24 Mar 2020

COVID-19: The pandemic that brought the world to the brink of a economic depression

The effects of the COVID-19 pandemic could drive the world into an economic depression. The coronavirus brought business to a sudden stop. Besides, it sent stock markets into a meltdown and forced central banks to take emergency actions. As the coronavirus outbreak may just be getting started, Central banks and governments are unleashing interest rate cuts. Other actions adopted to preserve the economy were loan guarantees and new spending, tapping emergency powers to reassure investors and cushion the shock to companies.

The most exposed to the fallout are businesses and workers in transport, the energy industry, and hospitality. In the U.S, Donald Trump is asking Congress to approve a rescue bill. The plan is to inject $1 trillion into the economy to prevent mass layoffs at airlines, hotels, and restaurants. On Friday, the UK government said it would pay 80% of the wages of anyone at risk of losing their job. Read more on this below!

Understand how the COVID-19 pandemic may lead us to severe economic depression. (Source: O Globo)

The relationship between the COVID-19 and an economic depression

The reaction to the COVID-19 outbreak was hammering both supply and demand. That dual-threat is exactly why pandemics can be much more damaging than many other events causing an economic depression. People are more likely to stay home during an outbreak to avoid getting sick. Doing so limits the demand for consumer goods and services.

Starting on February 18, US stocks entered a stunning freefall that wiped away roughly a third of their value and ended the longest bull market in history. Markets in Europe and Asia have also plunged. Europe’s Stoxx 600 has lost roughly a third of its value since February 18, and Hong Kong’s Hang Seng Index has dropped 18% over the same time period. 

The economic scenario is getting worse. According to Bank of America, $27 trillion has been wiped off global stocks since the end of January. Goldman Sachs estimates that 2.25 million Americans filed for unemployment benefits this week. Morgan Stanley says spending commitments from the United States, Europe, Japan, the United Kingdom, and China add up to at least $1.7 trillion in the form of credit guarantees.

The COVID-19 pandemic could spark a repeat of the Great Depression that began in 1929 and lasted for years. Economists are already thinking about how it will change the world.  The merits of capitalism, democratic systems of government and globalization are likely to come under intense scrutiny.