Recent weeks have entirely transformed the world around us. Coronavirus pandemic took its mighty toll in basically every country across the globe. In addition to its destructive effects on the human body, the SARS-CoV-2 virus also has a pretty devastating impact on the global economy. Of course, humanity has already faced some severe crises. However -until now - those were mostly the periods of economic slowdowns. Meanwhile, the current situation brought us a definite stop in many branches of the economy.
When we look at the economy, we need to remember that the individual markets which are making it up, create a specific system of connected vessels – whatever happens in one of its parts, equally affects other elements. That is why only by looking holistically, we can examine the impact of the pandemic on three main components of the economy: goods and services market, financial market, and the factor market.
GOODS AND SERVICES MARKET
The decision to restrain the economic activity has resulted in a paralysis of the goods and services market. Some entrepreneurs are trying to save their companies by offering products online, but it was not always possible. The last three months have resulted in the specter of bankruptcy hanging over many industries.
Foreign trade exchange - which is a significant source of income for most countries - has also experienced problems served by a pandemic.
The World Trade Organization predicts that the trade sector may shrink by as much as 32%. According to the Bloomberg Agency, the current crisis may pull out as much as $5 trillion from the global economy. To make it easier to visualize – this amount is higher than Japan's annual Gross Domestic Product!
Many companies providing services, which are not means of satisfying the most critical and urgent human needs, had to suspend their economic activity entirely. However, after alleviating some restrictions, consumer demand for many of these services has already started to flood particular markets. The main problem for many service providers was primarily surviving this hard time.
FINANCIAL MARKET
Due to the outbreak of the pandemic, changes in the financial markets were incredibly dynamic. They resembled the fluctuations observed during the Global Recession in 2007-2009, although some indexes recorded even higher daily scales of changes than 12 years ago.
Central banks in many countries responded to the pandemic with the decision to lower basic interest rates. It is supposed to reduce the costs of obtaining financial resources and encourage consumers to take loans to stimulate the economy. However, at the same time, it leads to rising inflation and significantly reduces the profitability of deposits.
It is also worth noticing that despite the reduction in loan costs – which is undoubtedly beneficial from the borrowers' point of view – not everyone will be able to take advantage of this opportunity because loans will be harder to obtain. Banks began to tighten the rules on which they lend funds to the customers. For example, some banks now require a 40% down payment for mortgages, which makes them unreachable to masses of customers. Those decisions will certainly cut many people away from a secure form of emergency financing, which is an excellent opportunity for shadow banks. They tend to offer loans on usury terms that can push their customers into the debt trap. We should remember that the decision to use their services should be only an absolute extremity for us.
I believe no one will be surprised by the fact that on the day when the WHO announced the coronavirus pandemic, global stock exchanges witnessed mass stock sales. Two days earlier – precisely on the 9th March – the oil market suffered a pandemic-based crash, which caused such a massive drop in stock prices on Wall Street that trading was halted for 15 minutes.
At the beginning of the pandemic, countries' decisions to take particular measures to contain the virus have wreaked havoc on global currency markets. The currencies of countries basing their economy on oil extraction suffered the most. Investors wanted to avoid risk by buying the US dollar, which is an all-time safe-heaven currency. Indeed, the major currencies have experienced significant sales compared to the US Dollar (even the Japanese yen!). Unfortunately, frightening news about the scale of pandemic development in the US caused the US dollar exchange rate to fall, especially at the beginning of March. Dollar course witnessed some fluctuations since that fall; however, it seems more stable than at the peak of infections in the USA.
PRODUCTION FACTORS MARKET
The International Labor Organization in Geneva has estimated that the coronavirus pandemic will reduce the global labor market in the second quarter of 2020 by 6,7% working hours, which corresponds to as many as 195 million full-time positions. Experts unequivocally state that this is the worst global crisis since World War II.
The industries that suffered significant losses due to the virus are generally tourism, catering, and entertainment. According to Holger Schmieding, chief economist at Berenberg Bank, preventing a pandemic from recurring at the end of 2020 or 2021, may require national governments to introduce severe travel restrictions. That could be harmful to the tourism and transport industry to some extent.
Most companies have decided to reduce employment due to the obligation to suspend or severely restrict their economic activity. They implement these decisions primarily by decreasing the employees' working time, reducing their wages, and individual or group redundancies. At the current moment, reports show that more than 40 million Americans have applied for unemployment benefits since the beginning of the coronavirus pandemic.
Pandemic has also left its mark on the commodity markets all around the world. Usually, in times of economic uncertainty, investors tend to withdraw from risky investments and turn to the precious metals they trust. This time it became evident with gold reaching around $1750 per ounce. The Bank of America's analysts projected that by October 2021, gold might be reigning on the commodities market at its record price – $3000 per ounce!
Coronavirus pandemic resulted in a severe decrease in demand for oil. That is why Riyadh wanted to reduce oil extraction. This decision was supposed to maintain its price but led to the conflict between Saudi Arabia and the Russian Federation, which formerly did not want to comply with OPEC's provisions. On the 8th March 2020, oil prices have plunged over 30%, representing the most significant one-time drop since the 1991 Gulf War. After these countries had reached an agreement, the oil market decided to shock the investors. For the first time in history, on 20th April 2020, humanity has experienced negative oil prices. One had to pay extra for someone to buy the WTI type of "black gold."
(To be exact, the prices that surged below 0 were the prices of oil futures, which are financial contracts obligating the buyer to purchase an asset or oblige the seller to sell an asset at a fixed price and on a fixed date in the future). That is due to a significant drop in demand for oil, the lack of storage space, and infrastructure deficiencies.
SUMMARY
As can be seen, the coronavirus pandemic's impact on the global economy is pervasive and complex. It's important to understand that such a severe economic crisis may pose a significant threat in the case of similar situations recurring in the future, mostly by depleting funds for maintaining the health care system. That may lead to many more deaths even after the main enemy – coronavirus – is defeated.
To fight the enemy – which for the economy is the severe recession – we should get to know it as accurately as possible.
But remember - stay safe! :)
Comments