Covid-19 and the Great Recession Economic Impact Comparison
The 21st century has seen two crises in just two decades. One in the form of the Great Global recession (GGR) of 2007-2009, and second in the form of the current COVID-19 outbreak. The underlying source of GGR was demand-driven as imbalances in the financial market discouraged aggregate demand in the housing sector, famously known as housing sector bubble bursts. While the current crisis in the guise of the outbreak is relatively different and its fundamental cause is originated from the supply side of the economy. In other words, the former crisis was due to demand shortage in the economy whereas the current outbreak has stopped the whole economic activities from manufacturing to services and hence can be referred to as a supply-driven crisis. Though the underlying sources of the two crisis are quite different their economic effects are quite same leading to increase unemployment rates across the globe, restrictions on global trade of goods and services, a major cut in policy rates to boost investment at home, tremendous growth in public debt, massive fiscal stimulus to avoid fall in domestic consumption and regulation of various financial institutions to promote the lending system. Different economic sectors have been severely hit by the two crisis I.e. financial sector, business sector, commerce and trade, transport sector due to fluctuation in energy prices, and tourism sector, Jakson (2020).
Financial imbalances in the wake of GGR devastated the banking sector. Both common and preferred stocks of the banks in the USA have been crushed and lack of mortgage relief affected the smooth functioning of the banks. In the short run, the sharp decline in housing prices caused many banks to lose money as an increasing number of investors failed to repay mortgage loans. As a result, banks faced credit-constrained to the needy customers and business and stopped lending to each other and thus the shock spread throughout the entire banking sector. Similarly, the current outbreak is posing severe challenges to the banking sector. Many experts have predicted a credit crunch similar to that of the GGR. According to them, there may be a sudden fall in the availability of loans from the banks as many corporations are likely to be bankrupt such as the tourism, transport, and Oil and Gas sector. Traditional banking procedures are losing their value and contactless payment instead of physical exchange of banknotes has been recommended by WHO. Banks in the USA, South Korea, and China started to isolate banknotes to reduce the infectious elements attached to banknotes. The current outbreak has affected the stock market in a similar fashion as it was in the case of GGR. For instance, stock markets in G7 countries have plunged by almost 33 percent compared to their high peak in January. However, the stock market in G7 countries was down almost 55 % in the wake of GGR. Similarly, from January 2020 to April 2020, the world stock market has experienced the fastest decline by almost 25 %, Chaudhry (2020).
The current outbreak has stooped the production of nonessential goods and services to curtail the spread of coronavirus. The severe lockdowns across the world have increased the unemployment rate in an unprecedented manner and almost 17 million people in the USA applied for unemployment insurance. As per ILO’s global employment trends (2020), almost 2.7 billion workers have been affected which are roughly 81 percent of the global workforce due to the severe lockdowns. The same trends in the labor market have been noticed during the GGR. For instance, As per ILO’s global employment trends (2010), nearly 212 million people had lost their jobs in the wake of GGR. The unemployment rate increased in major OECD countries from 2007-2009 and the USA, Spain, Turkey, Estonia, and Ireland had experienced 4.9 %, 10.3 %, 4.6 %, 10.9 %, 8.1 % higher unemployment rate respectively. Similarly, the GGR was marked by a severe decline in business investment due to the tightening of the credit mechanism. There were many factors played their role in declining investment I.e. pessimistic views of business owners about future economic conditions, excess capacity of many businesses due to the low demand for the products, and shrinking of credit facilities. Though many central banks have pursued near to zero policy rate their policy of low-interest rate could not motivate business investors. The current covid19 outbreak has also reduced private investment as many businesses have stopped production. However, public investment on essential goods and services has risen in the presence of single-digit policy rate.
Besides, global commerce and trade have been restricted in the wake of the outbreak as it was the case during GRR. The outbreak has been so far encouraged protectionists measures and it is likely to have a long-term impact on the free movement of people and goods. As per the predictions of WTO, there may be a decline in the global trade of goods and services in the current year between 13% to 32%. China’s exports to Africa have dropped by almost 15 percent as many factories and manufacturing units in China are closed due to severe lockdowns. In the same way, the Unavailability of finances in the trade market has brought down the volume of global trade during the GGR. As per the WTO, the global exports of goods and services plunged almost 12 % and 9 percent respectively during the GGR. lock-down of cities, the interruption of international travel, and the movement of people and goods across territorial boundaries of states has paralyzed the notion of the global village, Jakson (2020).
One of the primary victims of the outbreak is the transportation sector as the lock-down of cities and self-quarantine policies by various governments have disrupted international travel and movement of people and goods & services across the border and only transportation of essential goods are being taken place. As the demand for transportation is decline so does the prices of Oil and Gas across the globe. For instance, international market prices for oil dropped from $60 per barrel in January to its lowest level $10.7 per barrel in April. In the same way, a decline in the demand for oil has reduced its prices in the USA to its record lowest level of $1 per barrel. This trend in the oil sector is similar to that of the GGR where a deflation associated with lower aggregate demand took all assets down including oil and gas. For instance, Oil prices had jumped down within six months from a record high of $147 per barrel to $33 per barrel. In the same way, the prices of LNG too fell from $14 per KG to $4 over the same period, McDonnell (2020).
Further GGR also harmed the tourism sector as the economic position of the household as well as business weakened both domestic and international demand for tourism. For instance, the tourism sector in the UK has witnessed a total loss of £42 million in the wake of GGR. One of the major components of tourism spending is business expenditure and during the recession, the slowdown of business activities affected business-related tourism, Webber (2010) Similarly, the current outbreak has also been disastrous for the travel and tourism sector. The busy airports in the pre-corona period with thousands of people arriving and departing now have turned into abandoned places because of strict lock-down measures. For instance, as per the estimates of UNWTO, there may be a decline in international tourist arrivals around 20% to 30% in the current year.
The basic purpose of this research article was to provide a detailed comparison of the two crisis of 21st-century I.e. The Great Global Recession of 2007-2009 and the Covid-19 pandemic and their economic repercussions on different sectors of the economy. This article initially elaborated on the causes of the two crises and later discussed their major consequences on the different sectors of economy I.e. financial sector, business sector, commerce and trade, transport sector due to fluctuation in energy prices, and tourism sector.
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