Whether economies are able to avoid recession or not, the path to growth with the spread of the Coronavirus will depend on a combination of factors, including the degree of delay or abandonment of demand, and whether the shock is truly the lapse or persistence, or whether there is harm Structural, among other factors. Here we can draw three broad scenarios:
First, the real (classic) economy scenario, where in this scenario the economy can return to annual growth rates and fully absorb the shock. Although he may appear optimistic about the gloom that is taking place today, we believe it is possible.
Second, a scenario that believes the shock will continue, as the economy resumes its initial growth path, the outcome incurring some permanent loss. We think it is possible under this situation, but we have to wait for more evidence regarding the actual damage of the virus, for this situation to be essential and permanent.
Third, a scenario that produces the ugly effects that the first and second scenarios may produce, in which case we have to ascertain whether Corona will cause major structural damage, such as causing a major imbalance in the aspect of the economic supply, such as the labor market, the formation of capital, or a process productivity. It is hard to imagine that, even with the pessimistic assumptions.
Once again, it is worth going back to history to observe the trajectory of the potential impact of the Corona virus experimentally on the global economy. In fact, we can revert to previous shocks, including epidemics, such as SARS, H3N2 flu (Hong Kong) in 1968, 1952 H2N2 (Asian) flu, and 1918 Spanish flu.
Will there be lasting economic consequences for the Corona virus?
To understand this, we need to examine the mechanism by which the health crisis afflicts the economy. If the classification of recessions indicates us on the economic side that the virus is likely to attack, then the means of “economic contagion” also tell us how the virus controls its host. This is important, because it has different effective effects and treatments, and there are three ways to infect the Corona virus for the economy:
Causing an indirect blow to confidence (affecting wealth)
A traditional transition of external shocks to the real economy through financial markets, where they become part of the problem, not the solution. With the decline in markets, and household wealth shrinking, household savings rates rise, and consequently consumption decreases, and this effect can be strong, especially in developed economies, where the family owns large stock assets, such as the United States, which believes that it will take a sharp grant (bear market) Difficult to correct) and an ongoing recession.
The direct impact on consumer confidence
While financial market performance and consumer confidence are closely related to each other, long-term data also show that consumer confidence can decrease even when markets rise. Corona appears to be delivering a potentially severe direct hit to confidence, leaving home consumers unable to plan discretionary spending, and perhaps pessimists in the long run.
Supply-side shock
The above two paragraphs are concerned with demand shocks, but there are additional risks through the negative impact of Corona on supply. With its effect on production and the disruption of important components in supply chains, gaps become problems, production can cease altogether, and closures and layoffs occur. There will be a lot of variation across economies and industries, but taking the US economy as an example, we believe it will take a long time from the crisis for this to happen. As for its effect on demand, we consider this to be secondary.
Recessions are often periodic events, not structural, however, the boundaries can be blurred between these periods. To illustrate this, the previous global financial crisis was a cyclical (very bad) event in the United States, but it also had a structural burden.
Can the Corona virus create its structural legacy?
History indicates that after a major crisis, the global economy, such as the current spread of the Coruna virus, is likely to change to another form through a number of important ways.
The legacy of small economies
Crises, including epidemics, can stimulate the emergence of new business technologies and paradigms. In 2003, SARS was often credited with adopting online shopping among Chinese consumers, which accelerated the rise of "Ali Baba". With schools closed in Japan, the United States, and other markets, could e-learning and e-learning offer a breakthrough? Moreover, will digital efforts in Wuhan to contain the crisis through smart phone tracking devices effectively reveal a powerful new tool for public health remotely?
The legacy of big economies
Indeed, it appears that the virus will accelerate the emergence of decentralized global value chains, essentially the virus will add a biological dimension to political and institutional forces, which have pushed the value chain model before 2016 into a more fragmented trend.
Political legacy
Political repercussions cannot be excluded globally, as the virus tests the ability of different political systems to protect their populations effectively, and as a result, fragile, vulnerable institutions can be vulnerable, leading to political transformations. Depending on its durability and intensity, Corona can redefine the elections in the United States. On the multilateral level, the crisis can be read as a call for further cooperation, or on the contrary, the bipolar centers of geopolitical power being dismantled from one another.
What should leaders do regarding economic risks?
There are many perspectives from the financial markets, and the history of similar shocks, including lack of reliance on expectations, as financial markets currently reflect a great deal of uncertainty. A wide range of scenarios are still possible, and companies can explore them. Also, there are those who are advised not to allow changes in financial markets to judge the business that companies and institutions plan, focus only on signs of consumer confidence, trust your own instincts, and know how to use your company's data to compare these ideas.
Begin by looking after the crisis to choose the micro or macro economy or the legacy that you will see after the Corona crisis, and what opportunities or challenges will appear on the surface later? Think about how to tackle the post-crisis world. Can you be a part of those who quickly rely on new technologies, processes, etc.? Can you finally find an advantage in difficult times that is in the interest of your company, customers and society?
Effects spanning several decades
Foreign Affairs magazine reported that the global economy has entered into a severe recession, and that the contraction will be sudden and severe due to the outbreak of the new Corona virus, expecting the effects to be effective for decades to come.
Most of the economic forecasts for 2020 expected a year of steady growth, if not increased,. The update of the IMF forecast for January witnessed an increase in growth from 2.9% in 2019 to 3.3% in 2020, and there were many reasons for optimism, including the Trade Agreement The "first stage" between China and the United States, and reducing the impact of Britain's exit from the European Union.
Then came the outbreak of the coronavirus, and caused a big shock to the global economy. The Organization for Economic Cooperation and Development recently cut its forecast for 2020 growth in half from 2.9% to 1.5%, and the International Monetary Fund indicated that it would issue a major adjustment soon.
But even this first round of reviews may have been very optimistic, as it included the widely held assumption that the recession in the first quarter would be immediately compensated in the second quarter.
Before the epidemic, many of the major economies, including Germany, Italy and Japan, were already ill equipped to deal with even minor external shocks, the magazine stated.
She emphasized that the sudden economic turmoil caused by the new coronavirus is highly destructive. For example, the travel industry is an indication of the losses that hit the economic sectors.
The fears of contagion on aircraft and the closure of countries to its borders caused a major blow to the aviation sector. In response, airlines have reduced flights sharply, because they are trying to maintain operational and financial viability, as well as layoffs.
The magazine pointed out that it will not be easy to restart a modern, interconnected global economy after the crisis has ended, and that the recovery of the economy will begin when health officials can assure people that the virus has been contained, and that the immunity from the disease it causes has increased, confirming that the recovery will not be immediate but will be Soon.
The magazine added that the correct response from governments, companies and individuals can limit the coming economic downturn, shorten its duration and contribute to a sharper, stronger and more sustainable recovery.