Written by: Ivana Ivanova
The main aim of this article is to explore and observe what the impact of the coronavirus on the global economy and financial markets is and what the consequences of the pandemic will be.
Background to the Problem – What is COVID-19?
By now, many will now that COVID-19 is an infectious disease initially identified in Wuhan, Central China at the end of 2019. The virus is spreading rapidly between people, causing them mild to moderate respiratory illness and pneumonia for no apparent reason. Other symptoms include: fever, dry cough, a sore throat, and tiredness. COVID-19 can also be asymptomatic, initiating no noticeable illness to the infected, but they can still spread the virus.
In the most severe cases, people with the virus can develop difficulty breathing, and may ultimately experience organ failure. Some cases are fatal (New Scientist, 2020). Currently, there are no specific vaccines or cures for COVID-19, but there are a lot of on going clinical trials working on developing a potential treatment (WHO, 2020).
During the first quarter of 2020, the rapid daily growth of infected people by COVID-19 together with the rising death tolls around the world have put the most affected countries on lockdown. Almost all of Europe, the United States and parts of Asia placed drastic new measurers in order to fight the spread of the Coronavirus. The governments suspended all types public gatherings, closed schools, pubs, restaurants, gyms, theatres, as well as sending people to work from home. The society is ordered to leave home only for ‘very limited urgent purposes’ and essential shopping (Davies and Diver, 2020).
Despite all the measures, up to 11 April 2020, more than 1,721,000 people are known to be officially infected and more than 104,000 deaths have been recorded – including 9,874 in UK (See table 1). Until mid-April 2020, the peak of the outbreak still has not been reached.
Impact on the Global Economy
Since the virus outbreak at the end of 2019, not only have people lost their lives and beloved ones, but large amounts are left unemployed, many businesses are bankrupting, and the health systems and hospitals worldwide are overwhelmed. As the coronavirus is going global, it could bring the world economy to standstill with a total loss of $2.7 trillions – equivalent to the entire GDP of the UK (Bloomberg, 2020). The lockdowns, the social-distancing and the suspended ordinary daily routines are ‘punishing’ firms worldwide – from airlines and hotels chains to the corner shops and the small family business.
Economic disruption related to the coronavirus is expected to rob the world economy of growth for the first time since 2009, according to London-based research firm Capital Economics. Thus, according to a report by CNBC, “that is the prescription for a global and U.S. recession” (Stevens, 2020).
Additionally, the International Monetary Fund on the 9th of April said the coronavirus pandemic had instigated an economic downturn the likes of which the world has not experienced since the Great Depression. The vision of J.P. Morgan experts on the economic consequences of the virus stress have recently evolved dramatically with respect to the severity and duration of the outbreak. J.P. Morgan Global Economics
Research states that the global economy is expected to experience an unprecedented contraction during the first half of the year as containment measures are driving deep collapses in monthly economic activity.
The U.S. economy is likely to drop by 14% in the second quarter, after suffering a 4% contraction in the first quarter, before potentially recovering to 8% and 4% growth in the third and fourth quarters respectively. Europe region GDP is expected to experience an even greater fall, with declines of 15% and 22% in the first and second quarters, before potentially starting to recover by 4.5% and 3.5% in the third and fourth quarters of 2020.
Recent forecast indicated that the unemployment rate for developed markets as a whole will rise by 1.6% in the next two quarters, which is more than the initially expected damage on the labor market (JPMorgan.com, 2020). The United States economy is believed to experience higher unemployment rates than Europe, as 6.6 million US workers filed for unemployment at the beginning of April 2020 bringing the total numbers of Americans who lost their jobs in just three weeks to over 16 million, as shown below in Table 2 (Word Economic Forum, 2020).
Table 2. Jobless Claims in US 2004-2020
Focusing on the UK, the number of new claimants for universal credit has rapidly risen by 10 times from 94,015 to 950,000 for the period from 31st January 2020 to 31st March 2020, as seen below in Table 3 (Statista, 2020).
China’s Impact on Others
China is the world’s second-largest economy, after the US, and leading trading nation, so economic fallout from the original COVID-19 epicenter is critical. For the rest of the world, China matters as a source of demand, a source of supply, and a focus of concern for financial markets. So, the non-functionality of the Chinese industrial production will have a key significance for global value chains and trading relationships.
Global brands that count on the Chinese market for a sizeable chunk of sales are braced for a significant hit. (TED talks, 2020) Others, who depend on China for their main production and supply are experiencing difficulties ‘funding’ both their online and physical stores with stock. For example, Apple’s manufacturing partner in China, Foxconn, faced production delays. Some carmakers including Nissan and Hyundai temporarily closed factories outside China because they couldn’t get parts (Bloomberg, 2020).
Impact on Financial Markets
The FTSE, Dow Jones Industrial Average and the Nikkei have all seen huge falls since the outbreak beginning on 31st of December. The Dow and the FTSE recently saw their biggest one-day declines since 1987. As seen below in Table 4, the stock markets have fallen by roughly 35% since January 2020. Moreover, Table 5 shows the falls of FTSE 100 since 2000, and clearly indicates the so called ‘Worst Week’, when the index dropped even lower than the Global Financial crisis in 2009 (BBC, 2020).
Additionally, the COVID-19 outbreak affected Europe’s largest banks drastically. As seen in Table 6, Europe’s largest bank, HSBC, has seen the value of market capitalization fall by 47.4 billion U.S. dollars between December 31st and March 31st, 2020. Market capital value of BNP, Santander and Lloyds Bank have also fallen (Statista, 2020).
The market capital value of the European Stock Exchanges has also dropped significantly, as seen in Table 7. Europe’s biggest stock exchange, the Euronext, which combines five markets based in Belgium, France, Ireland, the Netherlands, and Portugal has also recorded falls since the COVID-19 outbreak reached Europe.
In response to the mass fear that the global pandemic will destroy economic growth, central banks in many countries, including the United Kingdom, have reduced interest rates. These actions are believed to make borrowing cheaper and encourage spending to boost the economy.
For example, in order to keep inflation rates low, and therefore the price of goods and services stable, the Bank of England has lowered the Bank Rate. Such a measure was used in 2008 during the global recession when the BoE lowered the bank base rate from 5 percent to 0.5 percent. Due to the economic fears surrounding the COVID-19 virus, as of the 19th of March 2020, the bank base rate was set to its lowest ever standing, as seen below in Table 8.
The major problem with lowering interest rates is that there is an end limit as to how low they can go. Quantitative easing is a measure that central banks can use to inject money into the economy to hopefully boost spending and investment. Furthermore, this is the creation of digital money in order to purchase government bonds. By purchasing large amounts of government bonds, the interest rates on those bonds lower. This in turn means that the interest rates offered on loans for the purchasing of mortgages or business loans lower, encouraging spending and stimulating the economy.
Additionally, global markets are expected to experience a recovery after the US Senate passed a $2 trillion (£1.7tn) coronavirus aid bill to help workers and businesses. However, the financial markets are expected to remain unstable until the pandemic is contained.
With COVID-19’s expansion around the world, it was only a matter of time before the stock markets reacted to the new danger. The crash finally occurred in the week ending February 28, when leading stock markets around the world faced their worst week since the 2008 financial crisis.
However, recently some of the markets have started to stabilize and the investors and analysts predict that they will start to recover in the third and fourth quarter of 2020. Unfortunately, the biggest fears are ahead, particularly concerning global economic growth. The unpredictable duration of the COVID-19 pandemic and the increasing spread puts the global economy in major uncertainty and the deepest economic recession of our lifetimes’ most likely to become a reality.
References and Bibliography
Bloomberg.com. 2020. Bloomberg – 2020 Coronavirus Pandemic Global Economic Risk. [online] Available at: <https://www.bloomberg.com/graphics/2020-coronavirus-pandemic- global-economic-risk/> [Accessed 10 April 2020].
Davies, R., 2020. How Coronavirus Is Affecting The Global Economy. [online] the Guardian. Available at: <https://www.theguardian.com/world/2020/feb/05/coronavirus-global- economy> [Accessed 10 April 2020].
Davies, G. and Diver, T., 2020. UK Coronavirus Lockdown: How Long Has It Been Extended For, And Have Rules Changed?. [online] The Telegraph. Available at: <https://www.telegraph.co.uk/news/2020/04/11/uk-coronavirus-lockdown-government- rules-extended/> [Accessed 10 April 2020].
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Stevens, J., 2020. Market Sell-Off Recap Tuesday: Worst 2-Day Slide In 4 Years, Apple Correction, Futures Bounce. [online] CNBC. Available at: <https://www.cnbc.com/2020/02/25/stock-market-today-live.html> [Accessed 10 April 2020].
TED talks. 2020. What Coronavirus Means For The Global Economy | Ray Dalio. [online] Available at: <https://www.youtube.com/watch?v=yrxYhv2O3wU> [Accessed 11 April 2020].
World Economic Forum. 2020. Global Uncertainty: The Economic Fallout From Coronavirus. [online] Available at: <https://www.weforum.org/agenda/2020/02/containing-the- coronavirus-what-s-the-risk-to-the-global-economy/> [Accessed 10 April 2020].
WHO. 2020. Coronavirus. [online] Available at: <https://www.who.int/health- topics/coronavirus#tab=tab_1> [Accessed 10 April 2020].