Lessons from the Great Financial Crisis
- Friday, April 3, 2020
It is expected that the contraction in global activity in 2020 will be around 3% and this will exceed that seen in the first year of the Global Financial Crisis (GFC) of 2008 when global GDP contracted by 0.5%.
However, unlike the GFC there is an expectation of a relatively rapid bounce back. After the downturn in 2008 it took just over three years for the US economy to regain the level of GDP achieved prior to the crisis, one of the slowest recoveries on record.
Growth was held back by the unwinding of the debt bubble which meant that banks and households were focused on reducing their borrowing despite central banks cutting interest rates to their lowest levels on record. The debt reduction process was long and arduous and is still not over for the household sector which continues to reduce its leverage and cut debt relative to income. The scars of the GFC still exist.
This time is expected to be very different as, rather than an L-shape, the majority forecast is that the recovery to follow a V-shape path, with the US returning to its previous level of activity in the third quarter of this year. Such an outcome reflects expectations of the lifting of restrictions on movement and the return to work as business restarts, shops re-open and normal activity resumes. Not everything will come back at once and there will be some permanent damage, but the return to work will bring a significant reacceleration in growth, especially when supported by loose monetary and fiscal policy.
The key risk to the V- shape forecast is a potential return of the virus in the third quarter of this year, resulting in another shutdown in Q4. On this basis the economy could experience a number of aftershocks following the initial outbreak with restrictions being re-imposed and lifted so as to manage the capacity of the healthcare system to cope with the number of critical cases. In economic terms this would lead to a double dip recession with businesses closing again as restrictions on movement are re-imposed. The actions that governments and citizens take now will be our best guard against the return of the virus.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.