Economic Consequences of COVID-19

All countries of the world are heavily impacted by the Covid-19 epidemic. We present different indicators from several countries, all indicating a major economic shock. The Covid-19 pandemic has brought economic activity to a halt in an increasing number of countries. This brake had international repercussions with the fall in foreign trade and the increase in investor risk aversion. This sparked a frantic global quest for dollar liquidity as well as capital outflows to developing countries.

International repercussions on the global economy and government reaction

In the Eurozone, the PMI (survey of corporate purchasing managers) saw the largest decline ever after settling at 51.6 in February. This index is constructed in such a way that a number below 50 indicates a contraction, and a number above 50 represents an expansion of activity. The scale of the crisis is also historic in the rest of the world. For example, Australia had experienced the longest period of uninterrupted growth among developed countries to date. This trend is likely to stop, with the Covid-19 likely to plunge the country into recession.

The job market in the United States is deteriorating at an unprecedented rate. The last week of March saw 6.6 million Americans jobless, double the previous week, which had already set a “record”. On average in recent years, about 250,000 Americans have been unemployed every week.

In China, industrial production plunged 13.5% in January and February 2020, compared to the same period in 2019. Such a drop is unprecedented in China since the country turned to market economy in the late 1970s.

The major economies reacted by taking vigorous monetary and fiscal policy measures. The short-term evolution of demand and activity will depend entirely on the duration and severity of the confinement of populations. Once it is lifted, the recovery will likely be gradual and uneven. Government action will need to evolve, with aid measures in the face of the pandemic giving way to measures to revive growth, with public finances still under strain.

Faced with the prospect of a severe blow to GDP, central banks reacted quickly and energetically. The Federal Reserve has cut the Fed funds to zero and launched a commercial paper buy-back program as well as high-rated corporate bonds. It also sent the message that it would “do whatever is necessary” to stabilize the market for agency treasuries and the mortgage-backed securities market. The ECB, for its part, launched a pandemic emergency purchase program (PEPP), amounting to EUR 750 billion, and introduced essential flexibility regarding the breakdown of its shopping.

The oil market is collapsing due to the COVID-19

If someone tell you “take this for free and I’ll give you 30$” you might think he’s being ridiculous, and he’ll look like a psycho in your eyes if the thing he’s proposing was Oil, yes the black gold. But trust me, that is actually happening in the era of COVID-19 pandemic; the impossible became possible and the price of oil fell to the ground, and we can say ‘underground’ for the US case. So you might be asking “how is that related to the COVID-19?”: We all know the price of any good is related to supply and demand, and in this era of COVID-19 the demand of transport fuels decreased due to the lockdown and quarantine. With that, a big amount of oil, let’s call it “unwanted oil”, in the market caused a big drop in oil price, and it turned US oil price negative to almost -40$ a barrel. This means producers will pay oil buyers just to get rid of the unwanted oil they have in hands, while the price of oil is still above zero in other countries. It’s all due to the type of crude oil. In America, West Texas Intermediate is an oil shale which costs a lot for its extraction and production (1 oil barrel costs +40$) while in Saudi Arabia, 1oil barrel is way too cheaper (1 oil barrel costs just 5 to 10 dollars) and so is Brent Crude in Russia. However, even if the international bench mark oil price (Brent Crude) is above zero with 20$ a barrel, it is a drop of two-thirds since January to 18 years lows. So the whole oil market is collapsing.

The Impact of Coronavirus on the global trading and the international commerce

In December 2019, a new strand of Coronavirus started spreading in the streets of Wuhan in China, ever since this has turned into a global pandemic with the virus now present everywhere in the world. This rapid spread has caused governments all over the globe to put social distancing policies in place. Most countries have banned the entrance of anyone that wasn’t present in their territory before the virus broke out. No one was expecting a decrease in the amount of goods being traded in the world but this happened sooner than later, countries like China who have temporarily stopped all forms of import and export, other countries focusing on importing only essential materials and merchandise that can’t be produced nationally. This has caused many companies and factories to close up shop and put their workers to rest. Laying people off work forces countries to provide some sort of financial compensation to help the now unemployed workers, that also means less income for the state. This situation is unprecedented, and currently no one has clear and precise answers to the questions currently on hand. One thing that is definitely sure is that we need to revisit all the habits injected into our bloodstreams from consumerism and capitalism, the only way for us to survive and grow from this pandemic, if to refocus toward the human capital instead of the bottom-line.

Authors