COVID-19 Economic Impact on Global Financial Market

The COVID-19 pandemic may affect the global economy in three key ways: by creating market and supply chain disruption, by directly affecting production, and by its financial impact on financial markets and firms. However, a lot depends on the public’s reaction to the disease.

COVID-19 is a disease caused by a virus known as SARS-CoV-2. Much of the disease is still unknown. While public health officials are still determining the medical impacts of the SARS-CoV-2 virus along with certain key features, such as the incubation period, we believe that the economic impact will in part depend on the public’s reaction to the disease. Public reaction could cause the disease to spread more widely and rapidly, or it could generate unnecessary costs.

CDC Guidelines for Preventing COVID-19

The US Centers for Disease Control and Prevention (CDC)[1] released guidelines for the prevention of COVID-19. The CDC’s recommendations include:

  • Know How It Spreads
    • Currently, there is no vaccine to prevent COVID-19.
    • The best way to prevent illness is to avoid being exposed to the SARS-CoV-2 virus.
    • The virus is primarily thought to spread from one person to another – it is spread through respiratory droplets produced when an infected person sneezes or coughs.
    • These droplets can land in the noses or mouth of people who are nearby or may be inhaled into the lungs.
  • Clean Your Hands Properly and Often
    • Wash your hands properly and often using soap and water for about 20 seconds – this is particularly important after you sneeze or cough, after blowing your nose, and after you have been in a public place.
    • If soap and water are not accessible, use a hand sanitizer with at least 60% alcohol content.
    • Avoid touching your eyes, nose, and mouth with your unwashed hands.
  • Avoid Close Contact
    • Practice social distancing – staying at least 6 feet away from others.
    • Avoid close contact with people who are sick.
    • If COVID-19 is spreading in your community, put some distance between yourself and other people.
  • Cover Coughs and Sneezes
    • Cover your nose and mouth with a tissue when you sneeze or cough; or use the inside of your elbow.
    • Immediately dispose of used tissues in the trash.
    • Wash your hands immediately with soap and water for about 20 seconds.
    • If soap and water are not accessible, use a hand sanitizer with at least 60% alcohol content.
  • Clean and Disinfect
    • Clean and disinfect frequently touched surfaces every day – this includes doorknobs, countertops, light switches, remote controls, sinks, phones, tables, etc.
    • If surfaces are dirty, make sure to clean them – use soap and water or detergent before disinfecting it.
  • Stay Home
    • Stay at home as much as possible – only go out when absolutely necessary.
    • Stay at home if you are feeling sick.

Countries that implement these CDC recommendations may experience less dislocation, although there may still be an economic impact. For instance, social distancing and business closures might reduce the available labor force in an area experiencing the pandemic. In this case, there might be mild rolling economic impacts as COVID-19 outbreaks occur in different regions.

A severe public reaction in which local authorities or the people themselves decide on extremely strict measures in a given area may create substantial economic costs, particularly in regions and for industries that focus on production that cannot be done virtually (i.e. manufacturing). If many countries go for this type of response, the global economy impact could be quite large.

COVID-19 Global Economic Impact

The COVID-19 outbreak may affect the global economy through three different channels:

  1. Market and Supply Chain Disruption
    Many manufacturing companies depend on imported intermediate inputs from China and other countries affected by the pandemic. Many companies also depend on sales in China to achieve financial objectives. The slowdown in economic activity, as well as transportation restrictions, in affected countries will probably have an impact on the production and profitability of some global companies, particularly in manufacturing and in raw materials utilized in manufacturing.

    For businesses that depend on intermediate goods from affected regions, and are unable to switch sourcing, the size of the impact may depend on how quickly the outbreak is stopped. Small and medium-sized businesses may have greater difficulty surviving the disruption. Businesses tied to touring and travel are facing losses that may be hard to recover.
  2. Direct Production Impact
    Chinese production has already been significantly affected due to the shutdown of Hubei province and other areas. Other countries, including the Philippines, are also starting to feel a direct impact as their authorities put in place similar measures.

    Furthermore, the slowdown in China has effects on exporters to China. According to the World Bank[2], China’s largest sources of imports are Japan, Korea, and other Asian countries. Thus, even without new COVID-19 outbreaks, these areas will likely experience sluggish growth in the first half of 2020.
  3. Financial Impact on Financial Markets and Firms
    Temporary disruptions of production and/or inputs may stress some financial markets and firms, particularly those with insufficient liquidity. Traders in financial markets may or may not correctly understand or anticipate which firms might be vulnerable. The resulting rise in risk may expose that one or more main financial market players have taken investment positions that are unprofitable under present market conditions – this can further weaken trust in financial markets and instruments.

    A possible event (low probability) would be a substantial financial market disruption as participants become worried about counterparty risks. A somewhat more likely probability is a substantial decline in corporate bond markets and equity markets, with investors choosing to hold government securities due to the uncertainty created by the COVID-149 pandemic.

Possible Economic Scenarios

The scenarios below are purely theoretical ideas about possible paths that the COVID-19 outbreak, and the global economy, might take.

  1. Financial Crisis
    Delayed production schedules and shipments create financial issues for companies with heavy debts, particularly in the United States. The global market decline and flight from risk – investors selling assets such as volatile stocks and high-yield bonds – reveals investors who have underpriced risks. Worry about counterparty risks hastens the decline and dries up liquidity in financial markets. Central banks hurry to manage the problem. Financial markets – and the global economy – recovers after a V-shaped recession.
  2. Global Pandemic Response
    Economic centers around the world experience Wuhan-style shutdowns as people panic over the spread of the SARS-CoV-2 virus. Uncoordinated plans and decisions on a country-by-country basis disrupt the movement of both people and goods. Global manufacturing rapidly declines, as businesses with international supply chains can only operate intermittently. Tourism, travel, and related businesses sharply decline, and tourism-based regions and businesses suffer. International trade falls, global GDP stagnates, and a global recession is a big possibility.
  3. The Worse Is Over
    Transmission in China has already slowed down. While some isolated outbreaks occur in other countries, these do not create a massive spread of the SARS-CoV-2 virus. As the global number of COVID-19 cases stabilizes, China’s economy returns to normal and there is little impact outside of some areas. China’s GDP takes a major hit in the first quarter of 2020, but bounces back up in Q2 and Q3; however, some of the lost production is never recovered. Some companies outside China experience short-term supply disruptions, but the effect on the global economy is temporary and small.

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