April 8, 2020

Fathom’s Chart of the Day 08.04.2020: Cost to governments of fighting COVID-19 on a par with that seen through the GFC

by Fathom Consulting.

The drop in economic activity that is unfolding is, for those of us who have not lived through the Great Depression, almost certainly an order of magnitude greater than anything we have seen before. But that does not mean that we are necessarily facing a recession that is more severe than anything we have seen before. What is crucial is that governments around the world step in immediately to support those firms, and those workers, who have been severely affected by the lockdown so that they are able to swing back into business once the restrictions are lifted. In a note to clients we argue that this is likely to cost somewhere in the range 15%-50% of annual GDP. A large sum of money, undoubtedly, but in the vicinity of the increase in government debt that took place across the major economies in the aftermath of the Global Financial Crisis, as the grey shaded area in our chart makes clear. The risk, if we do not put in place the necessary support packages, is that the initial sharp contraction gets locked in, and we endure an ‘L-shaped’ recovery.

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