From FO’s Perspectives
Since coming to our attention in Wuhan, China in November 2019, the Coronavirus (COVID-19) has rapidly spread throughout the globe, destabilizing communities, nations, and continents as its impact starts to become more pertinently felt with steeply rising infection numbers and death tolls. Coronavirus is a disease caused by SARS, where the virus attacks organs, most frequently the lungs, causing respiratory failure and death if it progresses. However, it is not only the biological consequences that we are seeing from this pandemic. Economies and markets have been severely impacted, ranging from the closing of businesses to billions being wiped off stock markets on an apparently weekly basis. So what has been the economic impact of Coronavirus and how bad can it get?
The first major economic impact of the pandemic has been its effect on global growth. The pandemic has essentially led to the standstill of many nations, in particular in Europe and this has a direct effect on growth forecasts for countries. With companies temporarily closed and people essentially quarantined in their homes to minimize the spread of the virus, national economies are being ground to a halt with consumer spending drastically decreasing. For example, people are no longer going to Starbucks to buy their coffee on their way to work, restaurants will be empty due to the restriction on crowded places, sporting fixtures are postponed leading to a loss in consumer spending from transport to games to spending on food. All these individual things add up and play a significant role in impacting consumer spending which fuels economic growth. Furthermore, investment nationally and globally will be significantly impacted by the uncertainty, leading many firms to postpone planned investment while this pandemic develops which will prevent the creation of potential jobs to economies. According to the OECD, The world’s economy could grow at its slowest rate since 2009 this year due to the Coronavirus outbreak, forecasting growth of just 2.4% in 2020, down from the original 2.9% prediction in November.
Other than economies, individual sectors will be heavily impacted by the outbreak of the Coronavirus, most notably Tourism & aviation, hospitality, and manufacturing. Focusing on tourism and aviation we see arguably, the most heavily impacted industry. With more than 100 countries imposing travel restrictions, airlines cutting flights and tourists canceling holidays and business trips, the tourism, and aviation industries have been hit significantly.
Airlines are currently facing a sudden fall in revenues due to restrictions on flights and a fight to stay afloat with a sudden cut to their cash flow and this was most keenly felt today with Virgin Atlantic, who have asked the government for support to the sector with an emergency credit of up £7.5bn. The substantial economic impact on the aviation industry has seen airlines forced to permanently or temporarily reduce staff, with Virgin Atlantic leading the way with their announcement that they will cut four-fifths of its flights and has asked staff to take eight weeks of unpaid leave. Other airlines have followed suit with Ryanair and EasyJet grounding most of their fleets, while BA owner IAG is to cut capacity by 75% [i].
It isn’t just airlines who have keenly felt the impact, countries who rely heavily on tourism are starting to and will increasingly over the coming months feel the economic impact from the Coronavirus on their tourism industries. Countries dependent on tourism will see the biggest impact from the lack of tourists and the purchasing power tourists bring with them. Countries such as the Maldives, where tourism makes up 41.5% of their economy or the Bahamas where it makes up 19.4% of its economy will face rising unemployment and income from the lack of tourists, meaning the likelihood of a recession is more apparent for them. However, even nations where tourism doesn’t make up as much a percentage of their economy will still be significantly impacted like the UK for example where tourism generates a £106 billion and employs over 2 million people [ii].
Last but not least, the Coronavirus outbreak has caused significant upheaval and carnage on global markets. Global stock markets such as the dow, S&P 500 and the FTSE 100 have had some of their worst weeks in history with billions wiped off due to the uncertainty and fear over Coronavirus. The simple explanation for the stock market to be falling is that the pandemic has dented consumer confidence and this thus leads to a fall in consumer spending and thus falling revenues, profits and dividends for firms. This will culminate in stocks on these markets falling in value. However, the widespread impact of the virus, tied with its growing spread and lack of solution has sent markets into overdrive where we have seen major swings and high levels of volatility.
To give some context to the impact of Coronavirus on markets, In the second week of March, the dow saw its biggest one day decline and the S&P 500 (a stock market index) wiping out its entire gain for 2019 within 2 weeks and is down 30% from its all-time high. While there have been various cases in the past of such decline and volatility e.g. 2008 crisis, dotcom crisis, there has never been a situation like this where entire economies are shutting down and more importantly, a crisis where we don’t know the full extent and where the end will be. With the virus not fully piercing through (statistically) in countries such as the UK and US, the potential for further drops is high and we have arguably not even hit rock bottom. While stock market crashes may seem like something not important to the everyday person, it is, in fact, more vital than realised with millions of citizens’ pension funds invested in stock markets, so severe declines in stock markets can see billions of people’s pensions and saving wiped off from falls in markets.
To end on a good note, one ray of light from this virus has been the positive impact of the virus on Gold. Gold is generally seen as a safe asset that doesn’t lose its value, so in times of uncertainty, the value of Gold increases as it is seen as a ‘safe haven’. So those who had already invested in Gold or companies who mine Gold will see a significant rise in the value of their investments. However, this seems to be the only good note in a sea of ever-increasing problems.
FO’s perspectives is a an independent blogging platform run by a talented journalist and a true friend of The RealTalk Blog. FO’s Perspectives offers the outlet for curiosity in understanding the state of African affairs allowing for the education to those in the diaspora and second generation about the history and factors really holding back the growth of the continent. The portfolio of FO covers a breadth of economic literature into the headline topics such as Brexit and Central Bank policy among others.
We look forward to future informative articles shared by FO in these unprecedented times.
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One particular item I feel that it is worth mentioning here is the sell off of US treasuries alongside bonds. As you discuss there has been a shift towards ‘safe haven’ assets, which typically include US treasury bonds alongside gold. Initially the price of bonds like gold was on the rise with record-breaking reductions in yield. However, the true level of market uncertainty and fear can be seen now that investors do not even want to hold AAA rated government bonds as there has been a move towards cash and in particular the US dollar.
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