COVID-19: Economic markets remain unstable
First published 17th March 2020
by Tom Warneke
Global | Understanding Your World | Resolving Incidents & Crisis | Fostering Growth & Opportunity
As the Coronavirus outbreak continues to spread further and faster day by day, global markets and economies are continually unsure of where to turn.
Initially economists (and virologists) forecasted that damage would be mostly contained to China however given the reach of COVID-19 globally, these forecasts are clearly incorrect. Where markets have been plunging recently despite frequent attempts by governments and central banks to stabilise matters, it’s clear that the unknown nature of the outbreak, its impact and its longevity are all playing into economic sentiment.
There’s still so many unknowns when in comes to COVID-19 and that makes it incredibly difficult to forecast and in turn, ultimately plan a recovery for the economic damage. China has been demonstrating a strong recovery however given that they may be seeing a ‘second wave’ of Coronavirus outbreak due to returning citizens and travellers, economic hits remain.
Even if the COVID-19 pandemic stabilises and the market begins to level off, it’s clear that the global economy is set for a period of greatly reduced growth into 2021 compared to the projections being proposed late 2019, before the pandemic was known. Governments also have their part to play — rolling out strong policies, shoring up public sentiment and protecting business and economic growth, predominantly in order to prevent a recession and a spiralling host of defaults and bankruptcies.
The Global Outlook
Economists in the start of 2020 were viewing COVID-19 under a 2003 SARS Lens, where the virus was mostly contained to China, thus, most projections looked at a hit to China’s GDP growth and a marginal GDP cut globally due to the impact on China. Fast forward to the end of March and we’re looking at widespread losses globally.
According to Stratfor, “Models based on the 1968–1969 flu epidemic in Hong Kong — which had a case-fatality ratio of 0.5 percent and killed one million people worldwide — have estimated total losses from the COVID-19 pandemic at about $2.3–2.7 trillion in a $90 trillion world economy. Based on a 1918 Spanish Influenza-like pandemic, a more extreme projection generated by the Australian National University put economic losses at more than $9 trillion, or 10 percent of nominal global output.”
Driving economic downturn is not only a lacklustre demand for domestic consumption but also widespread job losses and a general decline in consumer spending and portable income. Added to that, a near collapse of the entertainment, travel and hospitality sectors means discretionary spending is limited even should healthy people choose to try and spend their money.
Corporate profits are also impacted where companies may have higher expenditure when rolling out work from home programmes, decreased sales, decreased output or record amounts of debt being incurred. Due to economic shocks, credit markets are likely frozen making rolling over liabilities or undertaking new credit access untenable.
While these impacts are seen on a global level, it’s also pertinent to explore region specific economic factors and impacts to understand how market forces and economics pertain to your business and day-to-day.
China & Northern Asia
China accounted for one-third of global growth in 2019 however it’s certain that they’ve experienced diminished growth since the COVID-19 outbreak began. China’s industrial output fell by 13.5 percent in Jan/Feb and retail/consumer spending fell by over 20 percent. Capital investment (building and machinery) dropped by almost 25 percent whilst unemployment rose to an all time high of 6.2 percent. Add this to a massive decrease in foreign demand (fuelled by the global downturn in consumer spending) and China is continually taking hits despite their medical improvements. The outbreak is slowing in China and they’re turning factories back on and sending people back to work. Time will tell how long it takes for China to bounce back.
The United States
The United States isn’t as ready to handle the Coronavirus ourbreak as the world thought. On the brink of a recession, first quarter growth is near zero and likely to decline into the second quarter while panic in the markets continues. This coupled with the downturn in consumer and retain spending and the freeze on global tourism and entertainment means there’s not a lot to be excited about.
Unemployment claims were up 300% in February and this number could increase by millions before the next US Labour Department report. Ultimately, it’s unknown how long consumers will remain cautious and how long businesses will need to operate in reduced capacities but as long as these two factors exist, unemployment will rise and consumer sentiment will remain guarded.
France, Italy, Spain and the United Kingdom are on major lockdowns for at least the next 1–2 months and this will have a major impact on the economic growth of Europe. The EU commission estimates GDP will fall by 2.5 percent.
The Middle East and North Africa
Fuelled by lower oil prices as well as a halt on global air travel and tourism and well as a reduction in consumer purchasing, Coronavirus will have wide ranging effects on the Middle East region.
COVID-19 is also likely to have exacerbating effects on countries with existing geopolitical and economic crises such as Lebanon and Iraq who had existing financial crises before the outbreak. It’s likely that Lebanon will need to consider an IMF loan to deal with its rising debt.
Major economies such as Egypt, Turkey and the UAE are likely to be predominantly affected by the downturn in tourism and consumer purchasing.
The uncertainty around COVID-19 and the economic effects therein will likely force many gulf states such as Saudi Arabia, Bahrain and Oman to draw down on financial reserves. Coupled with the drastically low oil prices, these countries are also likely to delay or cancel large scale infrastructure and social projects.
Central banks are moving to alter interest rates to provide liquidity and ease the pressure on corporate books. The U.S. Federal Reserve and the European Central Bank are both exploring a multitude of measures to ease financial hardship on all levels of the economy (individuals, SMEs and major Corporations).
Key to understanding and mitigating the economic crises will be tied to the duration and severity of the outbreak. Where governments can respond effectively in containing COVID-19, there’ll be prudent and strong impacts both for health and a nation’s economy.
National fiscal policy changes are being offered by most governments in supporting their populations through grants, handouts, tax breaks and some form of lending/income guarantee. Initially designed to stem the tide of unemployment and increase consumer spending, it’s unclear if there will be disruptions to global trade and supply chains depending on containment.
Governments should look not just to fiscal easing and support but also shoring up supply lines, business and producers to ensure society can function on a day to day level without unleashing panic when goods become unavailable.
There’s several key indicators we’re monitoring to track not only the health impacts of COVID-19 but also the global economic health. These include:
- The spread, speed and severity of the outbreak and how it’s contained on a local, national, regional and global level. This includes real time data and comparing country to country to understand response efforts, what works and what doesn’t
- Stock Market sentiment. While there are likely to be highly volatile fluctuations on a day to day basis, the overall market trend and sentiment are key.
- Public sentiment is also key to understanding consumer and retail spending and unemployment factors.
- A re-emergence of the virus in locations previously in decline. This may indicate a longer crisis or may demonstrate ineffective containment measures, both of which will have economic impact.
- Outbreaks in Latin America and Africa as well as South Asia where health care systems are not as advanced and have increased capability
- Government policy and response to support the population, their incomes and their businesses.
- The tourism and transport sectors and how quickly globalised movement can resume to enable both people, good and freight can resume movement.
Many of our clients globally are already engaging with us as they determine how to monitor the situation whilst continuing their operations and keep their teams and operations safe.
We’ve setup a hub on our website to help our clients track the situation as well as access the latest in analysis as well as advice from the World Health Organisation — find us at www.complexglobal.co/covid-19
We’re helping our clients through monitoring and analysis of the situation via inCountry as well as our local, regional & global analysts and experts as well as our crisis response and emergency management provisions — ensuring our clients are assisted in their time of need.
If you have concerns about your current operations and the risks to your team or your business or if you feel you need a more developed understanding in the current situation and what might help you be better prepared, our team is able to assist. We have an expansive team in most regions with access to the latest information and analysis as well as scenario planning and support. To find out how we can support you, our team can be reached at email@example.com