Global Economy catches a Corona Flu

Coronavirus or COVID19 which supposedly started from  Wuhan’s Animal market has now transmuted itself into a pandemic. Apart from triggering a global health emergency, it is also reminding people of the Spanish Flu. Never before has any pathogen ever caused such disruptions that we end up shutting the global economy and worse still top voices from the finance world are comparing this to The Great Depression . In this article we decode how COVID19 has infected the global economy and what the future ramifications for the world may look like.

BY RATTANDEEP SINGH | 7 MIN READ

Coronavirus or COVID19, a virus which was supposedly transmitted from animals to humans is now a pandemic, meaning it has spread all over the globe. Not only this it has infected over 2 lakh people and has killed over 9000 people. Along with being a global phenomenon corona is now choking the global economy.

With thousands of people in the grey area for coronavirus, governments have taken stark prevention measures such as shutdowns imposed by governments worldwide are adding to a host of severe negatives for the global economy which was already weakening in 2019. This has disrupted global supply chains with the whole Chinese manufacturing sector being closed temporarily, increasing supply pressures on the economy. The current hotspot Italy has shut down its whole economy with its most prosperous and industrialised province Lombardy having the highest concentration of infected patients. This has shut down the supply chains with the European Union leading to spill over impacts all over the EU.

Not only do we have a supply side problem, the demand for all discretionary goods and services has suffered a sharp contraction. The worst affected sectors are tourism, aviation and leisure industries. Not only this, the pandemic is also hitting small business owners which are probably going to experience huge losses which would threaten their very solvency. The pandemic is also having mixed effects on the gig economy. On one hand food delivery services are in great demand as people prefer to stay indoors, while Cab Aggregators are feeling the heat as their business has dried up leading to huge disruptions for them.

Talking of solvency, it should be noted that the global economy has experienced a global corporate debt boom, fuelled by record low interest rates, with corporate debt in the US alone rising to over 16 trillion dollars. Out of this debt a huge portion about 1.9 trillion, is junk rated with BBB debt at over 3.5 trillion dollars. This portion of the debt pie has a high chance of default in times of distress. With coronavirus inducing both supply side and demand side pressures, we may see a host of bankruptcies in the foreseeable future. This is not the story of just US but of the whole world where policymakers are bracing for huge spike in bankruptcies and industry lobbies are asking for moratorium on loans (CII today asked for a moratorium on interest payments for MSME’s for 3 months).

These effects are being felt in the reaction of the policy makers as well as the markets. Global stock markets have entered a bearish phase and are trading at an average 25% down to their Jan 2020 highs. Volatility has spiked and the markets are now hitting circuit breakers very frequently. Add to this the Oil price war, which has dealt a great shock to the OPEC+ countries further eroding their resilience to face the global pandemic.

Even policymakers have taken the cues and have transformed into a recession mode, with the Federal Reserve leading the way. The Fed has reduced interest rates by 200 basis points and has introduces quantitative easing of 700 Billions to stabilise the credit markets, which were effectively blocked as a result of the fear in the markets. Along with this the Fed has introduced a commercial paper credit facility for large companies to prevent the collapse of the commercial paper market. Add to this the willingness of the Fed to take up tools straight from its 2008 recession playbook which has motivated other central banks to take up such emergency measures. The bank of Australia followed with rate cuts and the bank of England has introduced a host of measures to cushion the impact of coronavirus. These include a rate cut to 0.1% and the restart of the quantitative easing program. In India, the RBI has announced new LTRO(long term repo operation) plans with an aim to provide ample liquidity to the banks and credit markets as well as to reduce short term lending rates. Along with this RBI is conducting dollar rupee swaps to ensure ample availability of dollars as foreign investors exit the capital markets.

Apart from this there have been talks of big stimulus packages. The US government has proposed a 1.3 trillion package comprising of a plan to provide 1000 dollars to the people who will be most affected, a 50 billion plan to support the airline industry and other plans to shore up the social security systems. The British Treasury secretary announced plans to support small businesses with 330 billion dollars allocated for the same.

But what’s missing is China’s response to the economic collapse with JP Morgan predicting a 9% drop in Chinese GDP for this for Q1 FY21. Along with this market watchers have casted doubts over the ability of monetary policy to stimulate demand as people are not willing to go out and spend. Moreover, it remains to be seen how the Italian economy reacts to the economic sudden stop, with worries that it may lead to something similar to the Greece Debt crisis. 

Now what is uncertain is how governments will manage this crisis given that it has supply and demand side shocks and can lead to a host of major corporate as well as national bankruptcies as well. What governments may do is to get some laser focused measures to support the ailing sectors and sections of the economy to avert a full blown depression as something of such scale has been unprecedented in the whole modern history.