COVID-19 and Recession: How Big will be the Impact?

In a blog posted a few weeks ago, I talked about the key strategies that the pharma companies can adopt to deal with the impact of COVID-19. The strategies were dependent on the position of the companies on the recession readiness evaluation framework (added below). Check out the blog for more details on this.

Recession Readiness Framework

Two of the key parameters that have a prominent impact on the strategy are the length of the recession and the depth of the recession. In this article, we will be looking at the historical recession data to try and assess these two parameters.

Historical Recession Data: Duration of Recession

For this analysis, I looked at all the US recessions that have happened since the 1900s. Overall, I was able to identify 14 instances of recession prior to the current recession phase. The average duration of the recession (excluding the great depression of 1929, which lasted for over 40 months) was calculated to be around 10.8 months. The longest-lasting recession in recent years has been the great recession of 2007, which lasted for over 18 months.

Average Duration of Recession. Impact of COVID-19

To say that the current recession is showing the signs of the 2007 recession would be an understatement. We are already in the recession phase. Given the current impact of COVID-19, the length of this recession is expected to be at least equal to, if not more than the 2007 recession.

Historical Recession Data: Impact of Recession on GDP

The figure below shows the percentage fall in the US GDP across various recessions. The fall was calculated between the GDP peak and trough during the recession. Overall, the average fall in the GDP was close to 6%. However, if we only look at more recent data (post-1950), the average fall was close to 2.5%. In fact, the biggest fall in the GDP (>5%) in the last 70 years was observed during the great recession.

Impact of COVID-19

Historical Recession Data: Impact of Recession on Employment

We looked at the peak unemployment rates observed during the past recessions. This allowed us to get realistic estimates on the historical impact of the recession. On average, the unemployment rate has been observed to be around 8%-10%.

Impact of Recession on Employment. Impact of COVID-19

Historical Recession Data: Length vs Depth of Recession

In order to check the relationship between the length of the recession and the depth, we looked at the duration of recession and the fall in GDP. The figure below shows the relationship.

Relationship between duration of recession and % dip in the GDP. Impact of COVID-19

Based on the above figure, if the current recession lasts longer than the great recession of 2007 (20-24 months), we could see a prominent decrease in the GDP. If the COVID-19 crisis is not contained quickly, the impact on the GDP could vary from a fall of around 6% (optimistic scenario) to 10% (conservative scenario).