The coronavirus has already cemented its place in our history books. The effects of this virus, both physical and economical, stretch across the globe. To flatten the curve and allow hospitals the much-needed time and supplies to treat an unprecedented number of patients, the world has been put on pause. So, how is this unfolding in our economy?
Right now, policymakers find themselves left with the task of flattening the recession curve. A sharp recession in H1 is to be expected, with many analysts predicting a U-shaped recovery. It is estimated that the cost of containment could be as high as a 30% shock to each economy for a month; based on what was learned from the situation in China.
Speaking of what we have learned; the coronavirus is sure to change how we see not only global issues, but issues in our own home. This may include: investments in health, the definition of inclusive capitalism, China’s soft power, globalization, climate change, and how we look at savings and disaster preparedness.
Covid-19: Not Just a Health Crisis
2020 started off on a weak note. Global trade in goods and services had not grown slower since 2009. The manufacturing sector had already been seeing a recession since Q3 2019. The U.S. – China trade feud caused trade to grow at just +1.4%. Beginning in January, a China-centered supply shock sent shock waves across global trade and supply chains (travel and transport), disrupting manufacturing supply chains all over the world and unraveling financial markets as people began to realize a recession was unavoidable. This was followed by a demand shock that hurt consumption and investment in China, Europe, and the U.S. Then came the monster that is COVID-19.
For capital markets, we haven’t hit rock bottom yet. Insolvencies are expected to increase by +14% worldwide this year. Markets have not yet begun fully pricing with the lockdowns that are affecting more than 50% of the world’s GDP. When it comes to companies, this will be the fourth consecutive year that bankruptcies rise. A wave of insolvencies when business starts again is likely, in spite of the fact that policymakers have pledged to do whatever it takes to avoid unemployment and defaults.
Covid-19: The Quarantine
The pandemic first reared its ugly head in Hubei province of China in late-December. However, no confinement measure was put in to place until late January. From that point, it took nearly a month for the spread of the virus to slow and another month still before a gradual lifting of the confinement measures began.
Watching the confinements that are continuing to happen across the world, we are seeing an unprecedented confinement shock that will lead to the most severe recession of the century. Significant sacrifices in terms of growth are being made so that the government can impose drastic measures of confinement. Roughly 50% of global GDP and population are currently in a lockdown of some sort.
There are many theories on how this will play out, how long it will take for the economy to recover, and what that will look like. But everyone agrees on one thing: the economy will recover and will likely be stronger than before.