How did coronavirus bring the global economy to its knees?
How did coronavirus bring the global economy to its knees?
Almost 36 percent of the labour force in the USA is freelancing which is contributing almost $1.4 trillion to the economy.
Wuhan, China, December 2019 – Various cases of new viral pneumonia appeared in this industrial metropolis of 11 million inhabitants. The disease (COVID-19) spreads, and on January 9, Chinese authorities attribute these cases to a new type of coronavirus. The first death occurred two days later.
The epidemic is infecting many Asian countries and little by little other continents, with more than 115,000 cases of corona infection to date. It includes around 4,000 deaths as well.
The Chinese government decided at the end of January to quarantine Wuhan and prohibited the hundreds of factories there from reopening immediately after the Chinese New Year holidays.
The tourism and transport sectors were the first to worry about this epidemic, which will affect Chinese customers when many states prohibit the arrival of nationals from the Asian giant.
In January, the markets experienced their first jolts from Shanghai to Wall Street. The prices of raw materials fall. And between mid-January and early February, black gold prices plunged by approximately 20%. And that’s just the beginning.
Impact of Covid-19 on the global economy
Globalization has transformed the relationship between people and their environment: now the local is global and global is local. The same is true for the SARS-CoV-2 coronavirus pandemic, a type of virus that causes common colds but can also develop more severe illnesses.
The uncertainty and ignorance about the Covid-19 epidemic have also reached the stock markets and economies around the world.
The difficulty in slowing down the spread of the epidemic has forced governments to apply extraordinary measures, such as closing public buildings, companies, and shops, as well as limiting mobility.
As a consequence, production, consumption, and tourism have decreased in most affected countries. And that has economic consequences.
Strengthening the economy to curb the virus
International organizations such as the OECD (Organization for Economic Cooperation and Development) and the IMF (International Monetary Fund) warn that the pandemic may reduce world economic growth in 2020.
In a situation like this, states are bound to inject large amounts of money to keep the system working.
Other countries, such as France, have announced that they are suspending the payment of the rent and the bills for electricity, gas, or water, while the State itself will be in charge of paying the bank loans of people who cannot assume them because of the epidemic.
Besides, to combat the epidemic and limit the effects it may have on the economy, experts also recommend increasing resources in the health sector.
The fall of the stock exchanges
The fact that companies stop producing and people stop consuming also has effects on the stock markets and other markets.
On March 9, it became the second consecutive “Black Monday” on world stock markets, as a result of preventive measures against the coronavirus. Since then, the condition has only worsened with sharp declines in global markets.
A week later, on March 16, investors and companies woke up to drops of nearly 10% on the New York Stock Exchange, considered one of the largest in the world. In Spain, the Ibex 35 has experienced even more significant losses, and, together with Italy, it is one of the countries most damaged by the Covid-19.
Some fear that the SARS-CoV-2 Coronavirus pandemic could trigger a new economic crisis similar to that of 2008, which had global effects.
In all this situation, however, companies in the pharmaceutical sector are seeing their actions grow and earn money, mainly those that dedicate to researching a coronavirus vaccine.
On the other hand, the Chinese stock market is recovering now that the coronavirus epidemic is under control in the Asian country.
‘Trade war’ for oil
Coronavirus crisis has led to a decline in oil demand, as the industrial and domestic activity has slowed in many countries due to control measures.
In addition to consuming less fuel due to the pandemic situation, there is another factor that influences the price of oil: the internal battle between Russia and Saudi Arabia, which are the two largest oil producers in the world.
The oil has a significant influence on the world economy, and these producers had an agreement not to be harmed: coordinated the production and sale of barrels not compete.
In a context of crisis such as the coronavirus pandemic, Russia has seen an opportunity to advance to the United States (its eternal rival). It has decided to break the agreement and go it alone. In response, Saudi Arabia has agreed to lower the price of its oil to sell more.
This trade war has effects on the world economy. In recent weeks, the price of a barrel of Brent (the benchmark crude in Europe) has fallen more than 9%: the current price is about $ 30 per barrel, levels that have not for 16 years.
Countries affected by the Covid-19 epidemic
On Monday, March 16, confronted with the exponential increase in the number of contamination in the world, massive confinements, and the fear of a global economic recession, the markets fell one after the other. Central banks around the world deployed various insensitive.
- In Asia, there were losses everywhere: Hong Kong, Shanghai, Shenzhen, and Tokyo. After last week’s historical losses, the Australian Stock Exchange opened the week with an unprecedented 9.7% drop.
- Europe followed, with losses of 5.75% for the Paris Stock Exchange, 4.71% for that of London, and 5.31% for that of Frankfurt.
- The stock markets of the Gulf countries, which are very dependent on the energy sector, also collapsed – except for that of Qatar – swept away by the fall in oil prices.
- In the United States, Wall Street suffered one of the worst screenings in its history. Its flagship Dow Jones index collapsed 12.93%, its most massive drop since 1987.
Support measures for the economy
European Union :
The European Commission announced on Tuesday its intention to create a 25 billion euro fund to help E.U. member countries overcome the economic consequences of the epidemic.
United States :
In the U.S., as in the rest of the world, the markets fear the evolution of the pandemic. It also represents a risk of recession. Even the American Secretary of the Treasury, Steven Mnuchin, speaks for the moment of “slowdown”. The decision of the American Central Bank (Fed) to lower its rate to 0-0.25%, and to inject $ 700 billion, was not reassuring enough for the markets. On Monday, it announced the injection of an additional $ 500 billion to ensure sufficient liquidity.
U.K. Finance Minister Rishi Sunak on Wednesday announced a £ 30 billion plan to support the economy. Boris Johnson’s government budget includes “£ 30 billion in economic support to protect Britons, jobs, and businesses”.
In detail, 7 billion will help the self-employed and SMEs, 5 billion the health system, which is added to 18 billion other measures to support activity.
For its part, the Italian government announced this Wednesday a total of 25 billion euros to fight the epidemic of Covid-19, which has already killed more than 600 people in the country. Of this amount, approximately half will be mobilized as an emergency, while the other half will remain for possible future needs.
Justin Trudeau, Prime Minister, announced on Wednesday the creation of a billion Canadian dollars (640 million euros) fund to support the Canadian economy.
The fund “will provide funding to the provinces and territories to help them prepare for any eventuality and to mitigate the risk to Canadians,” said Trudeau at a press conference. The number of cases of the new coronavirus approached the hundred this Wednesday in the country, with one death.
The fund aims, in particular, to strengthen the health systems of the Canadian provinces. It will also provide financial assistance to Canadians forced to put themselves in isolation because of the coronavirus.
“No one should worry about their job if he is at quarantine,” said the head of government.
On Monday, March 9, the German government announced a package of measures to support its economy in the face of the impact of the COVID-19.
At a press conference on Wednesday, Chancellor Angela Merkel also said she was ready to come back to the sacrosanct rule of zero public deficits to deal with the epidemic.
With the evolution of COVID-19 into a global pandemic, economic costs could rise rapidly. A series of policy measures will are necessary for short and future years.
In the short term, the central bank and the Ministry of Finance need to ensure that the disrupted economy continues to operate while the epidemic continues. Facing realities and financial pressures, the government plays a vital role. Although the central bank can take interest rate cuts, the impact is not only a demand management issue but also a multifaceted crisis that requires monetary, fiscal, and health policy responses.
Longer-term responses are even more critical. Global cooperation, especially in the areas of public health and economic development, is essential. All major countries need to be actively involved. Once the disease has occurred in many other countries and attempts have been made to close the border after the pandemic has begun, it is too late to take action.