The economic upheaval caused by the COVID-19 outbreak has revived memories of the 2008-09 global financial crisis (GFC): recession chatter, bloodbath on global stock markets, governments and central banks loosening the purse strings.
The pandemic has virtually brought the world economy to a standstill with millions of people placed under lockdown and global supply chains thrown into disarray because of the virus wreaking maximum havoc in China – the world’s factory. While many are already comparing the current crisis with the 2008-09 recession, most experts do not expect it to be as bleak and are forecasting the global economy to swiftly recover in the second half of the year, provided the outbreak fizzles out by then. Yet, the Novel Coronavirus has dealt historic blows to the airline industry and oil markets. We asked experts to compare the economic damage caused by the two crises.
The aviation industry, suffering from cut-throat competition, price wars and poor financial health, has been clobbered hardest by the pandemic, which has virtually ground air travel to a halt and threatens to bankrupt most airlines. British Airways CEO Alex Cruz described the situation as a “crisis of global proportions like no other we have known”.
“Some of us have worked in aviation through the global financial crisis, the SARS outbreak and 9/11. What is happening right now as a result of COVID-19 is more serious than any of these events,” he said in a memo to staff.
Several prominent airlines are seeking state relief to help them weather the current turbulence.
“When we see well-capitalised airlines like Lufthansa making statements about the need for state support, then we know things must be bad,” Rob Morris, global head of consultancy at Ascend by Cirium, told us. “Clearly, for every airline globally the objective for 2020 will be to survive through this crisis. I fear there are many who will not be able to achieve that and we will almost certainly start to see some significant airline failures shortly.”
The oil markets are in no better shape. Global oil consumption is expected to witness its biggest fall in history, hurt by a temporary ban on travel, factory shutdowns and other measures to contain the virus. The fall in oil demand could easily outstrip the loss of almost 1 million barrels a day during the 2008-09 recession, Bloomberg reported. Compounding problems is an ongoing price war launched by Saudi Arabia which has pledged to flood an already oversupplied market with cheap crude. Oil prices have fallen by more than 50 per cent this year. “In 2008-09 we had a demand shock, and inventories built. This [current crisis] looks likely to have a bigger impact, partly because there is a lot of uncertainty still around and partly because it is both a demand and supply story,” Philip Jones-Lux, energy market analyst at JBC Energy, said. “The industry has been supposedly readying itself for a ‘lower for longer’ scenario, but the current market and outlook are beyond anything that could be reasonably prepared for and we are likely to see some real pain inflicted if prices remain in the $30-a-barrel range.” The housing market, which was propped up by cheap loans offered to households by banks, was the epicentre of the 2008-09 crisis. The bursting of housing bubbles in the US and in other countries such as the UK, Spain and Ireland brought major global banks, which did not have enough capital to withstand the shock, to their knees. The banks paid a price among other things for bundling subprime mortgages into complex, opaque derivatives to maximise profits. This time, the banks are in a much better position thanks to increased regulation.
“The 2008-09 crisis was far more severe because the global financial system was far more fragile. Banks were not as well-capitalised as they are today particularly in the US,” Sara Johnson, IHS Markit executive director, said. “While today there are concerns with rising nonfinancial corporate debt, I’d say the magnitude is not as severe as in 2008-09.” But banks, especially the European ones which have been struggling to boost profits at a time of ultra-low interest rates, are nevertheless feeling the heat. They are bracing for further interest rate cuts and loan defaults. Experts are also flagging a possible sovereign debt default by Italy, which is in a state of lockdown to contain the spread of the virus. European banks are holding more than €446 billions ($497 billions) of sovereign and private Italian debt, according to Bloomberg.
The collapse of US lender Lehman Brothers in 2008 fuelled the most painful global economic downturn since the Wall Street Crash of 1929. The sustained, severe recession saw global output contract by 1.8 percent in 2009 compared with an expansion of 4.3 percent in 2007. Millions of jobs were lost. While the current crisis could cost the global economy up to $2 trillion this year, it’s still not expected to push the world into a contraction.
“Our view is that this is a much more temporary shock that is going to have less significant and longstanding negative impacts on the global economy than the global financial crisis,” Ben May, director of global macro research at Oxford Economics, said. “It’s not that as if you don’t go out today because you’re worried about catching the virus, the money that you didn’t spend today will be saved forever. It’s more likely to be spent in the future. When you look at past episodes of virus outbreaks or natural disasters, you know typically discretionary spending returns at a later point.”