At the beginning of 2020, if you would have asked any research firm/brokerage house/bank or read any of their reports; you would have noticed one common theme and that would have been that 2020 would be the year of recovery (in global growth). After all who could disagree, the dark cloud (US-China Trade war) that dominated 2019 appeared to be behind us, early signs of economic recovery in Europe (especially Germany) were being seen and U.K. finally “Brexit-ed” with a landslide for the Tories who seemed all ready to level-up growth in the country.
The Corona-Virus is often called “The Invisible Killer”, and probably the moniker is just as appropriate in economic context. It was as if no one saw it coming and all of a sudden we were facing an economiccrisis even greater than the GFC. Over, the last few decades, we have seen unprecedented economic growth as a result of globalization (although Trump may suggest otherwise). However, a more inter-connected world, doesn’t come without its cons and never have we, till now, faced a bigger con than this Covid-19 crisis.
Chart – 1: Global Economic Surprise Index indicating a strong global recovery until the Covid outbreak went global
When the Covid outbreak in Wuhan started making the headlines back in Feb, most saw it as a supply-side shock given China’s role in the global supply chain. However, given the enhanced mobility and inter-connectivity (as a result of globalization), we saw the outbreak going global in no time. What was the solution; well it was pretty simply, ask the people stay in their homes. In other words, a trade off was required; bring the economy to a grinding halt to saves lives. What was the solution to the health crisis posed by the virus created a economic crisis of its own. It truly was a case of the remedy being worse than the disease. After all, no matter how developed a country is, no economy is resilient enough to face an almost absolute collapse in economic activity; especially given the growth in 2019 was already week due to the trade war and also there were no warning signs whatsoever.
The lockdowns that followed are not only going to lead to supply chain disruptions (the most obvious consequence) but also demand destruction given the lay-offs and bankruptcies that this crisis will bring. Almost any form of business with leverage is bound to be affected and those with higher levels of leverage will either go out of business or will have to do large scale lay-offs. The cascading effect of these lay-off/bankruptcies will in turn lead to further demand destruction. We are now in all likelihood facing increased default risks, massive rise in unemployment and falling inflation expectations & commodity prices.
Chart – 2: Global Composite PMI falling off a cliff, which are indicator of economic activity and industrial demand
This truly global crisis required a co-ordinated global response and that is what we have seen. In most of the developed world, we saw interest rates cut overnight to all-time lows to reduce short term borrowing costs. QE on an unprecedented scale were announced by all major central banks to bring down cost of govt borrowing so as to facilitate an effective fiscal response. Special loans at concessional rates (a.k.a LTROs) were also announced. We had most governments suspending collection of income tax, announcing moratorium for paying EMIs, announcing loan guarantee schemes and also making unemployment benefits. All these measures and stimulus packages might just be able to save us from global depression but we still have don’t a complete idea of the real damage this crisis will do to the socio-economic fabric of society as we know it today.