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Comparing the Covid-19 crisis to the 1929 depression

Gaurav Areng
·5-min read
Comparing the Covid19 Crisis to the 1929 Depression

The Covid-19 Pandemic, which is now also being referred to as “The Great Recession” by economists and finance professionals worldwide is often compared to past recessionary periods in order to gauge the extent to damage it can leave in its path.

Needless to say, the Covid-19 Pandemic has led to a global consensus regarding an impending global recession. As per IMF's World Economic Outlook Report for June, the global economy is expected to shrink by -4.9% in FY 2020-21 and then bounce back in FY22.With a consensus regarding the impending global recession, the only dispute that remains amidst economists worldwide is the shape of the recovery curve - Whether the recovery curve will be U-shaped, V-shaped or L-shaped.

One of these comparisons goes back to “The Great Depression of 1929”, a rare comparison when talking about any recessionary period. We shall discuss here the 2 events independently and the basis for comparison between them to give you a better understanding of why this comparison is being drawn so widely.

What happened during the Great Depression of 1929?

The 1930s witnessed the most severe erosion of wealth and economy worldwide in what is now known as, The Great Depression. This event went on to alter world events drastically and changed the way economies functioned forever.

The Great Depression was a major economic crisis that began in the US in 1929, the impact of which spread to the rest of the world and remained until 1939. The depression began on 24th October, 1929 (Black Thursday) when Wall Street witnessed a tremendous crash at NYSE as stock prices fell by about 25% in a day.

Although the Wall Street crash is known as the trigger for the depression, the underlying causes of the depression included a fall in demand levels, unintended increases in levels of inventory by businesses and misplaced monetary policies by the policymakers.

The impact of the Depression was such that most countries across the globe experienced extensive job losses, record falls in output levels and deflation.

Unemployment levels in the US reached about 25% between 1929 and 1933 while in UK, unemployment levels reached about 15.5% during the same time.

What is happening during the Covid-19 Pandemic?

The rapid spread of the COVID-19 Pandemic from Wuhan, China to the rest of the world has left Governments worldwide dealing with an unprecedented situation. They are struggling to maintain a balance between economic losses and safe-guarding the health of the country’s people. The balance is a tricky one to maintain and Governments are doing their best to show support for the economy and its people during such times.

The lockdowns imposed by Governments worldwide, in an attempt to contain the spread of the Covid-19 Virus, brought economies to an absolute standstill with no prior notice. Supply chains were disrupted, demand was wiped out as people feared pay cuts, job losses and increased cash reserves. Businesses struggled to survive and meet obligations while production levels and markets fell to all-time lows.

The unemployment levels in major countries have come close to the 1930s levels, raising comparisons between both the economic crises.

Comparing Covid-19’s Great Recession with the Great Depression of 1929:

Some key factors that you would consider while comparing both scenarios include the following:

  • Economic Recovery Curve: The economic recovery curve outlines how long the recessionary period is expected to last before economies recover from the crisis.

The 1929 Depression was characterised by an L-Shaped Recovery Curve, taking world economies over 10 years (1929-1939) to recover from the losses.

The Covid-19 Recession is expected to demonstrate either a U-Shaped Recovery Curve or a V-Shaped Recovery Curve as demand and supply are expected to bounce back sooner along with Government support measures.

  • Unemployment Levels: Unemployment Levels lay a key role in determining the health of any economy and its recovery.

As discussed previously, Unemployment Levels during the 1930s rose to a staggering 24.9% (in 1933 from 3.2% in 1929) in the US as per records from the Bureau of Labor Statistics.

Covid-19: Unemployment levels in the US for the month of May 2020 came in at 13.3% after reaching a peak of 14.7% in April, 2020 as per records from the Bureau of Labor Statistics.

  • GDP Loss: GDP is a Primary indicator of economic growth and takes into account the impact of the crisis on production and supply in the country.

In the 1930s, US GDP shrank by 8.5% in 1930. It further shrank by another 6.4% in 1931 and an additional 12.9% in 1932 as per records.

In the current scenario, IMF (in the World Economic Outlook for June) has predicted a contraction of US GDP by 8% in 2020 followed by a GDP Growth of 4.5% in 2021, reflecting expectations of a quicker economic recovery from the pandemic.

  • Stock Market Performance: Another key feature that is followed closely during market crashes and economic crises is the recovery time of stock markets. They reflect investors’ sentiments and confidence in the ability of businesses to pick up and grow back.

In the 1930s, it took the US Stock Markets more than 3 years to recover from the economic shock of the Market Crash of 1929 (Black Thursday).

In the current scenario, the stock markets have been seen recovering even before a complete unlock of the economies was implemented as investors’ faith in businesses’ ability to survive was sustained and fuelled by the Government Stimulus Packages.

Considering all these differences between the 2 scenarios, you must wonder why they are even being compared. The reason for the comparison lies in 2 fundamentals common to both:

  • Uncertainty regarding the duration of the crisis (No one knew when the 1930s crisis would end then and no one can now predict when the Coronavirus Impact will end i.e. a vaccine will be found)

and

  • Uncertainty regarding the economic impact of the crisis (In 1930s, no one could gauge the extent of damage from the Depression and even now, economists and Governments struggle to gauge the impact of the virus. Most companies in turn have suspended earnings forecast for 2020 due to the uncertainty caused by the virus).