How bad will it be for the economy, Covid-19

Around the world, economies are crumbling when the coronavirus outbreak, the price of every vital commodity has fallen We saw a lot of these markets hit Coronavirus has oil below $50 a barrel US demand in China has dropped off substantially You smash into the demand for copper, iron ore, even gold is going down America’s Department of Labour has recorded the highest ever number of new claims unemployment in the past two weeks—just under 10m Governments had modelled the impact of a pandemic on their economies But were in no way prepared. The indication is that economic activity has been sledgehammered in the course of a couple of weeks Just how deep is the crisis for the world economy? Over the past two months, the world’s biggest stock markets have turned red that because investors suddenly have to recalculate the future for the economy and the future for corporate profits

and adjust their figures sharply downwards and then they tend to sell assets, which are the most liquid

Often those are the big companies in the S&P 500 It had its quickest bear-market decline in history

When the dot-com bubble burst in 2000 it took almost two years it dropped by 49%.

 

In 2007-09the financial crisis led to a fall of almost 60% in just over a year The coronavirus pandemic has already seen the market fall by a third in just one month This crash has been so quick because it was   such a shock In the financial crisis, there was actually quite a long lead up That was good news after, long 18 months of bad news But this is genuinely a Deus ex machine, a bolt from the blue where investors were just not pricing in the risk of a pandemic, And certainly, governments have never in the past imposed the kind of lockdown on a global economy that they have this time So this was not  something people had in their models In an effort to stop the deadly virus, businesses have been forced to close and citizens isolated at home on an unprecedented scale worldwide It’s caused a unique economic crisis the influence of which will be greater in some industries, in particular, The industries which are hit hardest are those which are related to the consumer. So that’s retailing, that’s entertainment that’s hospitality, both hotels and restaurants many of which have simply been locked down And many of these companies will have high costs which they’ll need to keep meeting So, suddenly you have lots of costs continuing and absolutely no revenues which is the worst possible outcome for these businesses  if a business isn’t directly losing out from people staying at home

lockdowns are having a devastating ripple effect.

 

Modern the industry relies on goods and materials crossing borders When they can’t, production around the world is endangered The coronavirus caused a break in the biggest link in the vast, global, supply chain

The problem started in China where the disease started really to be seen in December and then had a huge impact in January China is the bedrock of the global supply chain Businesses started to look for alternative suppliers certainly, that was a race to try and find the few that had spare capacity As the virus spread, alternative suppliers have become fewer and further between It’s going to take a very, very long time for them to rebuild their supply chains In the meantime, because there’s very little demand for finished products Few companies are going to want to resurrect that supply chain

immediately until they know that the economy is settled down The true extent of the damage to the world, the economy will only start to become clear with the speed and strength of its recovery The big question that economists are still trying to grapple with is whether this is what they call a V-shaped recession or a U-shaped recession or an L-shaped recession In a V-shaped recession, the economy suffers a rapid fall but rebounds very quickly as opposed to a longer economic trough before recovery

or long-term recession Now, the most encouraging news we’ve had so far is that in China which was the first economy to be hit the latest figures suggest the most hopeful a possibility which is that this is a V-shaped recession now if China can do that, the hope is that Europe and America can do that later on when the lockdowns are lifted Europeans and Americans are also being helped by unprecedented government responses Up to €200bn £330bn $2.2 trillion in urgently needed relief These short-term protections might reduce the damage the economy suffers But this pandemic could last a long time

So, the difficult calculation for governments is trading off the lives of people who will die from the coronavirus versus the economic damage to the economy Year-long lockdowns would cost America and the eurozone perhaps a third of their GDP Models looking at America suggests that ending lockdowns would lessen that damage but would lead to around 1m extra deaths In the last 75 years, since the second world war, we’ve seen nothing like this Governments have not reacted on this scale So although it’s terrible, in a way it shows our humanity that we want to reduce the number of deaths so much that we’re willing to put up with all these restrictions and we’re willing to accept a big hit to economic activities Philip Coggan. I’m reporting for The Economist on the financial crisis that’s been created by the pandemic If you want to read more, please do follow my blogs.

Regard

Tahir Mehmood