A historical context for the 2020 recession


To understand where we are in the current economic downturn, it is helpful to look at previous times of recession and economic upheaval, comparing if it looks fast or slow compared to them.

Early 90s

This was a short and mild recession. The total drop in output was around 1.4% and the recovery to the previous GDP level took 2 years, growth then resumed at the same rate as before the recession. I estimate a permanent loss in output of around 6% of GDP.


Early 2000s

From memory this felt like a major recession but looking at the data it was very mild. Growth averaged around zero for 2 years, before starting on the previous growth path. Again, I estimate a permanent loss of GDP of around 6%.

Great Recession

Here the recession was much deeper and longer. A total drop in output of 4% and it took 4 years to recover to the previous level of GDP. I estimate the permanent GDP loss compared to the previous growth path to be 10%.

What can we learn from previous recessions?

  1. Future growth path

I cannot find an example of where we returned to the previous path of GDP. The loss of GDP is permanent but on the positive side in every case, we returned to the previous trend growth rate.

  1. Timing

The more severe the recession the longer the time to recovery and the greater the permanent loss in GDP. In the early 90s and early 2000s, it took about 2 years. For the Great Recession the loss of GDP was about twice as large, and it took about twice as long to recover with 4 years before the US regained its previous level of GDP.


How does the 2020 recession compare?

Q1 GDP came in at -4.8% which already puts this recession as larger than the ones we saw in the early 90s and 00s, second only to the Great Recession of 2008. However lockdowns only really came into effect during March, the last month of Q1.


How about Q2?

This is where the numbers look extraordinary and charts will have to change their scale dramatically. As I described in the previous post, recent estimates are down 35%.

https://www.frbatlanta.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf


Has there ever been as large a recession as this one?

The only comparison that can be made is with the Great Depression when GDP dropped a total of 25% between 1929 and 1933. In this case it took over a decade to sustainably exceed the 1929 level of GDP.

What does this tell us about 2020?

History tells us that the more severe the recession the longer it takes to recover. This recession is far more severe than any on modern history.

Many economic forecasts and especially the stock market tell us it will not follow the path of previous recessions and we will rapidly return to previous levels of GDP. I do expect a large retracement of the negative drop in the first half of this year. But I cannot see us getting close to previous levels of GDP any time soon.

In my next post I will examine the particular nature of this recession and how it may develop.

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