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Coronavirus: The worst economic disaster of the century

posted onMarch 24, 2020
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The economic fallout from the coronavirus pandemic will burden our societies for years to come, the Organization for Economic Co-operation and Development's (OECD) Secretary-General Angel Gurria warned. In an op-ed published over the weekend he writes the pandemic brings with it the third and greatest economic, financial and social shock of the 21st Century, after 9/11 and the Global Financial Crisis of 2008.”

His op-ed comes as lockdowns are seen around the world, with schools and almost all businesses closed. Many governments are unveiling titanic spending packages  to support workers and businesses threatened by the virus. Central banks are raising trillions of dollars to combat the pandemic but despite their efforts, financial markets across the world have crashed as experts warn millions will be unemployed and companies will go bust. 

The International Labour Organization (ILO) already warned that the economic fallout from coronavirus could cause the loss of up to 25 million jobs. By comparison, the 2008-9 global financial crisis increased global unemployment by 22 million. 

In the US, last week Treasury Secretary Steve Mnuchin said unemployment could hit 20 per cent for the first time since the Great Depression of the 1930s. St. Louis Federal Reserve President James Bullard predicted the US unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in GDP.

On Sunday, Mnuchin also said that financing programs to stimulate the economy could be worth $4 trillion. Meanwhile, U.S. financial markets have shed approximately one-third of their value in just weeks, despite aggressive action from the Federal Reserve. 

“There is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure there’s enough cash in the banking system” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis said. 

In the UK, the government promised a £330bn package, including loans and tax breaks for businesses and guaranteeing to pay up to 80% of workers’ salaries if they are kept on by their employers.The Bank of England also slashed interest rates to just 0.1 per cent, the lowest in its 400-year history. 

In Frankfurt, the European Central Bank said it will print 1 trillion euro this year to stem the coronavirus rout.

In Australia, Magellan Financial Group, one of the top-performing fund managers, estimated the world could need $26 trillion stimulus to counter the economic impact of the pandemic.

Nearly 80 countries have already requested emergency aid from the IMF to deal with the virus outbreak.

Dow Jones coronavirus

(Graph data source: FactSet)

V-shaped recovery = “wishful thinking”

Gurria forecast that even after the worst of the public health crisis has passed, people will face a job crisis. 

“Well before the outbreak, the global economy already exhibited a number of underlying vulnerabilities, which now risk worsening the downturn that COVID-19 has delivered. These include the high level of corporate debt and trade tensions between major economies. Another important vulnerability are the gaps in income, wealth and job stability in many countries, which threaten a large part of our populations. More than one third of OECD households are financially insecure, meaning they would fall into poverty if they had to forgo three months of their income.” Gurria wrote. OECD has 36 member countries.

In an interview with the BBC, Gurria said the belief of policymakers from the G20 club a few weeks ago that the world could enjoy a quick bounce-back was "wishful thinking". 

"I do not agree with the idea of a 'V' shaped phenomenon ... Right now we know it's not going to be a 'V'. It's going to be more in the best of cases like a 'U' with a long trench in the bottom before it gets to the recovery period. We can avoid it looking like an 'L', if we take the right decisions today." the Secretary-General of the Paris-based international trade body said.

Gurria's update is much more severe than the OECD's previous economic outlook in the wake of the coronavirus pandemic that was published  on March 2. In the worst-case scenario of its previous outlook, the influential think tank had forecast growth of just 1.5% in 2020, or half the rate projected before the outbreak. By comparison, the global economy contracted by 0.6% in 2009 as a result of the 2008 financial crisis.

The Institute of International Finance said Monday (March 23) that it projects a 1.5% contraction in the world economy this year, with advanced economies shrinking 3.3% 

As the crisis wages on, we can't help wondering how can a virus (coronavirus) which has caused 15,000 deaths globally -when the population of the world is 7.7 billion- pull the plug on the world economy. At the same time, so far this flu season, 16,000 Americans have died from common influenza, according to the CDC. Still influenza does not make headlines. The world economy was already heading down the slope and we needed a scapegoat for that. It is called coronavirus (official name: CONVID-19). The full economic impact of COVIDー19 remains unknowable. But it looks like coronavirus will bankrupt more people than it kills.