The last few weeks have been a tornado for the financial markets and the global economy. Even though the coronavirus is expected to have a limited duration, similar to other outbursts, its effects may have lasting impacts on the economy. This is because we still don’t know enough about the Covid 19 and we don’t have a preventive or curative treatment for it. Although the first vaccine is currently being tested, it probably won’t be available for a while, and this uncertainty alone is creating anxiety and panic.
The virus is easily transmissible even by people with no symptoms, and it is malicious beyond the normal seasonal flu. Although the Federal Reserve engaged in slashing rates and buying treasuries during the last weekend, markets around the world crashed on Monday anyway. The coronavirus is threatening to set off market disturbances in the global economy with very different weaknesses than in the global financial crisis twelve years ago.
Workers could be debilitated by the coronavirus, due to public safety precautions that may stop production. Reduction efforts may also prevent goods shipment, including in-between goods and materials that are necessary for other production. Shattered global supply chains are enlarging business supply costs across borders worldwide.
Interruptions in production are making hourly workers especially vulnerable. However, even salaried employees are spending less and less on services in order to avoid crowds in restaurants and travel. As a result, this reduces the daily income of hourly workers and broadens the disruption in the economy from goods to services. This decline in consumer demand will surely further soften investment demand.
Tourism and export-import
Some experts predict that global anxiety will keep potential international tourists and their money in their countries, which as a result will bolster the domestic economy. However, this notion ignores the fact that the same anxiety will keep foreign tourists and their money out.
This will also create an interruption of imports, which also has a mirror effect on the interruption of exports, and also will limit the availability of foreign parts and materials that are essential for the production of domestic goods.
Weak demand in oil will create a fall in oil prices and this will not stimulate enough spending on cheaper gasoline to make the economy whole. Nevertheless, the fall in oil prices isn’t only the result of the fall due to the coronavirus, but due to the opportunism by Russia.
The USA has the ability to produce large quantities of oil using expensive horizontal drilling methods known as fracking. On the other hand, Russia has its own dispute with Saudi Arabia, which wants to cut down production in order to keep oil prices high, with its vast oil reserves in the ground.
Long hard drag or short hard shock?
In mid-January, the coronavirus broke out in China and they have been fighting it ever since. China’s officials admitted that the virus has spread all over the county and it had taken specific hold in the Hubei province and its capital, Wuhan. China fought the coronavirus much in the same way the whole world will have to and it is by shutting down the entire country and by setting up a system that separates the sick from the healthy.
These measures had a devastating toll on China’s economy in the first two months in 2020.
- Industrial production fell by 13,5% and service production by 13%
- Manufacturing production took a hard hit falling by over 15%
- Automotive production fell by a 32%
- New housing fell by 44%, and a drop of 23% in housing completion
- Retail sales fell by 23%
- Exports fell by 17%
Once a big economy like China stops it might take some time to get it back on its feet. Small businesses are in great need of rescue and the sick still need care. The economy is still weak and the recovery will take much more time than Wall Street first assumed. Just like China, the United States economy will also be affected in some aspects due to the coronavirus outbreak.
Effect on businesses
Because of the outbreak of the virus businesses are dealing with a sudden stop in their cash flow. The most affected are a relatively new generation of firms that already struggling to pay back their loans. This includes the ”Zombie” companies that earn too little to even make interest payments on their debt and survive only by issuing new debt. We are witnessing the movie-like reality of deserted airlines, empty trains, and empty restaurants and it is badly hurting our economy. The longer this pandemic lasts the greater the financial risk will be for zombie companies and it could create a chain reaction just like subprime mortgages did in 2008.
Also, some businesses and companies have experienced problems connected with coronavirus outbreaks in their warehouses. So, businesses are considering clean and safe national warehousing where their precious good are safe and sound.
Over the decades, recessions have always been started by a period of higher interest rates but never a virus. The damage to our economy inflicted by these recessions commonly lasted up to two or three months. However, this pandemic is likely to hit the world of the economy with record levels of debt.
When the coronavirus is contained, and that day will come, our economy will get back on its feet. But long will it last and how much damage to supply chains and bankruptcies it will create that we just don’t know. The important thing is to try to keep ourselves healthy by staying inside, and in the end, the world will survive this pandemic, because as we all know the world has gone through much worse scenarios.