Key question asked over financial firepower

Compound effec

The economic shutdown in many countries came at a time when the global economy was overdue for a correction, having experienced one of the longest upward cycles in economic history since the global financial crisis.

Some commentators believe the compound effect of this could result in the 2020s becoming a repeat of the Great Depression in the 1930s

Michael Spence, professor of economics at New York University's Stern School of Business and a Nobel Prize winner for economics, said this is not inconceivable.

"There would have to be a lot of mistakes made to get there. The main risk is the poorer developing countries. They are highly vulnerable, both medically and economically," he said.

"If they don't get help from the G20, international financial institutions, and generally from other countries, they could be in a grim situation," he said.

Zhu Ning, deputy dean and professor of finance at the Shanghai Advanced Institute of Finance, said the problems of the 1930s were compounded by the wrong policy response (deflationary, rather than expansionary) and he is concerned that the action taken by governments this time might be ineffective.

"Global coordination is required to boost global demand once again. This will probably be more challenging after the pandemic is over, because the relatively lower hanging fruits (in terms of policy tools) have already been plucked in the aftermath of the previous crisis just over a decade ago," he said.

McWilliams, from CEBR, said if the pitfalls of the 1930s are to be avoided, trade wars have to be "well and truly" off the agenda once the pandemic ends.
"One of the big mistakes of the 1930s was to follow beggar-my-neighbor policies, imposing tariffs and limiting international trade," he said.