Impact on the economy of the coronavirus pandemic
The fight against the coronavirus
pandemic is paralyzing the economic life of the affected countries. The
stalemate is hitting the economic and financial world hard. At the moment, the
forecasts for the further course of the economic crisis are short-lived.
With the rapid growth of the pandemic,
the coronavirus has made many economic forecasts and analyst assessments
obsolete, sometimes in a matter of days. It is necessary to reconsider them.
For example, it was recently expected that the gross domestic product (GDP) of
the affected countries would experience a slight decline in the second quarter,
a short drop, so to speak, in growth.
But now public life is largely
blocked in many places, and even large sectors of the economy are stuck. Many
countries have already declared a state of emergency, others will follow.
Economic performance will therefore drop sharply in many countries and, from
the current point of view, it will certainly do so in the second quarter of the
year.
It is clear that this year, in the best of cases, the world economy will
grow by around 1%. Excluding the global financial and economic crisis of
2008/09, this would be the slowest growth of the past few decades. The world
economy is likely to stagnate. At the moment it is simply impossible to
estimate how serious and lasting the economic damage will be.
Absolutely necessary
Several economies are either
blocking or closing or have adopted stringent regulations to slow the further
spread of the corona virus pandemic. In many places, this state of emergency
will probably last longer than currently announced. Again, governments and
authorities need to reassess the situation on a daily basis. From the point of
view of health and health protection of each of us, these measures are
absolutely necessary and indispensable. But they are hitting economic life
hard.
For example, we now expect the US
economy, which is the world's largest economy, to experience a strong recession
in the next two quarters, mainly because it must digest two shocks
simultaneously: the crisis due to the coronavirus and the collapse in oil
prices. Gross domestic product (GDP) is expected to drop from 3% to 5% in the
second quarter of the year, according to the forecasts of various financial
agencies. However, Migros Bank expects the US economy to gradually recover from
the autumn. In many parts of the world, the economy is also expected to develop
in a similar way. However, this assessment is a snapshot and is subject to many
uncertainties.
A vicious circle
In the sectors of air traffic,
tourism, catering and in many other branches of the economy, activities are
stopping or have already stopped. Although not all companies are forced to lay
off workers immediately, but may initially resort to measures such as part-time
work or reduced holidays, this will have far-reaching consequences for future
economic activities. Employees who earn less or even lose their jobs will cut
their expenses. As a consequence, consumption in many countries will weaken
considerably in the coming months with an effect that will inevitably affect
other sectors of the economy.
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Other firms are affected by the
fact that supply chains are severely disrupted or even disrupted. If the
supplier is located in a country affected by a blocking state, the supply chain
is severely tested. If sooner or later the components or other goods necessary
for production are in short supply, these companies too will have to downsize
their activities. In general, the gloomy economic prospects are inducing
companies to postpone the originally planned investment projects or to reduce
the already approved investment plans.
Panic on the financial markets
All these uncertainties are
reflected in the financial markets, which are under severe stress. In recent
weeks, stock prices have plummeted worldwide - with a strength and pace that
has caused panic among many investors and continues to frighten them. The
atmosphere on the capital markets is also tense. The risk premiums on corporate
bonds have significantly increased and the financing conditions for heavily
indebted companies have worsened.
Inadequate liquidity is a considerable burden
on the business world in the short run, although the selection process
currently underway for the real economy and financial markets is actually
healthy in the long run. At the same time, however, it is important to prevent
serious structural damage to the real economy as much as possible.
So many question marks
It is currently unknown how the
coronavirus pandemic will continue. Much depends on whether and how authorities
around the world manage to keep the pandemic under control in the coming weeks
and slow down the spread of the coronavirus. We can all do our part by
supporting the authorities and governments, adhering to emergency measures,
following the rules and thus easing, at least in part, the health system.
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If we do this, the slump in
growth may be less severe than currently outlined in the darker scenarios. If
at least the rate of diffusion cannot be slowed in the coming months, the
economic outlook will worsen accordingly. Another big question: will the virus
spread once the containment measures are loosened?
Extensive support measures
In the face of all these shocks,
central banks around the world have already rushed to the aid of the financial
markets in the form of interest rate cuts and / or huge liquidity injections.
We expect central banks to take further market support measures in the coming weeks.
They have not yet completely exhausted their resources. However, monetary
policy instruments alone will not be sufficient to combat this economic crisis.
Economic aid will also be
provided mainly by governments, for example in the form of sizeable cyclical
packages and bridging credits. Many states have already announced billions of
emergency programs and support packages. To avoid a credit crisis and a sharp
rise in unemployment, governments will have to take further measures in the
coming weeks and months.
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