COVID-19 infects the global economy

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Just 3 months ago, the economic climate seemed more certain and robust than ever with Brexit finally being finalised and US-China trade disputes being resolved. However… little did we know that the “Chinese Virus” would cripple the world to its heels in such a short space of time.

Here I discuss the unprecedented implications of the current situation while trying to answer the question: “What on earth does it all mean?”

Over the last few weeks you may have seen scary headlines like “Morgan Stanley predicts 30% contraction in global GDP,” “Equity markets rout continues to burn investors” and “Coronavirus outbreak will kill millions.” Although these are true to an extent, I believe that the worst is yet to come with an inevitable recession that might last years.

Indefinitely, the tourism industry will be the worst hit as consumer spending will dry up over the next 6 months as confidence in the economy is at all time lows. 65% of UK output is attributed to consumer spending therefore such drastic cuts in consumption will lead to mass unemployment. Some agencies predict unemployment will peak at 20%, the highest since the Great Depression of 1929. With millions across the UK out of work and with little income, the unseasoned Chancellor of the Exchequer Rishi Sunak took bold actions to lessen the blow.

Some of his policies include a direct injection of £30 billion into small businesses and deferred VAT payments over the next quarter. While these expansionary fiscal measures will lead to some support for the economy, will this be enough? Sunak is counting on small businesses using these credit facilities to survive the next couple of months but I don’t think this is sustainable over the long term. Given the recent implementation of a lockdown by the Prime Minister, it is extremely unlikely that many of these firms, which underpin the performance of our economy, will be able to survive as spending would essentially be zero hence leading to the biggest downturn in the past century.

On an international scale, Chinese PMI (an index which measures the output of the manufacturing sector) hit a record low at 35.1 in February 2020, a reading below 50 suggests contraction in activity. Furthermore, world stock markets crashed by 30% in a matter of weeks with damming consequences for pensioners and investors. Gold, a safe haven among traders, stayed at multi-years high however buoyed by strong appetite during these uncertain times. Such turbulent market conditions have not been seen since the Financial Crisis and foreshadow that this might not be the end. On the contrary to make matters better, the FED printed $6 trillion in their latest Quantitative Easing program buying up government bonds and other mortgage backed securities in a hope to stimulate spending. The impact of these unprecedented measures are yet to be seen but it is unlikely to be enough to help the global economy stabilise.


References

  1. Simon Kennedy, “Morgan Stanley, Goldman See Virus Causing Greater Economic Pain”, Bloomberg, March.22, 2020
  2. Consumer trends October to December 2019, https://www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/bulletins/consumertrends/octobertodecember2019
  3. Catherine Neilan, “Government pledges to businesses”, City AM, March.17, 2020
  4. Henry Sanderson, FT
  5. https://tradingeconomics.com
  6. Image source: Yahoo Finance!

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