1. The virus affects supply and at the same time slows down demand in most of the countries and industries
2. Growth rates of economies slow down
3. Bankruptcies increase
The coronavirus has now reached almost all parts of the world. Many countries with poor health care are closing their borders, and almost all countries have stricter entry regulations, peaking in an entry stop for European countries to the US. It is therefore clear that the virus is becoming a material threat to the global economy. Even a global recession seems possible, depending on how it spreads in the coming weeks. According to the World Health Organization (WHO), a worldwide pandemic can no longer be ruled out.
During the first few weeks, the virus was still limited to China, where the outbreak of lung disease had occurred. Whole megacities were evacuated and quarantined. The effects on the global economy remained manageable. This has changed now fundamentally. We can expect that China’s economic growth could even be less than 4% in 2020, and that the global economy could slip to below 3% for the same period. Switzerland is dependent on international trade and will suffer from this development. Only companies that have a competitive cost position, as well as sufficient reserves will be able to survive the shocks.
The danger for the global economy is significant, because the coronavirus has a negative effect on both supply and demand sides, according to Prof. Henning Voepel (leader of Hamburg’s Institute of World Economy). The evacuations in China are causing massive disruptions to the value chain. At the same time, travel is banned, meetings are cancelled, and investments postponed. This results in reduced demand, particularly in tourism and the catering industry as well as for consumer durables and capital goods.
A combined negative supply and demand shock has a severe impact on the global economy, especially at times when economic tension is high, and is eroded by cheap money and low interest rates already. Markets start to react now: Moving away from stocks, but investing in gold, solidly rated bonds and strong currencies. The coronavirus could become the “black swan” on the stock markets. They in particular tend to panic. We had signals at the New York Stock Exchange lately, when trading was stopped after the Dow Jones went down for more than 7% within hours.
It is currently difficult to make predictions as to how things will continue. Too little is known about the coronavirus. A vaccine will be readily available in 6 months at the minimum. The transmission routes are hardly known. It appears to be relatively easy to transmit and to be fatal at a higher rate than normal influenza viruses. Mortality rate is 10 to 30 times higher than the one of the seasonal flu. The economic consequences increase exponentially with the spread of the virus. The greater the spread, the higher the risk and the more far-reaching the measures to prevent infection. Irrational panic will add fuel to the fire for a global recession.
The coronavirus is symbolic of the current situation in the world, so Prof. Henning Voepel. Highly networked (contagion) risks in all areas: the financial markets, refugee policy, cyber risks, climate. And almost always there are hardly any supranational institutions that could ensure adequate coordination of security measures and policies. Perhaps a wake-up call at the right time, about how fragile our future is and how much we are still turning a blind eye to the risks.
Author: Danny Kaltenborn, Date: March 12, 2020