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How COVID-19 Did Not Cause the Recession

Outlining the indications that a recession was building long before COVID-19 entered the scene.

The available evidence suggests that, virus or no virus, a global recession was coming, and a big one at that. Well before the emergence of the novel coronavirus there were growing worries in the financial press and various policy circles that a global economic crisis was brewing, with fears that it could be of a similar or even greater magnitude than the mislabeled Great Financial Crisis (GFC) of 2008/9¹. Of particular note in this regard was the growing concern over certain alarming developments in the US financial markets.

Inversion of the yield curve

The first of these worrisome developments was that in July of 2019, long before there was any hint of an outbreak of COVID-19, the widely followed US yield differentials between 10-year and 3-month US treasuries fell below zero. Indeed, it can be shown that this yield inversion has predicted nine out of the last ten recessions in the US.

This is because it reflects, on the one hand, a shift from risky assets (e.g., equities and corporate debt) to safer long-term government fixed interest assets (e.g., 10 to 30 year Treasuries), and on the other hand, an increasing demand for short-term loans due to growing liquidity problems facing corporations and financial institutions. So when in July of 2019 the yield differential slipped below zero, that is, when the yield curve inverted, many market watchers were convinced that it would only be a matter of time before the economy would move into recession. 

Unprecedented liquidity injections

A second indicator that all was not well leading up to the outbreak of the virus is the developments in US money markets from mid-September onwards, which reinforced in spectacular fashion the impressions of growing liquidity problems arising out of the yield-curve inversion referred to above. It began with a sudden spike in short-term money market rates that saw the overnight repo rate rise from 2.4% to 9% in a matter of days. In response, the US Federal Reserve (Fed) began injecting considerable amounts of liquidity into the money markets by way of emergency overnight repo operations, which were well in excess of those seen at the height of the 2008/9 crisis.

What started with an initial injection of $50 billion as a supposed “temporary measure” progressed to between $50 and $75 billion per day for the next two weeks, with additional term repos added to the repertoire. By the beginning of October, the Fed was forced to admit that the problem was perhaps not so temporary after all as they announced that the extraordinary repo operations would have to continue until the end of November, with statements thereafter suggesting that these operations would continue for the indefinite future.

The overnight repo market injections of 2019 dwarf those of the 2008/9 crisis, a crisis which, it must be remembered, is referred to by all and sundry as the great financial crisis. Not only were the daily sums injected from September 2019 onwards both absolutely and relatively greater than those injected during similar extraordinary overnight repo operations in 2008/9, but they were injected for a considerably longer period.

Extraordinary overnight repo injections in the 2008/9 crisis averaged some US$23 billion per day and lasted a mere five days. Those that began in the middle of September 2019 averaged some US$55 billion per day and continued right up to the outbreak of the virus in the US and the adoption of even more extraordinary overnight and other liquidity measures by the US Fed, i.e., right up to March of 2020. That is, they lasted more than 5 months.

Profits, what profits?

A third piece of evidence that all was not well with the US economy going into the COVID-19 shutdown is the state of corporate profitability. As the chart below shows, periods of economic weakness in the US have typically coincided with weak (low) trend profits growth. This should hardly be surprising, given that profits growth is the major driver of economic growth in all capitalist economic systems. Trend US corporate profits growth had been falling continuously since 2015 and had been almost non-existent since the first quarter of 2017. This suggests that the US economy was living on borrowed time and that the longest recorded period of economic expansion in the US was long past its expiry date.

It needs mention here that alternating periods of strong and weak economic growth, referred to as the “business cycle”, are normal for all capitalist economies. The business cycle is not only a well-known phenomenon, but is also well documented by, among others, the National Bureau of Economic Research, an American private non-profit research organization, which has tracked business cycles in the US economy for over 150 years. According to these data, business cycles usually have durations of roughly 7-11 years. What the profits data referred to above suggests is that the most recent US business cycle that began with the crisis of 2008/9 was moving into a contractionary phase prior to the outbreak of COVID-19.

The US was not alone

The US economy was not alone in experiencing economic weakness in the period leading up to the outbreak of the COVID-19 virus. Well before the emergence of the virus other advanced economies were also reporting data suggesting a recession was in the making. By the end of 2019, data for the advanced group of economies suggested that these countries were already in a production recession, since the growth rate of production had been consistently negative. The economies of the Euro Area and Japan were displaying particular weakness.

Although Chinese government data were suggesting that production and GDP growth were holding up quite well―notwithstanding the trade war with the US―several proxy indicators of this growth contradict the official narrative. These indicators suggest that China’s economy too was in a fairly weak state prior to the outbreak of the virus in Wuhan. In fact, Chinese industrial firms saw their weakest profits trend growth on record with growth consistently negative since mid-2018. The last time profits growth contracted was in 2015/16, when China is thought to have gone into recession in spite of official data proclaiming the opposite.

COVID-19 as the perfect culprit

The preceding is not intended as suggesting the recent virus-related economic shutdowns will not have a bearing on the coming recession―they most certainly will. However, it should be clear from the compiled evidence that the shutdowns and general dislocation caused by the virus were the trigger of the crisis, not its cause.

This raises the question why this recession is being dubbed as the “COVID-19 crisis”. One obvious reason is that it offers orthodox economists and those in the mainstream financial media the standard fallback of a “random shock” to blame for the forthcoming collapse in economic activity and the financial disarray that will likely accompany it. But, perhaps more important, it also provides policy makers with an excuse to shed themselves of all responsibility for the part they play in the current crisis, especially the devastating impact it will have on vulnerable populations.


  1. Although the trigger of the crisis was a collapse of the housing bubble leading to the bankruptcy of a leading US investment bank, Lehman Brothers, it was, like all crises fundamentally an economic crisis.
  2. The data used in the chart displaying Chinese industrial profits data is the CNY value given by the NBS. It is acknowledged that this differs from the percentage changes also given by the NBS, and that both have been used by the press for similar purposes which obviously is problematic. To the best of our knowledge, there is no public discussion on this matter, although there should be.
  3. On 3/6/2020 two repo charts were replaced by a new one for the sake of clarity, using the same data.

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