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Witnessing The Impact of Covid-19

The global financial markets reacted strongly last week after CoronaVirus spread to nations outside China to Europe and the Middle East, stoking fears of a global pandemic. Because there is no or little information on how well the world is placed to cope up with the growing number of Covid-19 cases, the asset classes are pricing a global slowdown and recession very aggressively. The US President Donald Trump hinted of a possible hit from the global slowdown and the Fed cut rates by 50 basis points just  ahead of the quarterly review, which veterans believe was in haste driven by panic from Covid-19.

Evaluating the Real Impact of CoronaVirus?

Reduced Consumption:

Let’s move back to the basics of economics – GDP and National Income, the widely accepted economic indicators globally  weigh in consumption demand very heavily. Recessions generally witness a decrease in consumption followed by an increased savings. With coronavirus enlarging its territories globally, currently affecting 60 countries and over 100,000 people. The consumer confidence index has also fallen sharply leading to a rise in the value of safe assets such as gold.

Lower Production and Drop in Business Activity:

Reduced consumption gradually leads to lower production, trapping the economy in a vicious circle. Most manufacturing companies cut down their quarterly budgets driven by lower consumption levels, higher levels of unemployment and slow growth. The economy through supply side shocks and the intervention of the invisible hand via a expansionary monetary policy gradually revives.

Supply Chain Disruptions:

The coronavirus outbreak has shown that supply-chain disruptions could wreak far greater havoc on the global economy. Most of the global giants including Apple outsource their production to factories in China. With China being the epicenter of the global pandemic, some experts believe that manufacturing would move back to other parts of the world. On the contrary, we believe that the virus is likely to cause reduced manufacturing in other parts of the world as failing arrivals of Chinese-made components cause production delays.

Impact on Tourism and Other Related Industries:

While globalisation, free flow of information and trade have led to a growing tourism industry, in the short term most countries believe that quarantine is their only short term solution. Countries like Indonesia, Maldives and Hong Kong derive the majority of their GDP from tourism. People are becoming more reluctant to travel and are cancelling their trips. The airlines and hotel industry are majorly affected industries which would take almost four quarters to revive.

What could a covid-19 induced recession look like?

According to Harvard Business Review, “The vulnerability of major economies, including the U.S. economy, has risen as growth has slowed and the expansions of various countries are now less able to absorb shocks. In fact, an exogenous shock hitting the U.S. economy at a time of vulnerability has been the most plausible recessionary scenario for some time”

How long do you think the economy will take to revive?

Recessions are generally cyclical in nature but leave an impact for almost the next decade. The global 2008 debt crisis was driven by a housing bubble. Although the economy rebounded, the western world still faces household deleveraging as an ongoing secular phenomenon, driven by a structurally impaired household willingness to borrow ultimately making it harder for policy makers to  push the cycle just by managing short-term interest rates today.

The Way Forward

Crises, including epidemics spur the adoption of new technologies and business models. 

The SARS outbreak of 2003 led to the adoption of online shopping among Chinese consumers, accelerating Alibaba’s rise. As schools have closed in Japan and could plausibly close in the U.S. and other markets, could e-learning and e-delivery of education see a breakthrough?