In 1941, Britain considered its colony of Singapore to be pretty much impregnable. But while the naval base was bristling with big guns, its defences were geared towards preventing a sea-based invasion and when the attack came it was on land, down the Malay peninsula. Britain was expecting trouble, just not from that direction.
The same fate has befallen the International Monetary Fund, which has been fretting for some time about excessive financial speculation on the back of permanently lowinterest rates and the risks posed by global heating but – like almost everybody else – failed to spot where the immediate threat was coming from.
The fact that the Covid-19 pandemic spread so quickly meant countries had virtually no time to prepare for it. Nor had they any experience of a recession arriving with such sudden ferocity. A look back at past slumps shows that it normally takes 18 months or two years for output to fall from peak to trough. This time, the IMF expects that following an unprecedented collapse recovery will begin in the second half of 2020.
Take the UK as an example. The IMF’s world economic outlook is predicting that the economy will contract by 6.5% in 2020, which looks similar to the decline during the 2008-09 recession. But the previous recession began in the spring of 2008 and lasted for five quarters.
This time the decline has been much more sudden, with the IMF expecting the maximum amount of pain to be in the current quarter. That’s also the assessment of the independent body that has the task of assessing the state of the economy and the public finances for the government.
But the Office for Budget Responsibility thinks output will fall by 35% between the first and second quarters and that public borrowing will hit 14% of GDP this year – comfortably its highest in peacetime.
It is a similar picture around the world. What is clear is that shutting down businesses and quarantining populations will have an enormous short-term impact on economic activity. It is also obvious to the IMF that the recovery is going to take some time, because countries will exit lockdown only gradually.
It remains to be seen just how gradual this process proves to be, and whether it is interrupted by a recurrence of the Covid-19 virus. The IMF is encouraged by the evidence that the lockdowns are helping contain the virus and thinks the extraordinary policy response from central banks will help limit the number of firms that go bust and the number of people who will lose their jobs.
But it has sketched out some alternatives to its baseline forecast in which the lockdowns are extended and there is a second outbreak.
Inevitably, the result would be both to deepen and prolong the downturn and in the worst case the trough would not come until next year.
By that time, the world economy would have shrunk by more than 10% and talk of a second Great Depression would be fully merited.