COVID-19: World faces spectre of next great depression

“It’s clear that the economy is contracting more quickly than ever before during peacetime,” said Jack Allen-Reynolds, an economist at Capital Economics.

Economies crumble

With the world’s biggest economy – United States – having shed 6.5 million jobs last week, up from 3.5 million the week before, economists are now being led to believe that the economy was in far worse shape than initially thought.

More people have been laid off in the US over the last two weeks than were laid off in the first two months of the financial crisis of 2008-09.

Analysts currently see a prolonged period of 15 per cent unemployment in the US, but because of the rapid increase in unemployment the past couple of weeks and no peak in sight for the rate of infections, the debate is around whether it will exceed over 25 per cent like it was during the Great Depression.

“Crisis like no other”

“This is a crisis like no other,” said Kristalina Georgieva, head of the IMF, on Friday. “Never in the history of the IMF have we witnessed the world economy coming to a standstill – it is way worse than the global financial crisis.”

The shock US employment numbers followed business surveys across Europe showed the services sector to be in deep trouble with the largest drop in activity and prospects for more than 20 years.

Indices of activity by purchasing managers in the eurozone, UK and Swedish purchasing managers’ indices all fell around 20 points, from levels below those seen at the worst point of the financial crisis.

Italy, which went into lockdown first, had the weakest PMI index on record with a figure of 17.4, compared with a figure of 50 which represents the point at which an equal number of companies reported rising and falling activity.

Rethinking recession

The dire state of curfew-struck countries is forcing some analysts to move past the conclusion of the economy being in recession to what’s possibly coming next – from a state of extended recession to a repeat of the Great Depression seen during the 1930s.

“Recession is baked in the cake – the global economy has stopped, and money has ceased flowing, and not only that, confidence has evaporated and, when that happens so quickly, it takes a long time to come back,” said Murray Gunn, head of global research at Elliott Wave International.

“The economy will be suffering post-traumatic stress disorder for a long time – therefore, a deep and elongated recession, a depression, is probable.”

“The crash from a high point in the US market means that it is the start of something rather than the end,” said Gunn. “Much like in 1929 to 1932, the stock market will probably bounce after this initial crash only for another devastating wave down to complete the deflationary process.”

Cash is king

The rapid-fire selloff in stock markets and dire economic forecasts due to the coronavirus have spurred a dash for cash, a Bank of America fund manager survey had showed.

Cash holdings in March surged to an average 5.1 per cent, just shy of the 5.5 per cent seen during the 2008 financial crisis, as equity allocations were in a record collapse, mainly led by Eurozone and emerging markets, the survey further indicated.

“Stocks, bonds and commodities all decline in deflation, but the one asset class that has benefitted through this is cash and, as the deflationary environment intensifies, cash will remain king,” said Gunn, the lead contributor to deflation.com. “The key to riding out deflation is to have cash, an income and as little debt as possible.”

“If you want to see how the value of your cash increases in a bear market, just turn the chart of the stock market upside down,” Gunn added. “When the bear market ends, it will be the cash holders that can pick up some amazing bargains.”