Everything looked so promising 3 months ago. We’d just started a new decade, and New Year’s resolutions were strong, bright, and hopeful. Sure, we did have a couple of hazardous events across different continents, but for the majority of the world, everyone was working hard to achieve their own goals. Fast-forward a few weeks, and you find a global pandemic that has cleared the streets and sent everyone into their homes.
As of today, the majority of the cities across the globe look like ghost towns thanks to the voluntary and enforced lockdowns. Shopping malls, theaters, sports, events, restaurants, cafes – all forms of businesses depending on social interaction have been shut down. Other kinds of businesses all over the world are also shutting down; the lucky ones assigning their employees to work-from-home, and the not-so-lucky ones shutting down until further – undetermined – notice.
A few weeks ago, when the virus was still transitioning from an epidemic to a pandemic level, no one was panicking. No one, especially the economy and financial experts, thought that the situation would get so drastic. It’s only expected that some negative outcomes will occur, some losses will take place, and some degree of a downturn will be witnessed. A few weeks ago, talking about a global recession would have sounded highly unlikely and paranoia-induced, but today, the possibility of global recessions looks very real.
The Global Outlook
Despite the fact that the problem we’re facing now is of medical and not economic origin, the fate of the global economy has become very closely intertwined with the healthcare status of the world. This means that while the whole global economy is very likely to take a hit, the severity of the hit will be dependent on many factors, some of which are the measures each country takes to manage and combat this deadly virus. To explain it in more detail, let’s discuss the following points:
1. Missed Windows
So far, there is no cure or treatment for the disease caused by the novel coronavirus: the COVID-19. The most effective way to manage a disease that’s as highly contagious as COVID-19 is by containing its spread before it’s too late. This is done by isolating the first batches of infected people as soon as possible, implementing social-distancing quarantine measures, and tracing back everyone that had come in contact with them.
To be able to contain this contagion effectively, the window for implementing these measures is very tight, and should be done as soon as the disease starts spreading; the earlier, the better. If this window is missed in the extended absence of any cure or treatment, the only way to limit the spread is to implement the same quarantine measure, albeit on a much larger scale. So instead of looking at a week or two in isolation, missing the window would mean an indefinite period of lockdown until every infected case has been found, and all chances of a virus resurface have been killed.
2. Early Vs. Late Action
When we take a look at the statistics, we’ll start to understand why the impact of this disease will be greatly variant in different countries. After the virus first appeared in China, most of the provinces were able to use the window for social distancing, with the province of Hubei being an exception. As a result, we can already see how many provinces have been declared free of the virus, and after a couple of months in lockdown, life is starting to get back to normal for those who took swift action.
On the other side of the globe, most of the European countries, the UK and the US, especially, have already missed their chance of early intervention. Since the virus has started spreading in the west due to the late notice, the true impact of how hard the western and European healthcare systems will be hit is still to be known. The real economic hit is yet to be known as well, although it’s quite certainly going to be extreme. Since the early window has been missed, governments had to seek much more extreme measures to implement social distancing. Closing a whole country for months on end is bound to disrupt the economy entirely, although the severity remains to be brought to light.
Meanwhile, several factors could change how this all plays out. Until this moment, there’s still a lot that we don’t know about this virus and how dangerous it really is. All we know is that, although its death rate is lower than other deadly diseases, it’s still fairly hazardous to older people and those with pre-existing medical conditions. Meaning the real threat lies in its ability to spread. However, several uncertainties could change the game further down the road, such as:
– New viral properties could emerge, or the virus mutate into a deadlier version.
– We still don’t understand the role of people who carry the virus but don’t show any symptoms.
– We have no idea how well immunity is built; neither do we know for sure the level of infection.
– Despite all efforts exerted, implemented policies will remain inaccurate, as long as we don’t have the full picture.
– Left to the people, we can’t be sure that the most effective measures are taken by households and private firms when it comes to social distancing rules.
The Dimensions of the Coronavirus Economic Shock
So what can we make out of the information we have so far? How is the new coronavirus affecting our global economy? The dimensions of the economic shock created can be explained in the four following points:
1. Financial Systems Risk
We’re starting to see the coronavirus shake the financial systems, despite originating from a healthcare issue. As the central banks hurry to contain the stress on the capital markets, some temporary solutions are being proposed, but more problems are bound to arise in the long run. These problems include a decrease in liquidity and an increase in write-downs, which will put the capital markets in tremendous distress. This will force central banks to take more action, although every course of action will still have its downfalls. If we reach a financial crisis, the economic systems will be hit hard, the capital markets will crash down, labor and productivity will be affected, and the whole economy will collapse.
2. Economic Freeze
Meanwhile, the longer the lockdowns, the worse the economy will be affected. These lockdowns have resulted in an economy freeze in most businesses. Larger businesses may have enough capital and resources to pass through this tough period, but smaller ones will barely survive. Many small businesses largely depend on social-interactions, like local restaurants and bakeries, with most of them barely surviving with a day’s worth of work. An extended lockdown will force these small businesses into shutdown, which is already happening on a large scale. However, the damage won’t be limited to just small businesses; even large companies in the most affected fields, such as airlines, are currently taking a very hard hit.
In the face of this economic shock, many businesses have been forced to fire or layoff most of their employees. A week ago, experts had estimated an average of 1.6 million unemployment claims in the US alone for this week, as a result of the coronavirus. The reality turned out to be much worse, with 3.28 million claims filed – a number that has never been heard of before, and it’s still rising all around the world.
4. The Ripple Effect
We’re now living in a globalized world, which means all countries have become dependent on each other. This means that even if a country has acted early on, taken all appropriate measures, and has declared itself free from the virus, it will still be affected by the global situation. Take China, for instance, the world’s second-largest economy and that which holds a third of the world’s products. China has taken the economic hit the earliest, affecting its production and economy the worst in its first quarter. However, even as it’s starting to stand on its feet again, the disruption in the global supply chain is expected to affect its progress throughout the whole year, not just the first quarter. After all, if there’s no one to purchase the products, the economy will still keep suffering.
Policymakers’ Response to Coronavirus
In efforts to delay the economic downturn as long as possible, governments and central banks have taken a few measures. These measures are as follows:
1. Reduce Interest Rates
The first thing that the central banks did was to lower the interest rates, and now they’ve reached an unprecedented near-zero level. This has always been a known strategy taken in desperate times to encourage citizens and individuals to keep spending money. Lower interest rates mean easier loans with better terms, and this will keep the cash flowing for a while, despite the economic freeze and loss of work.
2. Intervene with Financial Markets
Secondly, they intervened with the financial markets to ensure there’s sufficient cash flowing to meet the needs. In addition to pumping a lot of money into the financial systems, they’ve also eased up a lot of regulations to make the lending processes smoother and faster.
3. Buy Assets
The third and final thing that the central banks have done is to buy a lot of government and corporate bonds. These were also done in an effort to make borrowing money and financial security easier and more accessible to all individuals and businesses during these trying times.
4. Subsiding Wages
As for governmental actions, many governments in Europe and in the US have announced they’ll be subsiding the wages of those who’ve been laid off due to the coronavirus crises. In doing so, the governments hope that they’ll ease the economic shock resulting from the coronavirus so that when the restrictions are lifted, businesses will go back to working like they used to.
So, How Will it Play Out?
We’ve come to understand the dimensions of the economic shock the whole world is going through, and we’ve also gone through what some governments and policymakers have done to slow and ease the impact of this shock. So if you’re asking whether coronavirus will cause a worldwide downturn, the answer is a resounding yes. However, if you’re wondering about the severity of this downturn, then the answer depends on the following factors:
1. Economic Structural Resilience
Needless to say, this economic shock will have different effects on countries across the globe. The first deciding factor lies in the resilience of a country’s economic structure; the sturdier and firmer it is, the fewer the damages the country will have to deal with. Meanwhile, the extended freezing of the economy will keep worsening the profile of the upcoming crisis. So even if specific policies are implemented to help soften the blow, once the crisis starts affecting the financial systems as well, the danger level will get out of hand.
2. Policymakers’ Response
Secondly, the severity of the impact will depend on the cushioning implemented by the policymakers. In Europe and the US, for instance, we’ve covered how the central banks and the governments are taking adequate cushioning measures, but what about the rest of the world? In developing countries, it’s expected that the economic losses will be more severe. On the other hand, there will be consequences to all measures taken in this tough period. We can expect to deal with increased global debt, higher levels of unemployment, change in retirement plans, and a huge cut down in investments, all of which will affect the future of the economy in different ways.
The final deciding factor lies in how well we’ll be able to innovate our way out of this crisis. The innovation here means two things: coming up with new methods to manage this financial and economic crisis, and, more importantly, finding a cure or a vaccine for coronavirus.
As if out of a science-fiction novel, a virus broke out in the world, and we were anything but prepared to deal with it. In the span of only a few months, it has spread to the extent that countries all over the world were forced into lockdowns, freezing the global economy in the process. There’s no doubt that the whole world will witness some level of economic damage; the question remains as to how severe it’s going to be.