It takes a lot to get the world into a mass panic, and yet that is what Covid-19, otherwise known as coronavirus has achieved. From people panic buying and emptying out supermarkets, to governments announcing the cancellation of large gatherings it seems the coronavirus has brought the world to its knees. One big question that this all raises is, just how exactly is the coronavirus affecting the world’s finances?
At the beginning of March, there were a series of articles that went into great detail highlighting the potential risks and costs of Coronavirus on the world’s economies. City AM’s piece done at the beginning of March highlighted the great risks that could come from the virus, due to large swathes of China being placed under quarantine and effectively shut down. Indeed, City AM viewed the impact of the virus to be so profound they suggested that economic growth globally would be reduced from their previous view of 2.6% to 2.3% the lowest since 2009. Why?
The answer to that question is simple, at the time of their report, China, Italy and South Korea had the most number of coronavirus cases, and all three are countries which rely heavily on exports for their economy to be stimulated. As they had the greatest number of cases, trading partners would be wary of continuing a trading relationship with them for fear of the virus-which currently has no vaccine- being spread to their own citizens, thus bringing the pandemic to their nations. Furthermore, with China making up roughly 16% of the world’s GDP, anything which damages their economy substantially would have a negative impact on the world’s economy.
In the US, the initial sluggish response by the US government alongside fears about the wider impact that the virus could have on the global economy led to the stock market suffering its worst day since 1987, with stocks plunging by 10%. This was not helped by a US federal government that was led by a man who initially dismissed the coronavirus as nothing more than a common flu, and then as a democrat hoax.
Consequently, when President Trump stopped denying the seriousness of the situation and declared a national emergency-which consequently freed up funds for the federal government to use to fight the spread of the disease, the markets rallied by jumping up 9% almost cancelling their decline a few days earlier. This was accompanied by Nancy Pelosi, speaker of the House of Representatives, stating that her members would pass a bill that provides paid sick leave amongst other aid, thus potentially providing businesses and individuals with some cover in the event of employees needing to self-isolate.
However, though the US government has now deployed a more aggressive monetary policy response in order to respond to the demands of the global economy, they cannot influence the wider impact that the virus will have or rather has already had on supply chains.
With China having shut down a great many factories to try and stop the spreading of the virus, some US companies can expect to find their productivity greatly hampered as they struggle to adjust to this new reality.
Furthermore, in all of this, the US government cannot forget that its citizens will be wary of the virus and of its spread and impact on their own lives. This could lead to citizens giving up things such as air travel or going out to eat, which will hit the economy through lessened demand.
This could consequently force some businesses to shut down due to not being able to manage expenses, which would then mean that workers will either receive less money or no pay, or be let off entirely, which will then come back to hit the economy once more through having fewer paying citizens.
In the UK, it has been predicted that any shutting down of schools could cause as much as a 3% fall in the UK’s GDP, something that would cost the economy billions of pounds. The reasoning behind this figure is that with schools shut, workers would need to find childcare for their kids, and with every school shut, demand for childcare would skyrocket, thus making it difficult for such services to be readily available. This would necessitate parents taking time off work to be with their children, thus taking them away from work and from generating money for the economy.
This analysis was accompanied by recent Office of Budget Responsibility data, which suggested that with a large number of people potentially sick or restricting their movements, demand for services and goods and the ability of businesses to be able to supply them will be reduced. Something that would reduce incomes and spending alongside tax revenues, which would put pressure on the government to spend more to address the outbreak. Naturally such concerns have impacted the markets with most stock markets seeing a significant drop undoing the hard work that had gone into recovery much earlier.
With all this in mind, it is quite clear that the coronavirus is having a largely negative impact on the world’s economy. It is forcing governments to shut down large gatherings, forcing businesses to reconsider their supply chains and ensuring citizens are reconsidering their purchasing habits, all of which is creating uncertainty within the economy. One can expect there to be a period of economic shrinkage as people begin saving their money to try and avoid contracting the virus.