The Great Depression (1929) v/s Now
- 3 ins.ide
- Aug 4, 2020
- 3 min read
- Short Review (by Tanya)
Well 'when it rains, it pours'. At a time when the global economy was looking for signs of revival from the downturn caused by US-China trade war, geopolitical uncertainties, declining commodity prices, and slowing consumer demand, yet another 'downturn' came knocking the doors. The coronavirus pandemic has severely disrupted the flow of goods and people, stalled economies, and put a considerable ridge in global gross domestic product for months to come.
Gross Domestic Product is the money value of all final goods and resources produced by normal residents as well as non-residents in the domestic territory of a country.
The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. It was the worst economic downturn in the history of the industrialized world, lasting from the stock market crash of 1929 to 1939.
On October 24, 1929, as nervous investors began selling overpriced shares, the stock market crash that some had feared happened at last. A record of 12.9 million shares was traded that day, known as “Black Thursday.” Five days later, on October 29 or “Black Tuesday,” some 16 million shares were traded after another wave of panic swept Wall Street. Millions of shares ended up worthless, and those investors who had bought stocks “on margin” (with borrowed money) were wiped out completely. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid-off workers.
The post-war period has served as an important lesson in precisely what not to do, and what to do, in avoiding depression. The coronavirus has been a sudden, severe disruption to economic activity and regular social functioning. It’s clear with the Great Depression, with the benefit of hindsight, that there was a long lead up of factors that led to the eventual and devastating slump. The trajectories for the two events are quite different.
Today the global economies and Central banks are much more resilient and stronger than ever, the banks are well-capitalized, there is adequate money supply. The economic engine remains in decent shape, the pandemic has interrupted the fuel supply to the engine if it is re-established properly; a gradual rebound is possible.
No doubt, COVID-19 can move to a point of out of control – we’ve seen that in Italy, and there are worrying patterns forming in the US. But, there is nothing to suggest it’s a situation that can’t be controlled, using known methods of success that governments worldwide are replicating.
The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020, using market exchange rate weights—the deepest global recession in decades, despite the extraordinary efforts of governments to counter the downturn with fiscal and monetary policy support. Over the longer horizon, the deep recessions triggered by the pandemic are expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages.
Exporters of energy or industrial commodities will be particularly hard hit. The pandemic and efforts to contain it have triggered an unprecedented collapse in oil demand and a crash in oil prices. Demand for metals and transport-related commodities such as rubber and platinum used for vehicle parts has also tumbled. While agriculture markets are well supplied globally, trade restrictions and supply chain disruptions could yet raise food security issues in some places.
Given escalating challenges, the World economy is likely to witness a tough time in the coming quarters, however, to compare it with 1930 great depression will not be fair in our view. Even if the situation deteriorates further from here we do not expect it to be prolonged for longer and expect a gradual recovery.
For emerging market and developing countries, many of which face daunting vulnerabilities, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.
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