The Covid Crisis and the Great Depression of 1929

Such was the scale of the global market crash in the wake of the coronavirus outbreak, the spectre of the 1929 Wall Street crash and the ensuing Great Depression of the 30s has been raised.

The failure of many countries to coordinate actions in order to mitigate the virus has heightened concerns about the severity of the following crisis.

Panicked by a lack of information about the spread of the virus and the indecision of many governments, between health or economy, plus the continuation of tensions between Washington and Beijing in respect with the trade war, provoked a great fall in stock markets.

The V-shaped recovery (that means by the end of the year a surge in economic activity through the autumn) were ditched in favour of an L-shaped recovery of low growth into the middle distance.

One of the main reasons for this gloomy outlook, is because of the lack of confidence on finance ministries to respond effectively to the potential damage from Covid-19.

The global economy gets a downgrade from 2.5% to zero growth for 2020, which would mark the second-weakest year for the global economy in almost 50 years, with only 2009 being worse.

And the severity of this crisis would depend on how much time it would take for the virus to be contained, as for every day passed with the society and the economy in quarantine, the worst the outcome would be. Which in contrast with the crash of 1929, when there were international organization (such as FMI) to coordinate actions, this new crisis containment is done separately country by country, without noticeable coordination against a international problem.

Tommaso Valletti, head of the department of economics and public policy at Imperial College Business School, said: “Looking at the past two centuries, we had many recessions but only one depression - in 1929 - which lasted almost a decade. So we really have a very limited sample size to draw from history.”

“And the Great Depression happened with a perfect storm of bad events, including a tightening of monetary policy of the US central bank. We have learned how to lend support to the economy, and I observe that central banks are doing the right thing now, with expansionary monetary policies. I remain optimistic that we will avoid a repetition of the Great Depression: still, there will be massive economic and social costs and longer-term economic restructuring.”

Yet while central banks learned the lessons of the 1929 crash, it remains to be seen if governments have learnt the lesson of the last 10 years and put austerity behind them.

- Source - The Guardian