Covid shock vs global financial crisis

Context: A comparison between the COVID shock with the Global Financial Crisis (GFC) shows that the Pandemic is not as bad as the 2008-09 global downturn

Comparison between GFC and Pandemic induced slowdowns:

• Immediate impact:  According to the IMF, the world economy is poised to shrink by 4.4 % in 2020 while the shrinkage was only 0.6 % in 2009
• Loss of Output:  The output potential loss for Pandemic is projected to be 3.5 % while the output potential in 23 Organisation for Economic Co-operation and Development (OECD) economies had fallen by 8.3 % in 2015.

• Banking systems: According to the IMF’s Global Financial Stability Report, the banking systems is capable of tackling the shock of the Pandemic

• This better performance of the banking system during Pandemic is due to the higher capital cushions with the banks due to the more stringent capital requirements under Basel III norms.
• Banks were required to hold 2.5 % as capital conservation buffer along with the 8% capital required previously.

• Increased Borrowing:  Borrowing had increased during Pandemic comparing of that during the GFC

• The increased borrowing is sustainable now due to an increase in the difference between growth rate and interest rate and due to low inflation rates during the past years.

• Impact of fiscal stimulus: The retreat from fiscal stimulus during GFC was under way by 2011 while the current fiscal stimulus is expected to go a long way towards containing the impact of the Pandemic.

Conclusion: Though the immediate impact of Pandemic was more than GFC, it is expected that the present crisis will not be as bad as the 2008-09 global downturn in the long run.