Recessions
Recessions and depressions usually create high amounts of fear. Collectively, the global economy is adversely affected by a recession, and the losses are enormous from the international business perspective. A recession can be defined as a significant decline, notably in a specific designated region’s general economic activity. Generally, it represents a contraction of the business cycle when the economic activities experience a general decline. In the occurrence of a widespread drop in spending, a recession typically occurs (Christiano et al., 2015). A recession is commonly recognized as two consecutive quarters of a significant economic decline, with this being a reflection of the GDP, which is usually in conjunction with several monthly indicators of the deterioration, which include an increase or rise in unemployment rates. The essay explores how the current recession is notably different from the 2008 recession.
Notably, although the consequences of the recessions might be in many ways similar, there are typically significant differences that generally exist between the 2008 economic recession as well as the 2020 crisis that has recently erupted. Primarily, one of their differences may be notably on their origins. Firstly, the 2008 Great recession was majorly systematic, taking hold notably in the financial system. Elsewhere, the Great Pandemic of 2020 is generally a cyclical crisis that was mainly caused by the economy being brought into a sudden unexpected still that was generally in response to a health crisis (Gertler & Gilchrist, 2018). However, despite a large amount of uncertainty of the crisis, experts postulate that the rate of recovery of the economy is majorly dependent on the speed with which the containment measures of preventing the spread of the crisis are lifted.
The 2008 recession majorly is termed as the great recession. It represented a period of marked general economic decline globally observed in all national economies, with this decline occurring globally between 2007-2009. However, the timing and scale of the recession majorly varied from one country to another. Generally, there was a global GDP decline of approximately 5.1%, which hurt the business activities and spending patterns among different economies globally. Further, the peak global unemployment recorded was 10% by October 2009. The world financial markets, banking industries, and real estate industries were devastated due to the global economic downturn. The crisis majorly had several effects in the global economies, which included a worldwide increase in home mortgage foreclosures, with further millions of people being forced into losing their life savings, jobs, and losing their homes.
Generally, several factors are linked with the causes of the great recession. These causes include the Federal Reserve lowering the Federal funds rate. As a result, this went on to creating a flood of liquidity in the economy. Additionally, as a result of the Federal Reserve lowering the Federal funds rate, other effects that resulted included imbalances in international trade, limited regulation of non-depository financial institutions, and lax lending standards that majorly contributed to developed country’s high levels of household debt and also real-estate bubbles (Christiano et al., 2015). The high levels of household debt and real-estate bubbles have since then burst. Some of the 2008 recession responses include governments’ fiscal policies, central banks’ monetary policies, measures designed in helping indebted customers purposely undertake mortgage debts refinancing, and different approaches used by the government to bail out troubled private bondholders as well as troubled banking industries.
On the other hand, the current economic recession has been experienced in several countries due to an increasing economic showdown, leading to a slump due to the GDP decline in back-to-back quarters. Generally, the current recession is notably not caused by a broken link within the system, like the 2008 Great recession caused by poor decisions and decisions by Wall Street, whereby people with credit and income challenges were given mortgages. The recurrent recession is notably from an external threat, majorly, the worldwide pandemic (Gertler & Gilchrist, 2018). To curb the spread of the disease, namely Corona Virus (COVID-19), non-essential businesses were forced by the government to close their operation. Simultaneously, the government also brought lockdown orders, notably bringing numerous industries and functions to a grinding halt that has then resulted in an economic slowdown due to the reduced business activities.
Generally, Economists postulate that the factors that contributed to the current economic showdown, including how fast it hit and who the crisis is affecting, are usually different from the factors leading to the previous economic downturns. Thus this may lead to different outcomes (Foroni et al., 2020). This paper explores the significant ways in which the current pandemic-driven recession is further from the Great recession of 2008 and what those contrasts could generally mean for a recovery. These differences include:
The source of the current recession is not financial.
In many past recessions, the economic downturn was majorly resulting from issues in the financial markets systems, monetary policies, oil prices, or a specific sector within the economy. The Great Recession of 2008, which majorly lasted from December 2007 up to June 2009, generally resulted as a result of the subprime mortgage crisis as well as lax lending standards that notably contributed and led to the mortgage industry collapse (Foroni et al., 2020). On the other hand, the current recession was generally as a result of a public health crisis. Due to health concerns, this crisis’s only remedy was to stand down and pause the economy. Economic fallout resulted as a result, with this negatively impacting GDP growth, trade (including international trade), and an increase in unemployment rates.
The speed of the economic collapse
Another difference is notably at the speed of how the economy collapsed. The current recession is highly unusual in how fast it has hit, particularly on unemployment. Due to the shutdown of economic activity in the US and the global economy, trading activities took a slowdown, resulting in many industries collapsing hence shut down. In America, for example, millions of people have lost their jobs, both in the formal and informal sectors, due to the health crisis and the containment measures put in place to curb the spread of the disease. Contrary, the Great Recession’s unemployment rate did not peak until October 2009, despite the recession starting in December 2007 (Katz, 2015). In the US, curbing the current health crisis such as social distancing has caused unemployment rates even to surpass the 10% peak, raising questions of how comfortable the task will be to get the economy back fully fit again.
The scope of the current recession is broad.
One of the most distinguishing characteristics of the current recessions is that it is much more pervasive. Notably, in the Great Recession, the economic slowdown began mainly in finance, slowly trickling its way down to the rest of the economy. However, the current recession has hit fast, affecting everyone within the economy (Fernandes, 2020). All sectors in the economy have been adversely affected by the crisis, leading to a fast economic slowdown. As a result, the current recession’s pervasiveness makes it a difficult task for the governments to end the recession and boost economic activity. Majorly, when the private sector is generally not functioning fully, the private sector usually steps, in this case, to help (Nicola et al., 2020). As a result, the federal and state governments take up the public sector’s roles, especially during economic downturns. For example, during the Great Recession of 2008, President Franklin Delano Roosevelt’s administration created the Works Progress Administration, putting an average of 8 million Americans to work on various public projects (Mian & Sufi, 2015). However, the current recession has had measures that do not allow people to be in large groups, keeping them away from participating in those public projects.
2020 started in a better position
Generally, the 2020 economy majorly started in a better position, which is considerably different from the 2008’s. In the current recession, the financial year began with fewer imbalances, fewer debts for families and businesses, and more capital than the 2008 fiscal year (Coibion et al., 2020). 2008 was mainly due to a fault in the financial systems. However, due to the rampant damage of the current recession, specifically on the economy, 2020 could end in a far much worse situation than in 2008.
Demand crisis v Supply crisis
The Great recession of 2008 was majorly a demand crisis that was notably created from confidence. Contrary, the current downturn majorly started as a supply-side crisis. Notably, numerous companies in China were closed mainly due to the epidemic, contributing to many companies in the West lacking components vital for their production activities (Foroni et al., 2020). However, a second phase followed. After the pandemic spread, a demand crisis resulted because containment measures for the epidemic adversely affected consumption. As a result, this led to an increase in unemployment rates. The latest forecasts of the International Monetary Fund suggest that in 2020 (Coibion et al., 2020). The global GDP could fall by 3%, compared to the 0.1% decline in 2009.
Additionally, another difference between the current recession and the Great recession of 2008 is that the current crisis’s origin is notably not nebulous, but rather, it is majorly concrete. For the time being, the recent recession is also cyclical, not systematic, and further, it is causing adverse damages to both demand and supply.
Conclusion
Conclusively, despite the several differences between the two recessions, their consequences are almost similar. The effects include increasing unemployment rates and growing calls for the borrowing of funds from monetary institutions to cushion the impact on productive sectors and families. The recovery of the current recession is mainly dependent on the containment measures’ duration to open up the economy. However, a critical factor in the current crisis has been primarily on the speed and strength with which different agencies and governments have acted, which is vital in preventing cyclical recession from becoming systematic or structural. Any economic measures put in place will be decisive in the determination of the recovery shape. Notably, the longer the current health crisis affects daily life and business. The longer the respective country’s governments bring the virus under control, the more damage the crisis will cause to the economy, causing adverse effects.
References
Christiano, L. J., Eichenbaum, M. S., & Trabandt, M. (2015). Understanding the great recession. American Economic Journal: Macroeconomics, 7(1), 110-67.
Gertler, M., & Gilchrist, S. (2018). What happened: Financial factors in the great recession. Journal of Economic Perspectives, 32(3), 3-30.
Mian, A., & Sufi, A. (2015). House of debt: How they (and you) caused the Great Recession, and how we can prevent it from happening again. University of Chicago Press.
Katz, L. (2015). Long-term unemployment in the Great Recession. EPRN.
Coibion, O., Gorodnichenko, Y., & Weber, M. (2020). The cost of the covid-19 crisis: Lockdowns, macroeconomic expectations, and consumer spending (No. w27141). National Bureau of Economic Research.
Fernandes, N. (2020). Economic effects of coronavirus outbreak (COVID-19) on the world economy. Available at SSRN 3557504.
Foroni, C., Marcellino, M. G., & Stevanović, D. (2020). Forecasting the Covid-19 recession and recovery: Lessons from the financial crisis.
Nicola, M., Alsafi, Z., Sohrabi, C., Kerwan, A., Al-Jabir, A., Iosifidis, C., … & Agha, R. (2020). The socio-economic implications of the coronavirus pandemic (COVID-19): A review. International journal of surgery (London, England), 78, 185.