Great Depression vs COVID-19: Similarities and Differences

The Great Depression was likely the largest and longest slump in economic activity in world history. The COVID-19-caused recession has been frequently compared with the Great Depression of the 1930s.Obviously, in the case of COVID-19 recession the situation was not so depressing, but the global economy is going through hard times. The World Bank estimates that 1 billion young people will try to enter the labor market over the next decade, but less than half of them will find formal employment. As a result, the majority of young people, many of whom belong to marginalized groups, will be left unemployed or live in poverty. According to official figures, in the first three months of the pandemic, about 4.5 million people lost their jobs within the eurozone. In the United States, unemployment peaked at 14.7% in April and 10.2% in July. In the UK, the number of people claiming welfare  rose to 2.7 million between March and July. By comparison, during the Great Depression, unemployment peak was  25.6% in May 1933. The cumulative declines in industrial production (IP) during the first four months of the Depression and the 2020 recession were similar. Although IP continued to fall for several quarters during the Depression, forecasters currently expect that IP will rise in coming months.The cumulative decline in economic activity during the first two quarters of the 2020 recession was somewhat larger than the GNP decline during the first two quarters of the Great Depression. Moreover, the fall in real GDP during the second quarter of 2020 exceeded the largest one-quarter real GNP contraction during the Depression.During the Great Depression, the price level also fell considerably. At the business cycle trough in March 1933, the consumer price index (CPI) was 27 percent below its August 1929 level. Although the CPI fell during the first two months of the 2020 recession, it has since recovered to near its pre-recession level and is forecast to gradually rise.Huge as the gravity of COVID-19 recession there are things missing from the social and economic setting which were pivotal in the makings of the Great Depression.

  • COVID-19 occurs with no massive boom 

There was a massive boom during the roaring ’20s, before to the Great Depression, where a surging economy in the United States made way for mass consumerism. A boom often leads to a bust, where excesses, like debt, are unwound.

In 2019 we haven’t had a boom, we’ve slow growth for years. We’ve had no inflation problem, and haven’t had the central banks hitting the brakes. Yes, there are pockets of excess. But nothing like what we saw prior to the Great Depression.

  • Modern economics differs from 1920s economics

The inter-war period has served as was a good example of what not to do, and what to do, in avoiding a depression.

Prior to the Great Depression in the 1920s, we saw a massive trade war globally, tariff hikes in the US and other countries did the same thing. We saw monetary and fiscal tightening in various countries across the world going into it, which made things worse,” Oliver said.

“There was some weird view that the way to fix up a budget deficit was to just raise taxes and cut spending, which is not so good when you’re going into a slump, that made the whole thing worse,” he said.

Long and drawn-out global downturn is not inevitable

  • The two recession were caused by different factors 

While we may see the biggest hit to global GDP since the 1930s thanks to the shutdowns, there are big differences compared to the Great Depression, suggesting that a long and drawn-out global downturn is not inevitable.

In 2019 the coronavirus severed disruption to economic activity and regular social functioning, while during the Great Depression there was a long lead up of factors which led to the eventual and devastating slump.

“Basically, it’s a disruption to normal activity caused by the need to stay at home. In fact, growth could rebound quickly once the virus is under control and policy stimulus impacts,” said AMP Capital’s chief economist and head of investment strategy, Dr Shane Oliver.