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IMF Says 'Great Lockdown' Worst Recession Since Depression, Far Worse Than Last Crisis

Chris Gaetano
Published Date:
Apr 14, 2020
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The International Monetary Fund said we need to look further back to find an analog to the current damage being done to the economy in the wake of the COVID-19 pandemic: not the 2008 financial crisis, but the Great Depression. In its latest global growth outlook report, the financial organization said that, assuming the pandemic and required containment peaks in the second quarter for most of the world and recedes in the second half of the year, global growth will fall by about 3 percent, a 6.3 percentage point difference from projections at the beginning of the year. To compare, the Global Financial Crisis ultimately saw a 0.1 percent reduction in world GDP growth. This, the IMF said, "makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis." To further the comparison, the IMF said that, right now, both advanced economies and emerging markets/developing economies are in recession, the first time this has happened since the Great Depression.

The situation is actually estimated to be worse for advanced economies like the United States, as this group overall is expected to see a 6.1 percent average contraction in gross domestic product (GDP) in 2020. The United States, in particular, is projected to shed 5.9 percent of GDP this year. Other countries are not expected to fare much better—such as Japan, with a 5.2 percent expected hit—or they are projected to fare even fare worse—such as Italy, which is estimated to lose 9.1 percent of its GDP.

Growth is projected to rebound by 5.8 percent in 2021, if the pandemic fades and policy actions to contain widespread bankruptcies and job losses are successful, but then this will still be lower than projections made before the pandemic hit. In this best-case scenario, cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined.

In other scenarios, matters get even worse. If the pandemic lasts 50 percent longer than expected, global output is expected to drop an additional 3 percent from baseline (so, 6 percent), and recovery will be 1 percent lower (so 4.8 percent). If there is a second outbreak in 2021, then that recovery will be shaved down by 5 percent, so a mere 0.8 percent improvement. If both the 2020 outbreak takes longer than expected and there is a second outbreak in 2021, then next year's growth will be completely eliminated, as the IMF estimates an 8 percent drop in global economic output. In either of the adverse scenarios, the IMF said that it sees both an increase in public debt ,which will spook markets, and increase sovereign borrowing costs, which in turn will prevent many countries from providing the income support assumed here.

"This would lead to even worse outcomes and additional scarring, which would in turn further worsen public balance sheets," said the report.

Former Federal Reserve Chair Ben Bernanke, who led the central bank during the 2008 crisis, has previously eschewed comparisons to the Great Depression, according to MarketWatch. Bernanke, himself a scholar of the Great Depression, noted that that event lasted 12 years; this current crisis, he said, is more comparable to a natural disaster, and the response more like emergency relief rather than the typical anti-recession measures.

However Goldman Sachs, despite its recent bullish turn, is also sounding the alarm. While not exactly saying the word "Depression," the financial institution estimated that advanced economies will see a 35 percent contraction this quarter compared to the prior three months, which is quadruple the record set in 2008 during the financial crisis, according to CNBC. It also estimates that unemployment will hit 15 percent, the worst figures since World War II, and this is likely a conservative estimate, as this will only count those who are actively looking for work.

The grim warnings could be evidenced by recent reports from major banks. Wells Fargo reported that its first-quarter profits sank by 89 percent, going from $5.86 billion last year to $653 million this year; revenues, similarly, were down 15 percent, according to the Wall Street Journal. Though less embattled than Wells Fargo, JPMorgan Chase also reported a major hit to profits, 69 percent compared with last year, with revenue losses of 3 percent.

Markets so far have been sanguine about these developments, however, as JPMorgan Chase's stock actually rose by 3 percent in premarket trading, while Wells Fargo stock advanced by 1.9 percent. But perhaps this is because markets, despite dire warnings from the IMF and Goldman Sachs, are cheerful so far, according to CNBC. As of 10:47 a.m., the Dow Jones was up by 600 points, the S&P 500 was up by 2.6 percent, and the Nasdaq was up by 3 percent. Traders are apparently reacting to news that pandemic conditions are, while still grim, improving slightly.

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