The Impacts of Covid-19 on the Economy - Are we heading for 1929 collapse?

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The COVID-19 pandemic has had a profound impact on the global economy, and many are comparing it to the Great Depression of the 1930s. The Great Depression was a severe worldwide economic depression that lasted from 1929 to 1939 and was the longest, deepest, and most widespread depression of the 20th century.  At the moment we have eye-watering inflation which in turn will lead to disinflation, deflation and then stagflation.

The COVID-19 pandemic has resulted in some job losses, reduced consumer spending, and decreased business activity. The hospitality & travel industry suffered the most during lockdowns although government support and loans have kept the majority of businesses going.  Governments have implemented large-scale fiscal and monetary measures to support the economy, such as stimulus packages and low-interest loans, which have helped to prevent a complete economic collapse. Overall, the economy has held up pretty well and the talk of recession has been premature in 2022 and early 2023. There have been a great number of job losses recently in the tech sector but all other industries are ticking along ok.

The problem the economy now faces is persistent inflation that has occurred during the last 12 months, consumer saving rates have been slowly declining and credit card debt has been increasing along with other forms of debt. Wages have not kept up with inflation which has pushed many "just about managing" folk into poverty.

Business loans from covid are still to be paid back and higher interest rates are making it harder for companies to pay back these loans.  Consumers also face high mortgage and energy bills which are all drag on the economy.  As the economy is a bit like a supertanker, we haven't really seen any of these take effect and everything happens with a lag.  The most widely predicted recession in history hasn't materialised but that doesn't mean it's not going to happen. The soft landing will probably revert to a hard landing and disaster, which is likely to happen by the end of this year. 

As Henrik points out below, he is suggesting a blow-off top in the markets before the largest deflationary bust in history.

This could and will probably be devastating for many people.  Job losses, asset prices and a deflationary bust will have governments scrambling to prevent chaos, although the usual tools of reducing interest rates won't have much effect.  Some governments may revert to negative interest rates again.  There will be some respite when governments start bailing out the entire financial markets and start financial engineering and try to boost the economy,  but pensioners will find their pensions decimated and asset holders will see the value of their housing and stock portfolio down 50 or 60%.

I believe covid will make the situation much worse. After the deflationary bust, governments will try to boost spending and infrastructure spending but there will be a lack of active workers and too many will be relying on government support.  The likely outcome is a financial reset, debt written off and a new monetary regime.  I believe governments have underestimated covid, long covid and the resulting deaths from long-term illnesses. Many older workers have already taken early retirement on health grounds, or have chosen for their own safety to retire early.  When you have such inequality in the western world, it does allow many to have the freedom to choose when to retire.  For example, if you are a medical consultant in the UK and earning 150k a year, it wouldn't take many years if you have invested wisely to be able to retire before 55.  I'm not suggesting some doctors are being paid too much, far from it but when you have average salaries in Portugal of less than 1000 euros, you can see why it's possible for many on high salaries to retire early, sell or rent their property and move to another country. 

Younger people are also being affected by long-covid and have had to take long-term sickness and many will never return to the workforce unless science can catch up with the covid and provide better treatments to help the long-term sick.  With more covid variants in circulation and evolving and transmitting faster, the above problems are only going to get worse.   We must now hope science catches up with treatments and improved vaccines are developed, and also pre-empt other viruses that could greatly affect us, including bird flu, MERS or deadly combination.

As Covid-19 is showing it is not a seasonal disease, we can expect more people to develop long-covid and unfortunately a lot more deaths.  In the next couple of years, we should be prepared to buckle our seats, both from a health and financial point of view.

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