Statements that “everything has changed” to a new normal because of the global Covid-19 pandemic seem to suggest a fundamental change in economic, business model and social mores. We should remain skeptical of such claims.
The same thing was said in the aftermath of the Great Recession of 2008, and it is not clear any new normal persisted.
That is not to deny the continuing force of underlying and pre-existing trends. Basically, what was growing before the Great Recession continued to grow afterwards; what was declining also continued with the same long-term trend. Looking only at consumer loan delinquencies, they had been trending upwards for two years prior to the Great Recession, for example.
So was the 2008 global Great Recession a structural break, a point in time when fundamental patterns change because business models are broken? That now appears questionable.
Back in 2009, McKinsey consultants said “in most of the recessions of the past 40 years, demand caught up with capacity and growth returned in 10 to 18 months. This recession feels different.” Looking at mortgage defaults, maybe even the Great Recession did not change the underlying long-term trend.
There was a spike in first-mortgage defaults, with a peak in the immediate aftermath of the recession. But rates returned to pre-recession levels after a few years.
It might be incontestable that “the Great Recession accelerated a number of long-term trends and arrested the development of others,” professors from Wharton School and UCLA argued. But they also noted, about a decade after the event, that “at this point most of the indicators pretty much resemble what they were before.”
Some have argued that social impact has been long-lasting. The problem is that it also is possible to argue those trends were underway before and after the Great Recession, and are independent of the temporary impact of that event.
That is similar to the “weather caused revenue shortfalls” excuse one sometimes hears from public companies explaining why revenue fell short of expectations. That might be a plausible short-term explanation of consumer behavior, but also often masks other longer-term trends a firm faces, or management failures.
Did attitudes toward debt and leverage really change after 2008, and continue to the present? Some would say the evidence points the other way: that there was no long-term change. Sure, there was a four-year impact before the prior trend reasserted itself. But the long-term trend remained in place.
The caution is that present calls that we have entered a “new normal” might be wrong. There should be some impact for a few years afterwards. That happened in the wake of the 2008 Great Recession as well. But underlying trends reasserted themselves after about four years.
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