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This economic crisis is beginning to rival the Great Depression

Evening Standard logo Evening Standard 06/04/2020 Stephen King
a man holding a sign © Provided by Evening Standard

Economists are fond of describing economic downswings using letters of the alphabet. A “V-shaped” downswing suggests an initial rapid contraction followed by a rapid recovery. A “U-shaped” downswing has roughly the same beginning and end but has a grim period of prolonged stagnation in between. An “L-shaped” downswing — the worst of the lot — offers only the misery of contraction: there is no subsequent expansion.

Letters, however, tend to be roughly uniform in size. To capture the unique scale of the current crisis, we need to think about canyons, gorges and valleys. The Yarlung Zangbo Valley in Tibet is the deepest in the world, a whopping 5,382 metres below the mountains on either side. Since March, the world economy has, in effect, plunged off the top of either Namcha Barwa or Jala Peri, the surrounding peaks, on its way to the hardest of hard landings.

More than 9 million Americans have lost their jobs over the last two weeks. Surveys of economic activity in Europe have fallen to their lowest ever levels. Singapore Airlines is cutting 96 per cent of its capacity. Businesses the world over are struggling. This reversal is worse than the Global Financial Crisis. It’s beginning to rival the Great Depression.

China offers a ray of hope: for the time being, Covid-19 appears to be under control and people are beginning to emerge from lockdown. We are, however, a long way from being out of the woods. The Chinese “bounce” may be the equivalent of a bungee jump’s first upward oscillation. Demand is still brittle: re­opened cinemas in Hubei province are apparently struggling to attract still-fearful customers. The risk of imported reinfection remains high, one reason why Singapore, a poster child for limiting Covid-19’s spread, has imposed a new lockdown. Deaths in Italy, Spain and France are hopefully peaking, but they’re still very much on a rising trend in both the UK and the US. Meanwhile, many of the poorest nations, whose urban sprawls allow little room for social distancing and whose financial pockets are just not deep enough to provide wide-ranging economic bailouts, may be forced down the herd immunity path, a journey that threatens to leave them economically and financially marooned.

China offers a ray of hope but we’re yet to discover how far the economy has fallen and how we can recover

Even when the bungee rope eventually stabilises and we truly discover how far the world economy has fallen, we’ll still be confronted with huge uncertainties. Will we quickly be able to scale the other side of the valley, returning to some semblance of business-as-usual as companies emerge from their enforced hibernation and furloughed workers are, once again, able to engage in productive activities? Or will we discover that the valley floor is an economic version of the Grand Canyon, requiring an extended trek in the stifling Arizona heat before we reach the other side?

a man wearing a suit and tie smiling at the camera: Stephen King (Alamy Stock Photo) © Provided by Evening Standard Stephen King (Alamy Stock Photo)

At this stage, we simply don’t know. The absence of wide-ranging testing means we cannot tell how many people have been infected asymptomatically. We cannot yet assess whether those who’ve recovered are at risk of reinfection. Of those with Covid-19 who die, we don’t yet know how many die from it. We don’t know whether a vaccine will arrive any time soon.

It’s possible, therefore, that the trek along the bottom of the Grand Canyon might be long and arduous. That, in turn, raises another uncertainty. Most economists believe that a short-term lockdown will ultimately be better for our economic prospects than allowing the virus to run riot. During the 1918-1920 Spanish flu, for example, those US cities which went into lockdown subsequently fared better economically than those which didn’t.

What, however, if this lockdown is not the last? What if the other side of the Grand Canyon remains out of sight? We might then be forced to address some uncomfortable moral questions involving trade-offs between the quality of life for the majority — determined in part by our collective economic futures — and the heightened risk of mortality for an unfortunate minority.

Hopefully, the current lockdown will do the trick, creating conditions in which the virus either disappears or becomes routinely treatable. That way, the tricky moral issues can remain the preserve of philosophers of ethics alone. Nothing, however, in this terrible crisis can yet be guaranteed.

Stephen King (@kingeconomist) is HSBC’s Senior Economic Adviser and author of Grave New World (Yale)

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