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Recession or Depression, the Key to COVID-19 Crisis Is How Long it Lasts

The global economy is headed for a severe downturn, if it isn’t there already, and its longevity seems to be the only question remaining.

“In April, we had projected that the great lockdown of 2020 would be the worst recession since the Great Depression and the data that is coming in confirms that,” said Gita Gopinath, economic counselor and director of the research department at the International Monetary Fund, during the Financial Times Global Boardroom digital conference on Wednesday.

“If anything, it looks like the outlook will worsen,” she added.

The “fog of uncertainty” over the crisis has barely lifted and with the potential for a second wave of infections later this year, there could be a stop-start nature of openings, Gopinath said. That could be a minus 6 percent growth rate in 2020 and flat growth in 2021, she added.

“A trademark of the crisis is that it is global and no country is being spared,” Gopinath said. “All countries are looking at historic economic lows.”

She said one optimistic note is that there can be a recovery after a lockdown, citing China as an example of a rebound taking place now.

“It’s been dampened because external demand is weak, but domestic demand is picking up,” Gopinath said. “So there is hope in the sense of if these lockdowns can be lifted in a way we can ensure the people are getting the right information that the health crisis is under control with the right testing and tracing, then we can get a recovery.”

Sven Smit, chairman and director of McKinsey Global Institute, said the uncertainty right now on the health and economic sides is “crushing” and connected.

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Thirty-one percent of executives responding to a poll chose a worse-case scenario where it takes two to three years to recover after hitting bottom, however, 50 percent expect a recovery in two or three quarters, he said.

Looking at it another, way, 40 percent of executives believe the downturn will reach Depression levels, Smit said.

“People are not only not spending because they are afraid of their jobs,” he said. “They’re not spending because they don’t want to go to the shops. It’s only when it’s safe…when everybody will go out and go to a shop or a restaurant.”

He agreed that the countries that got the virus under control more quickly are the ones that have seen the earlier signs of confidence. So, it’s that interconnection, he said, that would lower uncertainty and is key to recovery.

Philip Lane, a member of the executive board of the European Central Bank, said even though household incomes have taken a hit, household savings have trended upward, thanks to government assistance.

“The big question is in the coming quarters and years, how quickly will households convert savings into spending,” Lane said.

Governments need to provide as much financial stimulus to the public and business community as possible, while maintaining liquidity and sound fiscal policy.

According to Carmen Reinhart, professor of the international financial system at the Harvard Kennedy School, emerging markets face the longest road to recovery because of their financial instability.

She said the current crisis is much more akin to the Great Depression of the 1930s than the Great Recession of 2008-2009 because of its global nature and crisis of food and basic needs.

“A key feature of this crisis, which makes me more concerned with regions like Africa, Latin America and South Asia, is that it is a very regressive kind of shock,” Reinhart said. “It hits the very lowest-income countries in the global economy, or the very lowest-income segments of the populations within countries.”

Gopinath also stressed that it’s important to avoid further trade tensions that would hinder a recovery.

“If we want to have recovery where we have firms reopening, production taking pace, workers being rehired, we cannot have further disruptions to the global supply chains,” she added.