing unemployment which could reduce the purchasing power and hence demand in society. This could lead to a vicious downward spiral. All these combined factors may lead the country into a period of recession.
In the current scenario, there is already an ongoing tussle between Saudi Arabia and Russia over oil production which has led to sharp decline in crude oil prices. Further coronavirus is leading to lockdowns across the world with direct negative impact on industrial productivity of most countries. Global markets have been crashing since last month. Investors are not sure of a global slowdown yet but they seem to be preparing for it seeing the global conditions.
Types of Recession V-shaped recession indicates that the economy suffers a sharp economic decline, but recovers quickly and strongly. It can happen due to increased consumer demand leading to a significant rise in economic activities. Example for such a recession is the 1950s American economy decline which recovered after 12 months. L-shaped refers to an economic recession where the recovery is characterized by a steep decline in economic growth followed by a slow recovery. It is the most dramatic type of recession and its recovery can take a long time. Such a recovery period can also be called a depression. Example of such a type is the 2008 financial crisis. Apart from these 2, Economists also categorise recessions as U-shaped, W-shaped depending on the recovery patterns.
History of Recessions Credit Crisis of 1772 In London, after a period of rapid expansion of credit, Alexander Fordyce, a partner in a large bank, lost a huge sum shorting shares of the East India Company and he fled to France to avoid repayment. It led to more than 20 large banking houses going nearly bankrupt. The crisis also then spread to Europe.
Stock Crash of 1929 On October 24, 1929, share prices collapsed due to drastic oversupply of commodity crops and drought eventually leading to the Great Depression. It is the most severe economic depression which resulted in loss of 90% of stock market value and failing of 11,000 banks. More details in Curiopedia section below.
OPEC Oil Crisis In October 1973, OPEC members launched an oil embargo targeting countries that backed Israel in the Yom Kippur War and at the end of it, a barrel of oil rose from $3 to $12. Since modern economies depend on oil, the higher prices and uncertainty led to a major stock market crash with the Dow Jones Industrial Average losing 45% of its value.
Asian Crisis of 1997–1998 After the collapse of the Thai baht in July 1997 there was a crisis of foreign currency and the Thai government was forced to abandon its U.S. dollar peg and let the baht float. This resulted in huge devaluation that spread to much of East Asia and increasing debt-to-GDP ratios.
The 2007-2008 Global Financial Crisis This was the biggest financial crisis after the Great Depression of 1929. It began with a lending crisis in 2007 which later expanded into a global banking crisis with the failure of Lehman Brothers in September 2008. Huge bailouts and other measures to control the damage failed and the global economy fell into recession as many economists had suggested.
I see more than a 50% chance of the United States going into a recession. – Alan Greenspan, Former Federal Reserve Chairman (6th April 2008)
On 29 April 2008, Moody’s declared that nine US states were in a recession. In 2008, an estimated 2.6 million U.S. jobs were eliminated and the unemployment rate in the U.S. grew to 8.5% in March 2009. This number reached 5.1 million by March 2009.
The impact in the US was so devastating that it led to 8 million home foreclosures, S&P 500 declined 38.5% in 2008, $7.4 trillion loss in stock wealth which is approximately $66,200 per household and price of the houses dropped by 40%.
In this period the private consumption fell for the first time in nearly 20 years. The depth and severity of the recession were very high. With the consumer confidence being extremely low, the economic recovery took a long time.
Looking Ahead It is very clear that seeing the ongoing global developments right from coronavirus to oil crisis there is a huge threat looming over the global economy in the coming months. The small businesses are going to be the most impacted with millions of people expected to lose their jobs. In this current scenario of uncertainty, it is now important to think of possible scenarios like what if the virus spreads more broadly with a higher mortality rate or if the outbreak continues in the next year as well then the economic impacts would be much more than anyone would have thought of. The severity of impacts would solely depend on the length and seriousness of the pandemic. It is the need of the hour to study the past data while keeping a close watch on current situations and strategically prepare for tough times ahead.
Curiopedia
The Great Depression was a severe worldwide economic depression across nations; in most countries, it started in 1929 and lasted until the late 1930s. It was the longest, deepest, and most widespread depression of the 20th century. The Great Depression is commonly used as an example of how intensely the world’s economy can decline. It started in the United States after a major fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929, (known as Black Tuesday). Between 1929 and 1932, worldwide GDP fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession. Personal income, tax revenue, profits and prices dropped, while international trade fell by more than 50%. Unemployment in the U.S. rose to 23% and in some countries rose as high as 33%. More Info
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