Corona Virus the new enemy of mankind after the mighty Thanos from Avengers. While I am writing this article, it has infected 4,490,958 people and taken 301,558 lives worldwide. This virus has affected all spheres of human life- a crisis like no other, and there is substantial uncertainty about its impact on people’s lives and livelihoods. A lot depends on the epidemiology of the virus, the effectiveness of containment measures, and the development of therapeutics and vaccines, all of which are hard to predict. In addition, many countries now face multiple crises—a health crisis, a financial crisis, and a collapse in commodity prices, which interact in complex ways. Economists suggest that this recession will be unlike other downturns in recent history because it is a recession which is a result of measures needed to contain a health crisis like social distancing and isolation, not by an unhealthy or unstable economy.
How is coronavirus causing a recession?
Economies enter recession after 2 consecutive quarters of negative GDP growth. Although there is no official verdict since it will be until July end to get 2nd quarter data but many economists expect a double digit decline in GDP growth in most of the countries in the second quarter due to Covid-19. There are many other factors which support the claim that we are going through a recession. Such as..
1.High human unemployment rate- Nearly 10 million Americans filed for unemployment insurance claims during the final weeks of March. Economists also predict that the unemployment rate could spike from 3.5% in February to 15% by the middle of the year. The United Nations forecasts that income losses in developing countries because of coronavirus could exceed $220 billion.
2.Very low company economy- Surveys of businesses and consumers are also pointing to a recession. A survey in March found that United States companies reported the steepest downturn in economic activity since 2009. Both services and manufacturing sectors of the economy tumbled.
3.Lack of demand- Since consumers stay home due to coronavirus. There is a lack of demand in the market. This drop in demand as reflected in the price of oil, which is near its lowest level in nearly two decades.
4. Drop in consumer spending- One early indicator is consumer spending in restaurants. Open Table stats of restaurant reservation in 5 countries shows a decline of 100 percent during the last two weeks of March.
Many economists say that the challenge is to prevent the coronavirus health crisis from turning into a prolonged financial crisis.
Will it be worse than the financial crisis in 2007-09 or maybe even the Great Depression?
A health crisis could become another Great Depression if we do not deal with it now and provide the support needed to get through this period.
Economists say that the actions policy makers take now will help us determine how long this recession will last and how our economy can recover. There is a sudden spike in the number of corona cases, so countries right now are trying to flatten that curve by locking down and enforcing social distancing. However, these actions have consequences - the more aggressively we try to slow the spread and save lives the deeper the recession.
So, the irony is that to save the economy you must shut it down first.
There are things that both central banks and governments are doing to ease some of the pain. The job of a central bank is to make sure that there is a steady supply of money flowing through the global financial system and in a time of crisis, they also make sure that the credit markets do not freeze up. As a result of which, central banks around the world have pumped trillions of dollars into the banking system to make sure banks and businesses can bounce back once this is all over. They have also cut interest rates to make loans even cheaper.
Central bank heroics alone are not enough; governments also need to step up. World leaders have pledged hundreds of billions of dollars to help people.
Other countries who are struggling economically or dealing with conflict, famine or even other diseases do not have that kind of cash to design policies and schemes that help the economy as well as their citizens to survive this pandemic. These countries will suffer the most because they were in a bad position going into the crisis and they will have the hardest time shaking off the negative effects of it.
How will we recover?
Economists mainly categorize recession and recovery into 3 main letters. V, U and L.
V is a quick rebound in growth where consumer and business activity surges after a downturn.
U is a slightly longer downturn followed by a recovery.
L is the worst-case scenario, a long, slow recovery.
The most encouraging news so far regarding the coronavirus and economy is that in China, which was the first economy to be hit, the latest figure suggests that this is a V-shaped recession. Goldman Sachs also predicts a V-shape recovery from the coronavirus, with GDP dropping as much as 34% in the second quarter and rebounding 19% in the third quarter.
Businesses abilities to stay solvent while they are closed is one factor that will affect the shape of the recovery. Another factor is how quickly people who were laid off during the recession can get their jobs back and if the relief from policy makers will be enough to get them through this prolonged uncertainty.
The only solution to this recession and economic condition is to first eradicate the pandemic, once that is done everything will fall back into place. So, stay safe, stay home, act responsible and be a hero.
Let us fight this together.