The negative consequences of the COVID-19 economic recession may last longer than the 2008 crisis

Madrid, March 16, 2021.- The 2008 global financial crisis lasted more than 10 years and fulfilled the characteristics of other crises of the past. The COVID-19 economic recession is unprecedented, unique, without antecedents, without manuals, without standard solutions. Therefore, its effects may extend for more than a decade. I have selected experts from the USA, Europe and Spain who explain why we are facing the worst crisis in the last 100 years.

Peter S. Goodman is the European economics correspondent for The New York Times, based in London. He was previously a national economic correspondent, based in New York, where he played a leading role in award-winning coverage of the Great Recession:

“The world is almost certainly ensnared in a devastating recession delivered by the coronavirus pandemic. Now, fears are growing that the downturn could be far more punishing and long lasting than initially feared — potentially enduring into next year, and even beyond — as governments intensify restrictions on business to halt the spread of the pandemic, and as fear of the virus reconfigures the very concept of public space, impeding consumer-led economic growth. The pandemic is above all a public health emergency. So long as human interaction remains dangerous, business cannot responsibly return to normal. And what was normal before may not be anymore. People may be less inclined to jam into crowded restaurants and concert halls even after the virus is contained. The abrupt halt of commercial activity threatens to impose economic pain so profound and enduring in every region of the world at once that recovery could take years. The losses to companies, many already saturated with debt, risk triggering a financial crisis of cataclysmic proportions. Stock markets have reflected the economic alarm. The S&P 500 in the United States fell over 4 percent on Wednesday, as investors braced for worse conditions ahead. That followed a brutal March, during which a whipsawing S&P 500 fell 12.5 percent, in its worst month since October 2008. “I feel like the 2008 financial crisis was just a dry run for this,” said Kenneth S. Rogoff, a Harvard economist and co-author of a history of financial crises, “This Time Is Different: Eight Centuries of Financial Folly. This is already shaping up as the deepest dive on record for the global economy for over 100 years,” he said. “Everything depends on how long it lasts, but if this goes on for a long time, it’s certainly going to be the mother of all financial crises.” The situation looks uniquely dire in developing countries, which have seen investment rush for the exits this year, sending currencies plummeting, forcing people to pay more for imported food and fuel, and threatening governments with insolvency — all of this while the pandemic itself threatens to overwhelm inadequate medical systems. Among investors, a hopeful scenario holds currency: The recession will be painful but short-lived, giving way to a robust recovery this year. The global economy is in a temporary deep freeze, the logic goes. Once the virus is contained, enabling people to return to offices and shopping malls, life will snap back to normal. Jets will fill with families going on merely deferred vacations. Factories will resume, fulfilling saved up orders. But even after the virus is tamed — and no one really knows when that will be — the world that emerges is likely to be choked with trouble, challenging the recovery. Mass joblessness exacts societal costs. Widespread bankruptcy could leave industry in a weakened state, depleted of investment and innovation”.

University of Rochester economics professor Lisa Kahn:

“In April, 20 to 30 million people were separated from their jobs and roughly 80 percent of them were placed on temporary layoff. What typically happens in a recession is that people permanently lose their jobs. In this case, people expected the shock to be temporary—maybe two weeks or a month. Over the rest of the year, we think that group was steadily recalled back to their previous employers, and that has been a very good thing. Unfortunately, we have seen much less progress among the group who was permanently separated from their previous employers. That group grew over the summer, is now sizable, and has shown no net progress in terms of returning to the workforce. I’m definitely concerned about how that group will fare once employers start hiring again in earnest. The dramatic thing about the COVID crisis was the sharp spike in unemployment. The job losses in earlier recessions look like blips in comparison. The shutdowns are not what have been driving the economic collapse; it’s the global pandemic. In New York State, the movie theaters started opening, but I don’t think many people have been going to the movies. People decide for themselves whether they want to leave their homes to consume during such a risky time. We saw this in May and June when COVID cases waned and we had a rapid economic recovery—we got back half the jobs we lost during the first wave. But in July, when we had our second increase in COVID cases, everything stopped, and the recovery has been moving sideways ever since. These additional COVID waves have prevented the economy from recovering in earnest, even though there have been relatively few state-imposed restrictions on behavior. We estimate that roughly 5 million workers will need to be matched to new employers. What does that number depend on? There’s a growing set of people who report they’re looking for work but don’t have connections to previous employers. In addition, workers on temporary layoff who were waiting for their employers to recall them may stop waiting, their employers may go out of business, or they may get sick of waiting. On top of that, there are a lot of people sitting out of the labor market who are neither searching nor waiting for employers to call them. This is also unique to the COVID recession. People are worried about the virus, or can’t leave home right now because they may have family members with a preexisting condition, or are required to be a primary caregiver to their children. Once COVID is no longer a factor, these groups will need to find new jobs as well”.

FMI diagnosis of the Spanish economy

Nicolas Arregui, Lucy Liu, and William Oman IMF European Department:

The pandemic has taken a significant toll on Spain’s people and economy, following five years of strong growth and job creation. A second wave of infections that started in mid-July has put a lid on the recovery. According to the IMF’s latest economic health check of the country, it will take several years for the Spanish economy to recover. And the outlook is subject to strong risks.

Here are six charts on Spain’s economic outlook and the country’s response to the crisis.

Despite a sharp rebound in the third quarter, the Spanish economy remains 8.7 percent below its level a year ago—one of the largest contractions in Europe. The magnitude of the drop reflects the large-scale spreading of infections, which required strict lockdown measures. Structural features that make the Spanish economy vulnerable to disruptions also played a role. Contact-intensive service sectors like tourism, which accounts for about 12 percent of Spain’s economy, were hit especially hard. Small and medium-sized companies, which typically have fewer financial resources and contribute to over 70 percent of employment, are struggling to stay afloat. The widespread use of temporary employment accounted for most of the job losses.
The Spanish authorities have provided swift income and liquidity support to limit the fallout of the pandemic. The short-time work scheme benefited about 22 percent of salaried workers at its peak. And public loan guarantees have targeted small businesses. In the near term, flexible and agile fiscal support needs to remain in place. Over time, the measures should become increasingly targeted, with a focus on vulnerable groups and viable firms.
Addressing corporate sector vulnerabilities is crucial for Spain’s recovery from the COVID-19 crisis. Taking into account the impact of policy measures, the share of debt at risk of vulnerable firms is estimated to rise by 7 percentage points—to about 37 percent—as opposed to rising by 27 percentage points without policy measures. This highlights the critical importance of policy support. Shortcomings in the insolvency frameworks, if not addressed, will weaken the economy’s capacity to deal with a potential wave of insolvencies. A slow restructuring of the economy could dampen firms’ profitability and investment, lowering the country’s potential growth.
The EU Recovery and Resilience Facility is an exceptional opportunity for Spain. It can provide a demand boost to support the recovery, while closing gaps in green infrastructure and human capital. This will accelerate the transition to a low-carbon economy and strengthen the economy’s long-term potential. Residential housing is an example of a sector that would benefit from labor-intensive, climate-compatible public investment. It accounts for about 16 percent of Spain’s non-EU Emissions Trading System emissions, is difficult to decarbonize, and is one of the most energy inefficient in Europe.
The pandemic is widening inequalities in the labor market. The job market disruptions among on young, low-skilled, and temporary workers have been especially harsh. Going forward, policies to overcome the overuse of temporary contracts and enhance the employability of dislocated workers through better active labor market policies, such as more targeted vocational training, will be key for greater social inclusion.
The pandemic is having an especially detrimental effect on women, putting decades of progress in gender equality at risk. Women are particularly vulnerable to the economic fallout of the pandemic. About 29 percent of women in Spain worked in jobs that were hit hardest by social distancing and lockdowns, compared with 21 percent of men. At the beginning of the lockdown, Spanish women worked at least two hours more of unpaid housework every day than men. Boosting family and childcare support and promoting flexible working arrangements are the key priorities for achieving greater gender equality.