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

published on July 2, 2020

Around the world, economies are crumbling

Since the coronavirus outbreak, the price of every vital commodity has 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 impacting the demand for copper, iron ore, even gold is going down

America’s Department of Labour has recorded the highest ever number

of new claims unemployment in the past two weeks—just under 10m

Governments had modelled the impact of a pandemic on their economies

But were in no way prepared

The indication is that economic activity has been

sledgehammered in the course of a couple of weeks

Just how deep is the crisis for the world economy?

Over the past two months, the world’s biggest stockmarkets have turned red

It falls like that because investors suddenly have to

recalculate the future for the economy

and the future for 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 the dot-com bubble burst in 2000

it took almost two years for the S&P 500 to drop by 49%

The 2007-09 financial crisis led to a fall of almost 60% in just over a year

The coronavirus pandemic has already seen the market fall by a third

in just one month

This crash 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 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, suddenly you have lots of costs 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 the 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, because there’s very little demand for finished products

Few companies are going to want to resurrect that supply chain

instantly until they know that the economy is 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 question that economists are still trying to grapple with is

whether this is what they call a V-shaped recession

or a U-shaped recession or an L-shaped recession

In a V-shaped 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

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 lockdowns are lifted

Europeans and Americans are also being helped by

unprecedented government responses

Up to €200bn

£330bn

$22 trillion in 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 lockdowns would cost America and the euro zone

perhaps a third of their GDP

Models looking at America

suggests that ending lockdowns would lessen that damage

but would lead to around 1m extra deaths

In the last 75 years, since the second world war, we’ve seen nothing like this

Governments have not reacted on this 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 we’re 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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