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An economic pandemic: the story of a continuous economic contraction

Reading time: 4 minutes

Franklin Roosevelt once argued that “the only thing we have to fear is fear itself”. Yet as the world is caught up in the continuously escalating Coronavirus outbreak, the economic stagnation and the slowdown of economic growth are what seems to be strategically placed in the middle of the decision – making tables internationally.

The deadly virus outbreak in China has now been linked to an international market turmoil, which has turned the tables for all economies. A dramatic drop in the price of oil equal to $2.79, a sudden increase in the price of gold and a fall of the Dow Jones Industrial Average by more than 1000 points are only few of the events which occurred just this week. The virus spreads and the markets shrink. Will the financial mechanisms in place be enough to prevent a global market recession, or have we already entered this phase, without the prospect of turning back?

What makes the situation worse is the sudden emergence of a significant number of cases in two major economies. South Korea reported more than 890 cases, a number which is bound to have an effect on one of the major international car, electronics and machinery producers. Within less than 48 hours, Italy reported more than 280 cases and 7 confirmed deaths, which led to the shutdown of public institutions, schools, private and public universities and sports events in some major cities of the country’s industrial North. Japan’s reporting of hundreds of infections brings four of the world’s top economies at a standstill.

The representatives of approximately 27% of the world’s GDP are striving to contain the virus, protect their economies and minimize the effect this will have on the international markets. In their efforts to not wreak havoc, the damage has already been done. The spike in the number of cases outside Asia, now recorded in countries in Europe and the Middle East as well, signals a new phase in the battle against the virus, greater risk for companies and their workers as well as efforts to maintain global economic growth.

Stock markets, which had managed to remain outside the sphere of influence of the fast – spreading virus were severely hit this week as well. After the Dow Jones lost 1031 points, equivalent to 3.6%, South Korea’s share benchmark index also dropped by nearly 4% and Italy’s main market index closed down more than 5%. Though these numbers may be hard to decipher, it becomes obvious that the market, as any living organism, is responding to the growing crisis; supply chains could be disrupted for months, or even years, to come and speculation for countries to succumb to recession becomes an ever more frequent phenomenon.

Fears of recession are now spreading outside China. Japan’s economy shrank approximately 6.3% in the October – December 2019 period, and there is speculation that another quarter of economic contraction will bring one of the world’s largest economies into a technical recession. The concentration of coronavirus cases close to Lombardy’s capital, the financial sector of Milan, is bound to affect the car manufacturing as well as luxury goods markets, which puts economists’ predictions of a recession even more into place. The German economy ground to a halt even before the virus outbreak settled in, due to the country’s dependence on China for its profitable car manufacturing economy. Economists at Berenberg, an Hamburg-based investment bank, estimate that the German economy will contract in the first quarter of 2020 and may significantly slow down in the second quarter as well.

The economic implications of the virus aren’t concentrated on individual economies only and the international effects are soon to be felt even more intensely. A slew of companies, including Apple, announced on Monday that the virus will prevent them from reaching sales and profits targets for the first three months of the new decade, which could potentially have an effect on the annual sales and profits numbers as well. The International Air Transport Association also announced that the virus could cost them around $30 billion in lost revenue and that a drop of 4.7% in demand would be the first recorded after the financial crisis that shook Europe since the end of 2009.

Major central banks have also deployed much of the mechanisms they would typically use in order to respond to economic downturns and global debt levels have never been higher, even surpassing the record $250 trillion reached in the first half of 2019 led by the US and China. Such events only limit the responses of policymakers who fear that any decision – making process will lead to the further disruption of the economy and the unsettling of the market. There is a growing consensus between economists, who suggest that the US Federal Reserve will be forced to cut interest rates even as early as March, in response to the virus and in an effort to revive the international markets.

Due to the uncertainty surrounding the virus’s trajectory, economists don’t know whether to expect the spread to slow down sharply by the end of March or to continue increasing and escalate into an international pandemic of an undefined scale. Goldman Sachs economists, however, expect that supply chain disruptions, should the case be the former, will be negligible and will be easy to correct should things return to normality quickly. In the case that the number of infections and cases doesn’t decrease soon, the scenario that could play out would be a disastrous one, not only for public and international health, but also for the markets’ well-being.

In the case that the virus doesn’t prove to be short – lived, the markets are bound to suffer. Economists fear that, in the case that China doesn’t revive soon, all global markets will be affected due to their dependence on the world’s second-largest economy. Some economists have even brought forward ideas for greater economic protectionism, which will limit countries’ dependence on both China and other international market leaders. Yet the very welcoming fact is that the Chinese economy has already started recovering faster than economists predicted it would, reducing some of the palpable anxiety.

Being able to predict the economic outcome without correct and complete health data is difficult and this is why economists and policymakers suggested that the monitoring of the virus is the first step towards correct decision-making. One thing is certain however: though the virus has been declared a pandemic by the United Nation’s World Health Organization, the havoc it has wreaked so far implies that it resembles more of an economic pandemic, that damages economies and leaves financial markets in disarray.

Author
Katya Mavrelli

International Politics and Government Student at Bocconi University.

Contributor of articles on international relations, politics, economics, technology and security.

Social Media Manager and passionate debater.

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