fahd
Past crises no comparison
We ended Part 2 – GVC, Global Virus Crisis – Recovery on analysts drawing comparisons to past crashes. There is a lot to learn from the COVID Crisis, as the global economy was ground to a halt and unemployment jumped exponentially in an already fragile economic system.
Many analysts compare this collapse to the previous financial collapses the global economy experienced, however in this article I articulate what makes this collapse different and explore what options are available on the road to recovery.
Notable past crashes; there was the great depression in 1929, The 2001’s 9/11 attack caused market sentiments to plummet in the airline industry which in turn damaged the economy. Then the famous subprime mortgage crisis in the U.S that led to the great recession from which some countries still haven’t recovered.
It’s important to realise that even though history provides us with a lot of insights from past market crashes, even ones that experienced huge economic shocks and job losses, our current scenario is completely unique.
Speed of this crash
The current financial crisis hasn’t been created by a financial system that’s stretched to the limit. It’s caused by a pandemic which has occurred in a hyper-connected world, one that is much smaller than what our predecessors lived in. This combination of swiftness and magnitude of shock to the global economy is unprecedented.
In my view, the narrative being pushed by the media and a lot of analysts calling this a ‘financial crisis’, is just wrong. The globe is facing a health crisis and asking economists and financial analysts to fix the economy is going about it the wrong way.
The curve vs economy
The economy is, however, linked to the spread of the coronavirus. If proactive measures are not taken by the authorities to control the spread of the virus, the human costs will be severe and the ripple effect of this experience will have a negative impact on the economy due to loss of capability and efficiency.
Many countries around the world have come to understand this and there is a lot of focus on flattening the curve. This is how the crisis transformed from health into a financial crisis.
As countries around the world introduced lockdowns and enforced social distancing it has brought up an interesting conundrum.
Research has shown conclusively that the more aggressively governments around the world try to flatten the curve the deeper the worse the economic impact.
As the world continues to be in various stages of lock down, it is a foregone conclusion that we will experience an economic contraction.
However, to use the terms of recession and depression is not the most accurate. Right now the focus is on protecting people’s health, especially those most vulnerable and doing everything possible to ensure the health system doesn’t fold.
What cannot be denied is that the economic impact this causes around the globe is going to be painful and we do not need to look any further than people in the hospitality, tourism and travel industry. Overheads still remain and banks continue to charge interest on loan balances.
An eye on India and China
India is the best example of looking at the effects of COVID19. Their population of more than 1.2 billion is currently under lockdown. From this 1.2 billion, almost 500 million are unskilled workers who live mostly on a daily wage.
The ability of these people to keep their jobs hinges directly on the duration and extent of the lockdown. Essentially determining if they are able to put a meal on the table or not.
In the current times of instant gratification, it is critical to observe how the pandemic caused the supply and demand market continues to experience a tsunami of chaos. Supply has been derailed as borders, business and factories closed down which then affected demand as industries don’t need raw materials when they are not producing any finished goods.
There is not enough research on the global impact that the 25% decline in production from China will have on the global economy.
Prior to the pandemic, China was heading to a -1% projection on its GDP (Gross domestic product). This also does not take into account health care equilibrium. China exited theirs, only to find out the U.S. and Europe are knee-deep in theirs.
One country battling this health crisis successfully does not mean that international trade will return to normal. The supply and demand shock experienced globally can be witnessed by the chaotic rise and fall in global sharemarket indices.
Next steps
How do we come out of this crisis?
It’s simple! We first deal with the pandemic.
In the meantime, it is the responsibility of the government and central banks to keep the ship afloat and plug the holes.
Central banks around the world need to ensure that there is a steady supply of money flowing through the global financial systems. This is to ensure credit is available for individuals and businesses without cash or savings to bounce back.
Governments need to be smart and not deploy a parachute which only favours a few, like the last financial bailout. They need to invest money into a trickle-up economy, where the money is provided to those with lost earnings so they can maintain basic needs like rent/mortgage, utilities and meals.
Plan B
Leaders around the world need to have a discussion on a Plan B if the fiscal stimulus package does not have the desired outcome.
This is to ensure that countries that do not have the cash don’t inadvertently cause a domino effect which will drag the globe into depression instead of a recession.
Recession – An economic contraction when GDP declines for two consecutive quarters.
Depression – A severe recession with a 10% or more decline in GDP.
The United Nation has stated that the developing countries have lost more than $220 billion dollars and these economies will have the toughest time navigating this crisis. The gap between the poor and rich nations will increase which will lead to an exodus of financial refugees.
Even though the short term looks dire, the opportunities that have arisen from this crisis is massive. The first conclusion is countries need to invest more towards their health care system. If every country were to invest 3% of their defence budget towards their health care system, we can easily navigate another pandemic. A second wave or a future mutation, or a new virus.
Businesses are now thinking about the sustainability of the current financial system. How do we make it more resilient?
Wealth cannot buy health, and that’s why a truly resilient economy needs to have a resilient health system.
Health is directly related to our food production, what systems can be put in place to ensure our food production will not get hit.
The economic system that will emerge from the current crisis will be able to ensure that it can continue to go on feeding people and keep people healthy.
Health and wealth go hand in hand and hoarders never get far.
Be it toilet paper or wealth 🙂
