The COVID-19 pandemic is a health crisis first and foremost.
With over 50 million infections, and 1 million deaths around the world, and still counting,
the coronavirus is the most deadly global pandemic since the Spanish Flu occurred a century ago in 1919.
However we also can’t ignore the devastating impact COVID-19 has had on economies and jobs as a result of government restrictions on borders and lockdowns aimed at controlling the virus.
Most countries around the world are now in recession.
Millions of people have lost their jobs, businesses are collapsing all over the globe and both the health and economic devastation are still ongoing.
For many people, the last time they might remember experiencing a similar recession was during the global financial crisis, also known as the GFC.
So given both COVID-19 and the GFC have caused global recessions, how do they compare?
In this video we list 4 reasons why this virus recession is very different to the GFC.
The GFC refers to the period between mid 2007 and early 2009 where banks around the world suffered significant losses.
The GFC was mainly caused by banks lending money to all types of people, even those on low income or without jobs who were unable to repay those loans.
These bad debts were then packaged up into overvalued financial products.
A downturn in the US housing market triggered a wave of subprime mortgage loan defaults leading to widespread bankruptcies.
The GFC was the worst recession in many countries since the Great Depression in the 1930s and resulted in millions of people losing their jobs.
1: Unprecedented Government response
Government responses to COVID-19 around the world have never been seen before
Borders have been shut, mandatory quarantines have been put in place and businesses have been locked down.
The extent of government intervention in the GFC was very different and more limited, and people did not notice much change in their day to day lives unless they lost their jobs.
The Government responses to COVID-19 meanwhile have affected almost every human being, including children who weren’t even allowed to go to school.
Governments around the world have also provided unprecedented stimulus, in many cases directly to the unemployed and businesses in trouble as a result of the coronavirus
Meanwhile Government support in the GFC was more centralised and was provided mainly to the banks so that the financial system didn’t collapse.
2: Consumer demands have changed
COVID-19 has caused a change in consumer behaviour that is very different to the GFC.
Government regulation, social distancing and increased standards of personal hygiene have fundamentally changed what consumers demand.
Demand for certain products has actually gone up such as hand sanitiser, delivery services and home office and gym equipment and technologies,
and yes, even toilet paper.
Meanwhile, demand for tourism and travel, eating out and entertainment have all taken a massive hit.
On the other hand, the GFC caused a more broad based decline in demand, due to an overall decrease in consumer confidence as a result of falling asset prices and job losses.
3: Economies have changed since the GFC
During the GFC governments went into significant debt to support their economies and central Banks reduced interest rates to try to boost demand, some even down to negative rates.
Economies are now more debt laden than they were before the GFC
so many countries have fewer tools at their disposal to try to resolve the virus recession.
The world economy also looked very different in 2020 compared to before the GFC in 2007.
For example, the world has only become more and more connected since 2007 as a result of globalisation.
Further the Chinese economy has become more powerful,
and is now the second largest economy in the world by GDP.
We’ve also experienced a digital and social media revolution since 2007.
Companies which are now so well-known such as Instagram, Snapchat and TikTok didn't even exist before the GFC.
4: The COVID-19 recession has more uncertainty
The main cause of the GFC was how banks and the financial system were regulated which could be solved through legislation.
How the COVID-19 recession will end is anyone’s guess because there are so many variables.
Firstly, from a health and science perspective, will this pandemic ever end?
For example, will there be an effective vaccine or will the virus just end up mutating?
Even if there is a vaccine, how long will it take to develop to ensure that it is safe and effective?
And will everyone in the world have access to the vaccine and even if they do, will people be willing to take it?
Secondly, from a behavioural perspective, will people’s behaviours change forever after having experienced COVID-19?
Will some people never want to leave the house and remain cautious for a long time? How will this change how they live their lives and spend money?
And finally, from a political perspective, what will COVID-19 mean for globalisation
now that it has exposed shortages as a result of countries being too reliant on other countries for their goods?
Also will governments keep imposing harsh restrictions to control the virus whilst it continues or will countries have to learn to live with it?
In conclusion, the four reasons in this video highlight that even though both COVID-19 and the GFC have caused global recessions,
the COVID-19 recession will play out quite differently to the GFC and will require a response unlike anything we’ve seen before.
However because of these differences, there may also be opportunities from this crisis that did not exist during the GFC.
Some people have made a lot of money trading on increased volatility in the stock market.
More and more people have the ability to work online now and changing consumer demands has resulted in businesses pivoting in new directions.
If the pandemic is resolved soon from a health perspective, then perhaps this recession will be over very quickly.
However all we can do is wait and see, as so much is out of our control.
Thanks for watching this video.
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