Coronavirus: Summary of the economic impact

Written by: Anisah Khan

Background

A new strain of the Coronavirus, Covid-19, made the jump from animals to humans in December 2019, and seems to have originated in the Hubei province, in the Chinese city of Wuhan. This current outbreak is the first-time humans have encountered this specific coronavirus. After reaching 18 countries, the World Health Organisation announced an international public health emergency at the end of January. The most severely affected countries include: China, Northern Italy, Iran and South Korea.

Outlook

Learning from the previous outbreaks such as SARS in 2003, many health professionals are predicting a quick recovery, based on the results of a decline in the number of new cases in China. This suggests that with the right control measures in place Covid-19 could become either a seasonal virus, the same way the other viruses reappear through mutations or a new vaccine could prevent further outbreak.

What has happened in the economy so far?

Just like the virus, the economic impact of it is also spreading across the globe. The OECD warned the virus’s spread could halve the global economic growth it was anticipating in its previous forecast. The S&P Global Ratings confirmed that the US economy will be hit deeper and longer than what was initially predicted by cutting growth to 1% from 2.2%. Furthermore, the forecasts also reflect the announcement of suspending the production and exports of the Boeing 737 MAX.

On the last week of February, US stocks had their worst week since the 2008 Financial crisis, earning then a new record of the fastest ‘correction’ in history. A correction occurs when the market falls more than 10%, signalling pessimistic investors and lower confidence. A record high was achieved on the 19th of February, with a 12% fall over the next six business days. In the same week, a ‘yield curve inversion’ was seen, which means yields on short-term government bonds were higher than yields on the long-term bonds. Since 1950, an inverted yield curve occurred before all 9 recessions, indicating the potential of another within the next 24 months.

On 9th March, The FTSE 100 entered as bear market, where the market falls more than 20% of its recent peak. Investors are likely to start ‘short selling’ in order to protect themselves against losses. This is a risky technique which can cause heavy losses as borrowed shares are sold and bought back at a lower price. Oil markets contributes greatly to these losses falling 20%, with BP and Royal Dutch Shell both tracking 15% lower than previous figures.  

Following this, when the US market opened on the same day a drop of more than 7% on the S&P 500 index triggered a ‘circuit break’, halting trade for the first 15 mins to in an effort to limit further decline in the markets. Crude Oil falling to the worst level seen since the 1991 Gulf War. The last time a circuit breaker was implemented was on the night of Donald Trump’s victory of the presidential election in November 2016, where buyers pushed up prices after the halt. This time the measure was put in place due to the market behaving similar to a recession period, which puts the 11-year bull market in jeopardy, as a bear market of 20% decline is probable.  Whether this action will help combat the economic decline is yet to be seen.

Alternatively, cryptocurrencies were thought of as safe havens amongst investors who use the during uncertain periods or political or economic unrest, much like other commodities such as gold. However, it is difficult to support this statement, after recent observations establishing the contrary. Bitcoin rose above $10,000 mid-February, a 38% rise since January however to weigh all effects of value fluctuation on the Coronavirus is unfeasible. Following this, on March 8th, it dropped significantly nearly 10% and 25% on March 12th. Due to the volatility of cryptocurrencies, this suggest they are no longer considered a refuge from market declines.      

 Why is this happening? Ripple effects

Many factors influence the downturn in economic growth due the virus. This includes investors becoming more cautious due to the uncertainty posed by the duration and effects of Covid-19 on market volatility and share prices.

Tech/Manufacturing

As the second largest economy in the world, China’s economic decline has impacted the global economy dramatically.  China’s manufacturing activity hit a record low, causing many companies to revise their own forecasts accordingly. The technology industry has been quick to react to the virus, with big Silicon Valley players such as Apple, HP, Intel, AMD and Microsoft slashing their profit forecasts causing a drop in share prices.

The forecast reduction is a direct result of cautionary action to reduce the impact of Chinese manufacturing plants not being able to deliver original planned production. With 65% of components and above 80% of electronics manufactured in China, technology companies are heading for an uncertain period of trade. Nonetheless, forecaster are continuing to look for telling signs and clues on how the economy is faring in the current climate, however due to the nature of backward-looking statistics; it may take weeks if not months for factors such as factory output to catch up with the real-life situation.

Trade

China is a key trading partner for the UK, becoming the second largest non-EU import partner behind America.  The Golden Era of UK-China relationship is a highly discussed topic undergoing annual reviews to ensure collaboration for a strategic economic benefit, boosting bilateral trade and investments. Many areas of trade are outlined including everything from financial services, cars and pharmaceuticals.

Due to the virus many disruptions are being felt through different channels such as the interruption to travel and tourism sector, key supply-chains, weaker demand from China and globally, reduced spending and lower commodity prices. All these issues collide together to interfere with the expected global economy growth.  

What’s has been done?

Following the disturbances caused by the Coronavirus, central banks have reacted to the current conditions by lowering interest rates. The FED announced two emergency cuts in the interest rates to a target rate of 0% to 0.25%. This was the biggest single day reduction to rates seen since 2008 financial crisis, with double the cut of what is usually applied (0.25%) and what was expected, indicating policymakers are seriously concerned. Australia’s central bank followed suit, by cutting the interest rate to 0.5%, a record low for the country.

On the 11th of March, The Bank of England announced a reduction in interest rates from 0.75% down to 0.25%. European central banks and others monetary authorities such the Japanese central bank are likely to announce similar measures – although they have far less room to cut rates before hitting 0% or even into negatives.

What will this do?

Lower interest rates are used to stimulate growth by encouraging investment and strengthen confidence in the economy.  In this case, amongst Coronavirus fears, lower interest rates are being used to boost consumer spending and employment rates, as companies invest in hiring more people and obtaining finance is cheaper for the consumer. In this environment with a drop in the cost of borrowing; safer Government bonds are more attractive to investors, increasing activity levels.

Conclusion

Throughout this crisis, close cooperation and communication between global financial regulatory institutions and Government discussion of fiscal and monetary policies is crucial to ensure that the crisis is averted, or any negative impacts can be limited.  

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