As a result of the coronavirus, we are heading towards the worst recession in peace time ever. Not just according to some people or the media, but according to globally respected institutes such as the World Bank, the International Monetary Fund and the OECD. Projections range from a 3% (IMF) to a 5.2% (World Bank) and a 6% (OECD) decrease in the global economy over 2020, before recovery can take place in 2021.

For those directly affected, this can be a major setback. People lose their jobs or experience a sudden drop in income. They may lose their homes and don’t earn enough to cover their expenses—including those for health care. Businesses go bankrupt or suffer severely, both in the short term and the long term. And at the national level, government debts increase while tax incomes decrease.

All of this sounds quite dramatic. And it may feel dramatic too. But if we put this recession in perspective, it may not be as bad as it seems. There are four reasons why.

Bad is subjective

The depth of the recession can be measured objectively. While projections differ substantially, after the fact we will be able to assess quite objectively how much the global economy has contracted as a result of COVID-19. But whether we label this contraction as good or bad is subjective.

There is a strong tendency to label the contraction as bad. Again, not only by some people or the media, but by the institutes mentioned. Some of the vocabulary that is used: “massive shock,” “plunged the global economy,” “severe contraction,” “deepest recession,” “the blow is hitting hardest,” “deeply sobering,” “economic emergency,” “heavy toll,” “fastest and steepest downgrades,” “long-term damage,” and so on. And this in just one press release by the World Bank.

I’m not saying recession is good. Maybe it is bad. But we can question whether it is really that bad. This is a subjective judgment, not an objective fact. It is seen as bad because we expect growth rather than a shrinking economy. And because it doesn’t match our expectations, we label it as bad. If our expectations change, our judgment changes as well.

Something is only bad when we compare it with something that is better. This applies to a person’s health, business performance, one’s financial situation and anything else. When we talk about recession, the reference point is always last year. So, compared to 2019, the global economy is projected to contract with 3-6% in 2020. This seems bad.

But let’s look at some numbers from the IMF what this really means. Over the past five years it reports the following growth numbers for the global economy: 2015: +3.5%, 2016: +3.4%, 2017: +3.9%, 2018: +3.6%, 2019: +2.9%. If the economy shrinks 3% in 2020, this means we’re back to the level of 2019, and if it shrinks 6%, we’re about to be back at the level of 2018. And if a sustaining COVID-19 threat will lead to an annual contraction of 3% for five years in a row, we are back at the level of 2015.
Source: Forbes
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