BIS Annual Economic Report 2020

A global sudden stop

The past year has felt like an eternity. It is probably too early to tell, but future economic historians might consider the Covid-19 pandemic a defining moment of the 21st century. When, just over a decade ago, the Great Financial Crisis (GFC) hit the global economy, it was rightly considered such a moment. The pandemic's legacy could be even deeper and longer-lasting.

The economic impact of the coronavirus has been variously described as suspended animation, a hibernation or an induced coma for much of the global economy. These metaphors bring to mind two key features.

First, this sudden stop has been extraordinarily abrupt. Economic activity has collapsed even more steeply than in the Great Depression, to even greater depths than those of the GFC. Many economies shrank by an annualised 25-40% in a single quarter, and some saw unemployment rates soar into the teens within a couple of months. Moreover, and unlike the GFC, the crisis has been truly global, sparing no country in the world. The collapse has elicited a monetary, a fiscal and, for the first time, a prudential response that exceeds in scale and scope the one to contain the GFC. And, again, central banks have acted as the first line of defence, pulling out all the stops in order to stabilise financial markets and the financial system more generally and to preserve the flow of credit to firms and households.

Second - and this is what makes the crisis so unique - it is a policy-induced recession generated by repressing economic activity. It results from efforts to tackle a health emergency and to save lives through containment measures and social distancing - previously obscure terms that have thrust their way into our day-to-day vocabulary. This unprecedented configuration greatly heightens uncertainty about the economy's future evolution.

But, before turning to policy in detail, how has the economic crisis unfolded so far? In particular, what role have financial factors played?