The Coronavirus epidemic has come with a remarkable and intense uncertainty. Government officials are uncertain of how deadly the virus is, and countless businesses and households are uncertain of how long the danger will last, as well as what actions governments are going to take to neutralize this threat. People are visibly afraid, as the market panic proves, and it may take several months for that fear to subside. As I’m typing this, there is literally a hand sanitizer, toilet paper, household disinfecting product, dry food supply deficiency occurring worldwide. This pandemic is a public-health emergency but it’s also transforming into an economic crisis.
Global markets are unstable and unpredictable, supply-chain disruptions are piling up, economists are slashing forecasts, and investors are fleeing to the safety of bonds. Covid-19, the disease caused by the coronavirus, has not only shocked demand by triggering travel restrictions, social distancing. and widespread uncertainty. It has also shocked supply as factories in China close, which interfere with complicated trade networks, upsetting global trade and causing shortages of drugs, medical equipment and consumer goods.
Over the past week, the Federal Reserve took aggressive steps to try to contain the damage, announcing that it would slash interest rates by half a percentage point. “The benefits of lower interest rates at this stage are questionable with a substantial part of the economic shock due to supply-chain disruptions and official restrictions on economic activity,” argues Brian Coulton, the chief economist at Fitch Ratings. Furthermore, “the Fed and other central banks have already pushed interest rates to historic lows; they are running out of their strongest ammunition.”
Economists say a pandemic could clearly cause a recession in the United States. But for that to happen, the effects would have to spread beyond manufacturing, travel and other sectors directly affected by the disease. “The real sign of trouble will be when companies with no direct connection to the virus start reporting a slump in business” said Tara Sinclair, an economist at George Washington University.
A recession is a period in the business cycle when economic activities are in a general decline, typically accompanied by elevated unemployment, falling income and consumer spending, rising business failures, and falling stock markets. Scary and unpleasant as they are, recessions are a normal occurrence in the modern economy, although the U.S. economy hasn’t suffered a recession since 2009.The length of a recession could range from a few months to several years before economic growth picks up again.
According to the National Bureau of Economic Research, the longest recession since the 1850s lasted for more than five years, from October 1873 to March 1879. The shortest was only six months ranging from January to July 1980. Since the Great Depression in the 1930s, a recession hasn’t been more than 20 months, with the latest one, an 18-month stretch from December 2007 to June 2009, being the longest. The global economy faces the “greatest threat” since the Great Recession, according to The Organization for Economic Cooperation and Development. They also stated that global growth could fall to 1.5% in 2020, should the outbreak spread further.
Many recessions, including the Great Recession and the 2001 downturn, intensify when demand evaporates from the economy. Struggling businesses lay off workers, consumers stop buying houses and cars, and frightened hesitant investors stop injecting money into the risky growing enterprises that stimulate the economy in the long term. To resolute the damage and turn the business cycle around, central banks lower interest rates and soak up safe assets, encouraging investors to take on more risk; congresses and parliaments cut taxes and disburse money to towns, states, and households, also spending on things like bridges, schools, and environmental projects.
Human labor is in short supply too, with people forced to socially distance themselves and stay home whenever possible. The virus is “no longer mainly a supply-chain issue,” a team of Standard & Poor’s analysts wrote in an alarmed note. “Both supply and demand effects are in play, and both are being amplified by tightening financial conditions.” But the question remains: How serious will the coronavirus outbreak become in the coming months? And will people risk their lives to continue working and spending money as usual precisely because of the economic stimulus? The economic stimulus package ended the Great Recession by spurring consumer spending. Most importantly, it instilled the confidence needed to boost economic growth. It also aimed to restore trust in the financial services industry. Maybe it will again?