Why the coronavirus downturn could be worse than the GFC
As COVID-19 continues to tank markets around the world, it's worth taking stock to see how it compares to the global financial crisis (GFC).
To be sure, coronavirus and the GFC are different crises borne of different causes.
The GFC was a credit crisis stemming from bad mortgage lending practices and antagonised by exotic financial instruments that dispersed and cloaked risk.
Eventually, mortgages defaulted on a mass scale and credit markets froze up. Companies were unable or constrained in their ability to roll over debt.
"The GFC was, first and foremost, a financial shock that took a severe toll on the real economy," says Stephen Roach from the International Monetary Fund (IMF).
"COVID-19, by contrast, is a public-health crisis. Draconian containment efforts - lockdowns, transportation bans, and restrictions on public assembly - are producing a shock to the real economy, with devastating consequences for businesses, their workers, and the financial sector."
However, there are some similarities in their effects. The present crisis, like the GFC, will possibly lead to a credit crunch. Highly leveraged companies could have difficulty rolling over their debt because markets have essentially stopped trading.
This problem is exacerbated by a lack of liquidity in the market.
"It is fair to say that a major contributing factor of the veracity of the market sell-off, in particular risk assets such as corporate debt, has been lacklustre liquidity and poor price discovery," says Jay Sivapalan from Janus Henderson Investors.
There's a growing consensus among business leaders that coronavirus will cause a recession (defined as two consecutive quarters of economic contraction) worse than the GFC.
Commonwealth Bank CEO Matt Comyn believes the impact from coronavirus could be worse than the GFC.
"There's every reason to be concerned at this particular point in time," Comyn told ABC.
"The GFC was quite different and much more around failure in the financial system and a lack of trust, particularly between financial institutions."
Meanwhile, Qantas CEO Alan Joyce believes the virus is worse than the GFC, and would likely lead to a "significant recession" globally and domestically.
This will have very real impacts for Australia. The necessary lockdown to combat the virus will also lead to widespread job losses. Westpac forecast the national unemployment rate to reach 11.1% by June due to a loss of 814,000 jobs.
However, the forecasts aren't all apocalyptic.
Chetan Ahya from Morgan Stanley says a scenario where the outbreak peaks in April or May would to a fiscal deficit in G4 nations (US, Europe, Japan and the UK) would grow to 5.1% of 2020 GDP.
"In this scenario, global growth averages just 2.3% in the first half of 2020, but starts to pick up in the third quarter."
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