In Depth

Is a new global Great Depression inevitable?

Upcoming recession risks matching the 1930s for severity, but doesn’t have to last as long

As coronavirus lockdowns cripple the normal functioning of economies around the world, business leaders and economists are beginning to count the financial cost of the pandemic.

Data is starting to illustrate the outbreak’s financial toll - with reports on Wednesday bringing ominous news from the EU’s two foundational economies.

In its worst performance since the last year of the Second World War, the French economy plummeted roughly 6% in the first quarter of 2020, new figures revealed yesterday.

At the same time in Germany, the country’s top economic research institute predicted a contraction of 4.2% over the course of the year. Theirs is “an economy in shock”, said the report.

Also on Wednesday, the World Trade Organization (WTO) released a report that predicted world trade would fall by between 13% and 32% in 2020 - citing the unpredictability of the pandemic from a health perspective as the reason for the wide range of potential outcomes.

“These numbers are ugly – there is no getting around that. But a rapid, vigorous rebound is possible. Decisions taken now will determine the future shape of the recovery and global growth prospects,” said WTO Director-General Roberto Azevedo.

Crispin Odey, the hedge fund manager and founding partner of London-based Odey Asset Management, wrote a letter to clients in which he said the pandemic was combining with the historic oil war to bring a global recession that was likely to resemble the Great Depression of the early 1930s.

“This is not like 2008-9, nor 2001-2, nor even 1989-92,” Odey wrote in the letter, which was seen by Bloomberg. “The fall in global gross national product for this year will echo 1931-2. That was a terrible time when countries and institutions disappeared and characters like Adolf Hitler seized their chance to take over Germany.”

Meanwhile, American hedge fund manager and founder of Bridgewater Associates, Ray Dalio, carried a similar warning. “This is not a recession; this is a breakdown. You’re seeing the same thing that happened in the 1930s,” he said during a Ted Connects talk on Wednesday.

“We’re not going to go back the way it was,” he said. “We’re going to restructure our economy and restructure our financial system.”

Presumptive Democratic nominee for president, Joe Biden, was just as stark in an interview with CNN on Tuesday.

“I think it’s probably the biggest challenge in modern history, quite frankly. I think it may not dwarf, but eclipse what F.D.R. faced,” he said, referring to President Franklin D. Roosevelt, who took office in 1933 following the Great Depression.

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“People may end up calling this the Greater Depression,” said Nicholas Bloom, a professor of economics at Stanford Graduate School of Business, and a senior fellow at the Stanford Institute for Economic Policy Research. “I think the drop will be comparable to the Depression. The only question is about the rate of recovery.”

Indeed, most commentators agree the rate of recovery is the crucial issue. The economic shock is already taking place, and now governments must work to ensure their respective economies start rolling as fast as possible.

This will almost certainly require some coordinated international action - at the very least the knee-jerk economic protectionism that elongated the slump of the 1930s must be resisted.

“People have made comparisons to the Great Depression. It’s not a very good comparison. The Depression was 12 years long,” said Ben Bernanke, the former chair of the US Federal Reserve, at a presentation on Tuesday.

“This is like a natural disaster, and the response is more like an emergency relief than it is a typical stimulus or anti-recessionary response,” he said, adding he was “pretty pleased” with the fiscal and monetary measures taken so far by governments.

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