Transcript of the Episode.
Hi and welcome to the second episode of Effects of COVID-19 on the world Economy.
Corono virus or to say covid-19 has crippled the world economy leaving no country, sector or industry behind with China , United States and Italy being hit the most. Is it the beginning of the next big Recession?
Well before we answer that lets look at the global scenario of various different economies.
It was a bruising year for one of the largest economy which is not just the supplier but also the one of the biggest consumer as well.
When the virus first hit, the supply side of China’s economy took a massive hit as things like factories were shut down. A trade war with United states had already left its economy expanding at the slowest in 20 years and now with the outbreak of the corona Chinese economy growth rate seems to have slumped to 4.5% in the first quarter from 6% in the same quarter previous year. The slowdown will leave a deep mark for the year.
All major readings plunged in the January to February period, as economic activity in much of the country came to a halt.
Value-added industrial production plunged 13.5 per cent in the two months, compared with a 6.9 per cent increase in December last year. Fixed asset investment mostly corporate and Government Bonds plummeted by 24.5 per cent in the same period, compared with an 11.8 per cent increase in December, while private sector investment fell 26.4 per cent and manufacturing investment dived 31.5 per cent. Retail sales shrank 20.5 per cent, while auto sales contracted by 42 per cent in volume terms and 37 per cent in value terms.
Capital Economics estimated that the latest data suggested China’s GDP had contracted 13 per cent during the first two months of the year, while Gavekal Dragonomics projected that GDP for the whole of the first quarter would contract between one and four per cent. Oxford Economics expected first quarter GDP to plunge 5 per cent.
Looking to a full-year horizon, it looks highly likely that annual GDP growth will be the lowest since 1978, when the late paramount leader Deng Xiaoping began China’s economic reform. Though it is very early to give a full assessment of China’s economic performance. However Some economists are already saying that the 2020 annual growth will be lower than the previous record low of 3.9 per cent in 1990
UBS said it would be a major achievement if Beijing could reach 3 per cent annual GDP growth this year, regardless of what stimulus measures Beijing took. Oxford Economics forecast full year growth of just 1 percent. Supposedly, as of mid-March, more than 90 per cent of state-owned enterprises and 60 per cent of small and medium-sized enterprises outside of Hubei province had resumed operation. But the surveys do not take into account what capacity these operations are working at.
Even if the growth was to spurt in the later part of this year business sectors such as hospitality, retail, transport, entertainment and tourism will continue to feel pain.
But now, just as China appears to be recovering from the worst of the health impacts, the spread of the virus to the rest of the world means the demand side of its economy will take a hit. Simply to put, even if the factories open back up, they will have far fewer customers to buy their goods.
What is even worst is that China’s debt has reached a high of more than three times its GDP, which leaves very less financial ammunition for policymakers at their disposal.
Companies may struggle to make payments on loans leading to a rise in what is called non-performing loans of $1.1 trillion, according to Standard and Poor’s. Chinese airlines have been forced to ground planes and are expected to lose $12.8bn in revenue. Apart from that there has been massive health crisis, however temporary, but has turned into a real economic shock with liquidity shortages and market disruptions amplifying the situation.
Italy is second on the list of the countries that have been most affected by the COVID-19. As per the various reports it is said that Italian authorities are finding it difficult to dispose of dead bodies of the individuals who have died on account of corona virus.
Global daily flight numbers were down by more than 20 per cent in the seven days to March 21 compared with the same period in the previous month.
The sectors that would be hit worst include textile, train and air transport, hotels, restaurants, shows, and sporting events.
Massive surge in NPA’s is also expected on account of loss of job and large number of people passed away due to this corona Epidemic.
It is estimated that Gross Domestic Product of Italy is forecasted to drop by 3% compared to the previous year first quarter however in the second quarter, this figure could decrease by five percent. Further domestic demand in Italy is forecasted to drop by 2.8 percent compared to the previous year while the industrial production is forecasted to drop by 4.6 percent compared to the previous year. Almost more than 60% of the companies in Italy are effected on account of Corona Outbreak with More specifically, roughly 99 percent of enterprises effected from accommodation and food services sector and 83% companies from transportation and storage sector.
Germany on the other hand could lose nearly €500 billion through the effects of coronavirus and a partial lockdown.
Austria, for its part, has long since closed its border with Italy. Austrian schools, universities and most shops have also been closed. Initially, France pursued a more relaxed approach, but it has now also shuttered its schools, restaurants and shops, as has Spain. Denmark, Poland and the Czech Republic have closed their borders with Germany.
Argentina is also going to need serious help, with its economy expected to contract for the 3rd consecutive year.
Inflation is running at more than 50 %.
The country has debts of more than $320bn with the country on the brink of default while IMF has admitted that the debt is unsustainable and they might have to take losses on their holdings. Even more astonishing is that the new President Alberto Fernandez has instead frozen prices and increased salaries. The ground reality may be even worse than being reported.
US is the third most hit country after china and Italy with new cases of covid-19 rising exponentially.
The typical bear market in the US, where the stock market falls by 30 per cent happens over 15 months however this time, there has been 32 per cent decline in 18 days. That’s never happened before even during the global financial crisis.
Nearly 40 percent of Americans were living paycheck to paycheck before the coronavirus hit, and there is widespread concern these Americans could lose their homes and may not have jobs to return to even after the pandemic subsides. The Labor Department said last week that the number of Americans filing for unemployment jumped to 281,000, its highest level in two years.
With already rising unemployment Insurance claims the true contraction in the economy is likely to be started. Millions of Americans loosing their jobs the upcoming time may be very challenging for the US economy. In any case, the ranks of the jobless will multiply in the coming weeks, as the rise in jobless claims indicates.
Further it is estimated that unemployment rate could hit 10 percent in April, a level unseen since the nadir of the last recession, with the possibility of even higher jobless rates in the following months. One reason that things could get so bad so quickly is that economic weakness feeds on itself, with demand falling as more businesses shut their doors and layoffs spread.
Delta one of the US airline company announcing cutting its flight schedule by 40% and parking nearly 300 planes as well as all the sporting events that have been canceled, the Broadway shows shut down – and then just everyday activities like going out to the coffee shop , the airlines and hotel Industries have hit the most. The National Restaurant Association said it expected sales to plunge by $225 billion over the next three months.
American MNC’s have also not been spared. With this epidemic breaking out in china Starbucks an American Giant of operating coffee shops all around the globe announced that more than half its stores in that country were shut down.
The nation’s largest automakers — General Motors, Ford Motor and Fiat Chrysler — have idled their plants as a health precaution, even ahead of an inevitable decline in demand. Smaller manufacturers face tough choices and bleak prospects.
And finally coming to India which currently is on the start of the Epidemic for which worst is yet come if it may. However so far there has been about 4000-5000 cases registered so far not less in itself but quiet small as compared to other nations.
Several strong measures such as complete lockdown up to 31st march, Complete closure of Railways has been taken by the government in order to stop spreading of this virus. However the stock market has plummeted in line with the global economies. For instance, the two biggest indices Nifty 50 and Senxes are already down about 40% from their highs with majority of loss in just few trading sessions.
However, the real Economic impact can be analyzed only in coming weeks when the real containment or the spread or the virus whatever depending upon the situation takes place.
On a global front
Covid-19 has also laid bare a problem for the globalized manufacturing industry. The production chain of many goods and services – from cars to electronics, smartphones, notebooks, drugs and other daily necessities – would grind to a halt if a disruption occurred in any one part of them.
One of the key issue is China’s growing role in the supply chain.
It became the world’s largest merchandise exporter in 2009, overtaking Germany and Japan. China accounted for a third of global trade in 2018, up from 1.2 per cent in 2000, according to World Bank data. Now the world would not survive without Chinese supplies, nor would China be able to endure without a global market.
Ever since the beginning of the 20th century the role of the tertiary sector in most of the economies around the world has been increasing with some of the economies heavily dependent on the service sector. According to Moody’s report lodging, restaurants and airlines would be among the most affected industries, with sectors like health care, pharmaceuticals, mining and chemicals taking more modest hits. Telecommunications, software and the steel industry would be among the least affected.
Globally, the airline industry is set to lose $29bn, according to the International Air Transportation Association (IATA).
Furthermore Economic data in the near future will be not just bad but unrecognizable,” Credit Suisse said in a note on Friday.
One reason that things could get so bad so quickly is that economic weakness feeds on itself, with demand falling as more businesses shut their doors and layoffs spread.
This will probably be the world’s first recession that starts in the service sector.
Over the long run, the economic damage will be determined not just by what happens on the medical front but also by the level of consumer confidence. When the entire world is fighting against the epidemic and thus on account of severe lock down overall spending is going to suffer. And because consumer spending is such a big part of any economy, that’s a major slowdown for the economy.
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In the coming episode we will be discussing about some of the basic fundamentals relating to the stock market and how we are slowing entering into the recession or are atleast on the verge of something bigger which may be yet to come. At this point of time it is highly Unlikely to see a V-Shaped recovery instead a U-Shaped recovery is expected.
Confused what is V-shaped and U-Shaped?
Wait for our next episode.
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