This is not the first time the world has faced economic dangers but the Covid-19 outbreak is by far the most devastating. I have a feeling that it could beat the legendary 1930s Great Depression. There are many questions to ask, particularly about the future of the world and the Thai economy. I'd like to raise three questions as follows:
Q1: Why is the Covid-19 pandemic causing the worst economic recession in a hundred years?
Both the International Monetary Fund (IMF) and the World Bank say this pandemic will cause the deepest recession since the Great Depression of the 1930s. At that time, the US economy shrank by 8.5% in 1929, 6.4% in 1930 and 12.9% in 1931. The economic depression spread round the world, causing the British pound to collapse and triggering bank crises in Germany and Austria in 1931. The world economy was falling apart. Things could have become even worse had the newly elected US President, Franklin D Roosevelt (FDR), not initiated a large-scale economic stimulus package called the "New Deal".
But the Great Depression was not caused by a pandemic, natural disaster, war or terrorist attack. It was simply panic after a decade of economic overheating. From January 1920 to September 1929, the US stockmarket index rose about 350% at an average of 35% a year. Propelled by greed, everybody from all economic classes invested their life savings into shares. Some even borrowed money to finance their investment.
When the market collapsed in October 1929, the future suddenly looked bleak and the fear of economic collapse became a reality. Consumers abruptly slowed down consumption and businesses halted their investments. These two factors gave birth to the Great Depression era.
The world's worst pandemic -- the Spanish Flu of 1918, which infected 500 million people and killed 50 million -- left no visible marks on the global economy. On the contrary, it flourished after the pandemic ended in 1921, entering the era of the "Roaring Twenties". Other pandemics like the Sars pandemic (2002), Swine Flu pandemic (2009) and Mers pandemic (2012) only resulted in minor hiccups in economic growth. Hong Kong, the centre of Sars, spent HK$11.8 billion (47.95 billion baht) to counter the economic malaise of the outbreak. It has already coughed up HK$137.5 billion to lessen the economic effects of the Covid-19 outbreak. See the difference?
The culprit is not the outbreak, the culprit is the lockdown. I am not saying that lockdowns are inappropriate. I mean that by adopting lockdowns to control the spread of diseases, one has to accept their great economic consequences. Singapore's recent second-quarter GDP performance -- it shrank by a whopping 41.2% -- is clear evidence. What was Singapore's GDP performance in 2003 during the height of Sars? It grew 4.5%. See the difference?
Q2: Did the New Deal stop the Great Depression? And how will current stimulus packages affect the Covid-19 economic depression?
The New Deal did not prevent the depression despite representing approximately 20% of GDP spending. It only temporarily halted the slide. US economic growth returned to positive territory during the programme but once it stopped in 1937, the economy slipped back into a recession, with a 3.3% decline in 1938 and unemployment rising back to 19%.
It was only WWII that ended the Great Depression. It was not the magic of war but the 100% of GDP spending on war budgets that did the trick.
Q3: Is any government likely to spend 100% of GDP to end the Covid-19 Depression?
According to IMF data, the world is spending US$11 trillion -- or roughly 12.6% of GDP -- to stimulate the world economy. If 20% of GDP spending could not stop the Great Depression what makes anyone think spending 12.6% of GDP can get the job done today? This is precisely the reason why the IMF has downgraded its 2020 GDP growth forecast from negative 3.0% in April to negative 4.9% in June. While countries are now reporting actual second-quarter GDP growth figures, I am certain the IMF will downgrade the whole year's economic outlook again.
Q4: Could the second half of this year be better than the first half for the Thai economy?
Forget about the risks of a second lockdown following current incidents. Thailand has done an excellent job in controlling Covid-19, resulting in an almost total removal of lockdown measures. Economic activity is being allowed to resume and consumers are enjoying their new-found freedom, with clubs and bars packed and the roads full of weekend travellers. Will all this pave the way for economic growth to resume later this year?
No. It is the opposite. Economic growth is likely to be much worse in the second half of this year for three reasons. The most important is that the cash handout programme of 450 billion baht (equivalent to 10.7% of quarterly GDP), known as Leaving No One Behind, was halted in the second quarter. With no more free cash, third-quarter GDP will decline 10.7% due to that factor alone. Second, people and businesses are running out of savings. The first quarter, despite GDP shrinking by just -1.8%, was mostly a "normal" quarter as 6.7 million foreign tourists spent money in Thailand.
Foreign tourist money, which accounts for 11.1% of GDP, was zero in the second quarter and is likely to remain zero throughout this year. To counter that loss of income, people are having to stretch their savings to survive. Thai people, on average, have four months of savings in the bank and that sum was greatly exhausted in the second quarter. Consumers have no choice but to further and severely cut back on spending until foreign tourist money comes back.
Third, more businesses will have to close for good, causing massive unemployment. There are three round of business bankruptcies. The first concentrates on export- and tourist-related businesses and have already happened. The second round will be in service-related business such as restaurants and retail sales. We are witnessing that now. The third round will be domestic consumption businesses, mostly SMEs, because domestic demand is too weak to support them for a prolonged period.
All these seriously negative factors -- no more cash handouts, exhausted savings, and permanent closing down of businesses -- leave me no choice but to be pessimistic about the second half of this year.
What about next year and beyond? Not good news. I will explain that in future articles.
Chartchai Parasuk, PhD, is a freelance economist.