How the COVID Recession is Different from Other Recessions

Recessions are often defined as two consecutive quarters of declining economic activity caused by reduced aggregate demand. During recessions, resources are not fully employed as unemployment rises and businesses close. Expansionary fiscal policies, such as government spending, may help create jobs and provide key long-term investments such as education and infrastructure to boost aggregate demand. However, the scale of fiscal expansion in individual countries will depend on pre-existing macroeconomic conditions and access to financing.

The World Bank estimates that 93 percent of all economies faced recessions in 2020. This compares to the 1930’s Deep Recession with 84 percent and the 2008 Great Recession with 61 percent. Unlike the previously mentioned recessions, the COVID-19 recession is health related, limiting the movement of people and impairing the demand and supply of goods and services, as persons are unable to have normal work, school or leisure related activities.

The COVID-19 recession also differed from the other recessions in terms of the speed of response by governments. Usually, the time taken to recognise recessions lags and the stimulus needed to aid the crisis may be prolonged through legislative requirements and parliamentary debates. As the 2020 recession was predicted, governments promptly implemented various policies such as additional spending, strengthening of the safety net for the most vulnerable, including displaced workers, and financial support for impacted businesses. In addition, international financial institutions intervened by extending financial assistance, including some debt relief, to countries to help navigate the crisis and mitigate the adverse effects of the economic decline.

As countries implemented lockdown restrictions, the travel industry, especially tourism and small businesses such as restaurants and theatres were negatively impacted. The World Tourism Organization (WTO) forecasted a 72 percent fall in global tourism activity, with the Americas experiencing a 68 percent decline. Total energy demand fell by an estimated 5.3 percent, with most energy sources declining except for renewable energy. Thus, energy-based economies also suffered economic contractions.

The stock market and housing market recovered from lows in March and April respectively, thus indicating signs of a return of confidence. However, the persistence of the health crisis means that uncertainty abounds about the durability of the recovery. The challenge facing governments, therefore, is to find a balance between promoting safe health care practices while creating an environment to curb the lingering recession effects of unemployment and corporate bankruptcies.