Impact on the economy of the coronavirus pandemic

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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