Unfolding corona

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The story of this quarter solely revolves around the word “coronavirus” and why shouldn’t it , given the fact that it has turned the whole world upside down. It has not only inflicted emotional and psychological pain but also has made our economies and markets vulnerable. On the flip side, OPEC+ countries weren’t coming slow either and instead decided to go for an all-out price war, amidst this situation.

Where it all started from?
On 31st-December-2019, the World Health Organization China Country Office was informed about a pneumonia of unknown cause. It was detected in Wuhan,  port city of 11 million people in Hubei province. According to sources, virus originated from the Huanan Seafood Wholesale market. Although the market was shut down immediately, but Chinese officials ruled out the possibility that this will have the potential recurrence of the SARS – illness that originated in China and killed more than 770 people worldwide in 2002-2003. It was matter of months when Chinese officials were proved wrong and on January 30, the WHO declared it as a global emergency as the death toll in China topped 170 with more than 7000 active cases. Soon after, virus took its toll on rest of the world. On March 11, the WHO declared the coronavirus outbreak a pandemic as infection rates and death toll surged exponentially. As of 2nd -April-2020, total number of countries infected are 186, the total number of cases are at touching distance of 1 million and total deaths are at touching distance of 50,000.

Historical Pandemics & Economic Consequences
Historically, in the 21st century, five major pandemics have plagued us, mainly SARS, H5N1, H1N1, Ebola and MERS. Coronavirus can be categorized as sixth major pandemic in 21st century. Below is the chart showing the estimated economic costs of the historical pandemics. According to the World Bank estimates, a global influenza pandemic similar to scale and virulence of the one in 1918(Spanish Flu) would cost the modern economy US$3 trillion, or up to 4.8% of the GDP(World Bank).

Economic cost of Pandemics
Source: World Health Organization

Economic and Financial Impact of Coronavirus:

Coronavirus (COVID-19) has slowed down economic activity considerably along with hurting the market sentiments. Huge output contractions in China are being felt throughout the world,  indicating the role china has in the  global supply chain, travel and commodity markets.

According to the OECD report, projected annual growth for the FY20 is going to drop to 2.4% from an already sluggish growth of 2.9% in 2019. They have predicted that this quarter might even register a negative growth.  Moreover, OECD has also stated that if the duration of the outbreak is prolonged, then the growth rate would be halved to 1.5% in 2020 as the factories would suspend their activity and workers stay at home in attempt to contain the virus.

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On the trade front, world trade has taken a worst hit in a generation. Such sharp collapse was not even registered during the 1973 oil embargo, the Sep. 11 attacks and The Great Recession. Global value chains have been paralyzed. Port and Cargo traffic across the globe has seen a significant decline over the past two months. The world’s busiest port, the port of Shanghai saw a 20% Y/Y drop in the containers throughout the January.

On the other hand, oil has been worst hit during this quarter due to two major reasons. Firstly, lockdowns mean that demand has been suppressed badly and secondly, Russia-Saudi Arabia’s price-war means that oil is being dumped into the market at very cheap prices.  Contrary, to this Gold after a steep fall has started gaining value gain as it is considered to be a safe haven along with the reserve currency, dollar. Unemployment is another major key economic indicator. Due to coronavirus, there has been significant layoffs in factories, travel industry, airlines and many other industries. As of 2nd-April-2020, U.S jobless claims doubled to a record 6.65 million. Moreover, it is feared that US jobless claims could reach 20m(15% of the workforce) surpassing the great depression record of 1930.

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Furthermore, impact of Coronavirus on the financial markets has been very painful and stressful. Massive equity has been wiped out. Following are the three major stock market index and starting from the outbreak in January till 1st-April-2020, they have fallen by more than 20% and touching almost touching 30% for Dow Jones and FTSE100.

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Travel and Tourism Industry:

Two major industries on the verge of collapse are travel and tourism industry. Due to lockdowns and subdued demand, airline traffic has plunged and according to experts it won’t recover anytime soon. US passed $50 bn aviation bailout to keep the industry afloat for at least next 6 months. In the past, economic and financial problems have either led to bankruptcy in the industry or to mergers in the airline industry. According to the International Air Transport Association estimates the airline industry can lose between US$252 bn of revenues due to depressed demand. World Travel and Tourism Council has warned that the virus could potentially cut 50 million jobs worldwide in the travel and tourism industry. Tourism accounts for 10% of the global GDP and it would take at least 10 months to recover from the strains.US can potentially lose $910 billion from travel and tourism industry and that fallout is considered to be seven times worse than 9/11.  According to the World Trade Organization Trade Barometers, the largest decline was in passenger air travel (93.5) and container shipping (94.3).

Policy Response and Future Outlook:

Governments and Central Banks across the globe have become proactive and have used various means to support their economies. Governments have announced fiscal stimulus which include support for businesses, direct cash transfers, restructuring of loans amongst many others. Central Bank’s have eased their monetary policies extensively and have resorted to quantitative easing. They have also announced packages to support the businesses during this difficult phase.

To conclude, As far as the future outlook is concerned so it depends on three variables: the growth and spread of virus, how long before the vaccine is found and lastly and most importantly is the effectiveness of policy makers in mitigating the damage to our physical and economic health and well-being. Surprisingly, these three variables are in our control. The better our response to these variables the better our chances of winning.

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