Covid-19: how bad will it be for the economy? | The Economist

around the world economies are crumbling since the corona virus outbreak the price of every vital commodity is fallen we're seeing a lot of these markets hit coronavirus has oil below $50 a barrel US demand in China has dropped off substantially you're impacted demand for copper iron or even gold is going down America's Department of Labor has recorded the highest ever number of new and employment claims in the past two weeks just under 10 million government's had modeled the impact of a pandemic on their economies but when in no way prepare the indication is that economic activity has been sledge-hammered in the course of a couple of points just how deep is the crisis for the world economy over the past two months the world's biggest stock markets have turned red it falls like that because investors certainly have to recalculate the future for the economy and the future of 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 the S&P 500 had its quickest bear market decline in history when bubble burst in 2000 it took almost two years for the S&P 500 to drop by 49 percent the 2007 to 2009 financial crisis led to a fall of almost 60 percent in just over a year the corona virus pandemic has already seen the market fall by a third in just one month this class has been so quick because it was such a shock in the financial crisis there was actually quite a long lead-up it was a good long 18 months of bad news but this is genuinely a deus ex machina a bolt from the blue where investors and were just not pricing in the risk of a pandemic and of course 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 impact of which will be greater on 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 certainly you have lots of cost continuing and absolutely no revenues which is the worst possible outcome for these businesses but even if a business isn't directly losing out from people staying at home lockdowns are having a devastating ripple effect modern 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 this 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 but of course 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 and in the interim was very little demand for finished products a few companies are going to want to resurrect that supply chain instantly until they know that the economy has settled down the true extent of the damage to the world economy will only start to become clear with the speed and strength of its recovery the big questions that economists are still trying to grapple with is whether this is what they call a v-shaped recession or or a u-shaped position or an l-shaped recession in a v-shape 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 and the latest figures suggest the most hopeful 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 lock downs are lifted Europeans and Americans are also being helped by unprecedented government responses 330 billion pounds 2.2 trillion dollars and 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 lock downs would cost America and the eurozone perhaps 1/3 of their GDP models looking at America suggest that ending lock downs would lessen that damage but would lead to around 1 million extra deaths in the last 75 years since the second world war we've seen nothing like this governments have not reacted on the 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 well willing to accept a big hit to economic activities I'm 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 click on the link opposite and thank you for watching

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