The Great Recession Was Bad. The ‘Great Lockdown’ Is Worse.

The unfolding recession will be much worse than the 2008-09 financial crisis and may be surpassed only by the Great Depression.

The Great Recession Was Bad. The ‘Great Lockdown’ Is Worse.
Police officers wearing protective face masks patrol a street in Moscow, Russia. (Photographer: Andrey Rudakov/Bloomberg)

(Bloomberg Opinion) -- The International Monetary Fund on Tuesday issued a stunning global economic forecast after most of the world's biggest nations shut down almost all nonessential businesses amid the coronavirus pandemic: The unfolding recession will be much worse than the 2008-09 financial crisis and may be surpassed only by the Great Depression.

What the IMF refers to as the "Great Lockdown" recession will cause global growth to decline by 3% this year, a sharp reversal from the 3.3% expansion it predicted in January before the disease spread to the world's industrialized nations and many emerging markets. By comparison, world growth fell just 0.1% in 2009 during the financial crisis.  

We asked Bloomberg Opinion columnists and contributors who write about the economy to share their thoughts:

Mohamed El-Erian, chief economic adviser at Allianz SE, the parent company of Pimco:

The IMF provides one of the most comprehensive and insightful analyses of the sudden economic stop triggered by the coronavirus. It places the right emphasis on how the world has dramatically changed in just a few months, the extreme uncertainties still ahead, the growing dispersion in countries’ abilities to respond effectively, the danger of adverse multiple equilibria and the severe risks of a worse outcome.

Needless to say, the ability to translate all this into precise economic forecasts is challenging, something that the IMF acknowledges itself by stressing the “extreme uncertainty around the forecasts.” Yet it is the forecast that will attract the most attention, and for understandable reasons: Forecasts are easier to broadcast in summary form.

Having said that, the specific projections still look too optimistic; and I say this notwithstanding the enormous uncertainty that still surrounds the duration of this new recession, how it will be lifted and what’s on the other side. The optimism isn't limited to a few countries. It starts with the U.S. and Europe, and extends to many other nations, both advanced and developing. As such, a negative 3% global growth in 2020 may be the sunny scenario. We should hope for it, but plan for more contingencies, especially when it comes to the vulnerable developing economies where the risk of massive human tragedy is already too high.

Bill Dudley, president of the Federal Reserve Bank of New York from 2009 to 2018:

In my view, it is a reasonable forecast. But it should be taken with a grain of salt given the considerable uncertainty that surrounds the outlook in a vast array of dimensions. A non-exhaustive list includes: the effectiveness and sustainability of social distancing; the course of the coronavirus and the impact this has on behavior (willingness to fly, take cruises, go to restaurants); the timeline for when a vaccine will become broadly available; and the impact on government, household and business balance sheets and how that affects future saving and spending decisions. There is considerable uncertainty about each dimension and all these aspects will interact in complex ways that we cannot fully anticipate.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015:

The IMF's new growth outlook for 2020 is a dire one, and includes an overall fall in output in the U.S. of almost 6%. The baseline outlook for 2021 is much brighter, but it is predicated on the assumption that "the pandemic fades in the second half of 2020." The alternative scenario, in which Covid-19 and associated stringent public-health interventions persist into 2021, unfortunately seems highly likely to me. Fortunately, countries such as the U.S. and Germany are able to borrow at extraordinarily low interest rates. They should be prepared to make full use of that fiscal capacity to support the global economy during the deepening slowdown, whatever its duration, and to provide much-needed vigor to the recovery that follows.

John Authers, senior editor for markets:

A 3% contraction in the global economy this year would be very, very bad. The one number needed for context is 0.1%. That was the fall in global gross domestic product during the Great Recession year of 2009. We all know that the worst downturn in generations will be due to the greatest voluntary halt in economic activity in history. But it’s also important to note at least one factor that we were worried about even before Covid-19. China’s Energizer Bunny growth has kept the entire global economy ticking along for three decades and alone almost stopped growth from going negative in 2009. Its growth is no longer so reliable, and the IMF’s pessimism owes a lot to the way China is trying to handle its economic transition.

Beyond that, as Bloomberg noted in impressive detail last year, economic predictions are difficult. The IMF does still matter. As an organization it is arguably better positioned than any other to produce forecasts like this. We should attempt to navigate the world ahead of us with some kind of a road map, and this is the best it can manage. But the IMF does have a tendency to underestimate growth, and with impressive honesty it admitted back in 2014 that its forecasts are no more or less accurate than those of private-sector competitors. So we can still hope that it has underestimated growth this time.

Tim Duy,  professor of economics at the University of Oregon:

The IMF is correct in that this will likely be the steepest contraction in a century. Acknowledge, though, that we are also witnessing support in the U.S. that is impressive in both its size and speed as policy makers rush to put a floor under the economy. The Federal Reserve has taken a whatever-it-takes approach to shoring up financial markets and preventing a credit collapse, while Congress has enhanced unemployment insurance to provide generous benefits to a wider range of workers. It also has funded forgivable loans to small- and medium-sized companies to encourage them to keep employees on payrolls.

To be sure, not everyone will be caught in the safety net and the money is moving out the door slower than we would like. Still, the substantial amount of support for the economy should limit the downside. The bottom will be deep relative to where we began, but not nearly as deep as it would be absent the policy support. Eventually, the economy will restart, and while it may be many months until we have a widely distributed vaccine or other therapeutic cure, we are moving toward that objective. During that transition, businesses and individuals will have to learn how to live with the virus. Continued policy support will be essential to fostering gains even as we confront a new normal for the economy.

Conor Sen, portfolio manager of New River Investments:

Although economic output and employment may drop by the most since the Great Depression, the early policy response from the Fed and Congress provide hope that it need not feel historically painful for Americans. The Fed has rolled out emergency lending and liquidity programs with record speed, doing what they can to stabilize the financial system and credit markets.

As for workers, we may see a historic gap between the income received by Americans and the number of them who are employed. If 20 million Americans are thrown out of work by the crisis, but the vast majority are receiving $900 weekly in unemployment benefits thanks to legislation passed by Congress, most of them will still be able to pay their bills. It may be temporary, but American workers have a safety net like they've never had before.

The economic shocks resulting from the coronavirus may be the only option if we're going to prevent millions of deaths. But if we get the policy response right, and so far we've been moving in the right direction, then we might have record unemployment for a while but also defeat the virus while ensuring that people get paid even if they're out of work. That should be our objective, and if we achieve that goal, it would be an outcome to celebrate.

Noah Smith, former professor of economics at Stony Brook University:

The IMF is absolutely right that the initial shock of the coronavirus is likely to be worse than the recession that followed the financial crisis of 2008. But it overestimates the speed of the recovery, for at least three reasons.

First, there's the global nature of the crisis. The Great Recession was a U.S.-centric downturn that later became a Europe-centric downturn. The coronavirus pandemic is hitting every major country in the world at more or less the same time. Every advanced economy is in some form of lockdown and every emerging market economy is being hit by capital outflows, collapsing commodity prices and the threat of the pandemic. This means that even when some countries start to recover, they will be slowed by the many others that aren't.

Second, the coronavirus depression will lead to enduring policy changes that will further disrupt the world's economic system. A rise in financial nationalism and an attempt to bring important supply chains within national borders will partially reverse globalization; both business models and asset markets will take years to readjust.

Third, Donald Trump's administration has shown itself to be rudderless and ineffectual during the crisis, suggesting that the U.S. executive policy response will remain weak and haphazard throughout 2020. Better policy may or may not arrive in 2021, but by then crucial time will have been lost.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

James Greiff is an editor for Bloomberg Opinion. He was Wall Street news team leader at Bloomberg News and senior editor for Bloomberg Markets magazine. He previously reported on banking for the St. Petersburg Times and the Charlotte Observer.

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