Author Spiegel

08.04.2020 16:56

The Greatest Financial Shock of This Century

REUTERS/Aly Song

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On December 31 last year, China alerted the World Health Organization to several cases of unusual pneumonia in the city of Wuhan, a port with 11 million people in the central Hubei province. The name of the disease or its cause was unknown. 

The timeline of coronavirus updates, with details and statistics, is readily available online. What isn’t covered is the financial toll the virus has or will have on the economy. 

The current financial toll of Covid-19

Because of self-isolation, quarantines and the dangers of public outings, businesses literally froze in place. In an op-ed published over the weekend, the Organization for Economic Co-operation and Development's Secretary-General Angel Gurria called the COVID-19 health crisis the "greatest economic, financial and social shock of the 21st Century." Covid-19 is a particularly severe shock as it is a both supply (limited production, disrupted supply chains) and a demand (social distancing, uncertainty, job loss) shock.

The second biggest chain in the global marketplace - USA - is the country suffering the most cases of the infection. Furthermore,  Italy, Spain, France and Germany are being hit the hardest. Travel bans and restrictions are rendering small businesses incapable of turning any profit. Travel agencies, restaurants, hotels or any businesses even remotely associated with tourism are cutting people’s wages. The crisis is hitting individual wallets, not just corporations. Not only that, there are already reports circulating of unpaid vacations and layoffs. 

And the hits keep on coming

  • The second biggest chain in the global marketplace - USA (as of publishing this article) has the most active cases of Covid-19. 
  • Oil has slumped to its lowest price since June 2001. The price of gold seems stable for now.
  • Investors are increasingly fearful about a global recession, even the price of gold has tumbled, even though gold was heaved as the “safe haven” of investment. 
  • Copper prices reduced significantly since the beginning of the year. Notably, China accounts for half of the global demand.
  • Medical supply chain is in complete chaos in the US. Hospitals are forced to work with unverified sources to fill their supplies. 
  • Consumers are cutting costs, buying only necessities, which means every other supplier is being crushed under bankruptcy.

And these are just general points we can make in the third month of Covid-19’s effect on the financial market. 

An anti-virus vaccine is expected to be available in early 2021. Effective medicine that does not exist at the moment will also have a positive impact on alleviating the domestic situation. Uncertainty about the timing when the virus can be stopped makes economic forecasting difficult, as there is no comparable historical example globally. According to some analysts, the scale of the negative impact of the virus on the world economy may be similar to World War II. Developed countries (US, EU, etc.) mobilized sizable funds in response to the crisis and provided liquidity to the markets. The EU has suspended fiscal rules. International financial institutions allocated solid funding to member states.

Financial experts of the world came to the conclusion that there are 3 scenarios as to how this virus can affect the global economy. 

The positive scenario 

Economic downturn from March to May, possible recovery in April-May. These stats could offer 2.1% growth in the global economy, but the probability of this outcome is only 10%. 

The mild scenario 

Economic downturn in March-May, recovery in June-September, and downturn again from October. Controlled in April-May, re-spread of the virus from October, the possibility of this scenario is 50%.

The pessimistic scenario 

Continued economic downturn from March, the virus is not stopped in 2020 and the cure or the effective medicine is not developed until 2021. The probability of this grim scenario is 40%. 

The three scenarios are not only dependent on healthcare professionals' development of a vaccine or cure, but it is on us, the citizens of the world to keep ourselves as healthy and safe as possible. The biggest heroes are the ones chilling at home, aren’t they? 

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