Covid-19 pandemic recession – comparison with the GFC and Great Depression
John Greenwood. Chief Economist and Adam Burton. Assistant Economist
The Covid-19 pandemic recession is materially different to both the 2008-09 GFC recession and the 1930s Great Depression for several reasons.
The most important distinction between the Covid-19 pandemic recession and the other two is the role of money and credit; throughout the GFC and the Great Depression there was a significant contraction in money and credit, whereas now there is a historic expansion in money and credit. Much more typically, recessions result from some imbalances in the economy, either in the financial sector or the real economy, which have to be rebalanced. There were no such imbalances in this recession. There was instead a government-imposed lockdown in order to suppress transmission of the coronavirus, resulting in a large shock to demand.
There are many suggested “remedies” that have been put forward in response to the Covid-19 pandemic recession. Negative central bank policy rates and yield curve control are seen as obvious extensions of an interest rate led monetary policy, but as we have argued these policies will be ineffective in reflating economies. Direct monetary financing of government spending (MMT) at least attempts to increase the money supply but can lead to excessive money creation and ultimately inflation.
Clearly, the Covid-19 pandemic is having a large effect on economic output in the short term and will probably leave some economic scarring in the longer term. Despite extensive monetary and fiscal measures taken to counter these problems in almost all countries, it is inconceivable that any combination of monetary or fiscal remedies will prevent or quickly repair every case of job loss, company closure, or other economic misfortune. Both supply side and demand side economic disruptions are therefore likely to persist, especially if we enter a phase of uncertainty regarding the trajectory of the coronavirus outbreak or, more worryingly, a second wave of the pandemic.
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