COVID-19 economic impact has started to rise adversely. Countries like China, Italy and the US are struggling to cope up with the situation. Reduction in social interaction, increase in home quarantine, and the decline in economic activity is indicating that the COVID-19 could cause a global economic recession.
25 March, 2020, | AtoZ Markets – The global economic recession happens where the economic activity between countries starts to slow down. Currently, China is the world’s second-largest export-oriented country. Therefore, the COVID-19 economic impact has a massive effect on the Chinese economy. Later on, the virus started to expand worldwide. Thousands of people from Italy, the UK, the US, India have started to be affected. Therefore, the question rises- Is the global economy going to face a recession?
What is Economic Recession?
The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months”.
A recession happens when a country faces a significant decline in its economic activity. The duration of the slowdown in economic activity should last for more than a few months, generally a quarter. During the financial crisis, the country will face a decline in the major five economic indicators. The major indicators are the GDP, employment, manufacturing, retail sales, and income. Some economists say that for a recession GDP should be negative for a minimum of two consecutive quarters.
However, the country might indicate the recession before falling GDP growth towards the negative territory. There are other indicators that are used to measure the upcoming GDP result of a particular country. Therefore, if the other indicators show the negative growth of the economy, the GDP will be negative automatically.
How the Recession Affects the Economy?
The effect of recession might depend on the logic behind the recession. If we look at the financial recession that was heated in 2009, we would see that the high paid White Collar workers have lost their jobs. Moreover, Banks made huge losses and a decline in profits.
However, the global recession due to COVID-19 economic impact is different compared to the recession that happened in 2009. As we know the nature of the virus outbreak is that it transfers from person to person by touch. So there is a possibility that the people will not move outside of the home. As a result, the economy might face a low income in the leisure and tourism sectors.
Moreover, businesses that require people gathering will be affected by the coronavirus. For example, industries like R&G, manufacturing, food production will be affected most. We all know that the economy of a country depends on every sector. Therefore, all companies directly or indirectly related to manufacturing will be affected. So we may see the COVID-19 economic impact to affect the overall economy both directly and indirectly.
COVID-19 may Cause a Global Economic Recession
The COVID-19 economic impact has plunged the global economy into a recession already. There are several indications that confirm the adverse income by the coronavirus, as mentioned by the credit rating agency S&P Global:
“The initial data from China suggests that its economy was hit far harder than projected, though a tentative stabilization has begun,” said S&P Global’s Chief Economist Paul Gruenwald. “Europe and the United States are following a similar path, as increasing restrictions on person-to-person contacts presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year.”
It also said that the GDP of nations might fall by 1% in the first quarter. Therefore, 6% in the second quarter. This is an important indication for the recession to see the GDP to fall in back-to-back quarters.
Social distancing might reduce consumer spending along with travel. Moreover, the recent massive decline in the oil price might hit the global energy sectors.
On the other hand, the US stock indices Dow Jones industrial average has lost nearly 3000 points in a day, which is the worst one-day loss in history. Therefore, economists are forecasting that the US economy might lose millions of Jobs at the beginning of the 2nd Quarter of 2020. If this happens, it would be the biggest loss in the employment sector after the financial recession in 2009.
How the Coronavirus might Hit the Global Economy?
The coronavirus started to rise from Hubei province in China. Later on, it became a global problem as it expanded to the US, Eurozone, and Asia. Besides China, Italy is the biggest victim of it. Overall, the global economy has been facing a disastrous effect due to the coronavirus outbreak.
#1 Shock in Financial Markets
During the outbreak of coronavirus, there was a massive decline in the global financial market. US stock indices- S&P 500 and Dow Jones have broken historic levels along with other global indices. On the other hand, the volatility in the financial market brought massive bullish and bearish pressure in the gold price. Besides the stock market, cryptocurrencies have faced a massive decline as well. Before the outbreak of coronavirus, bitcoin was near about $10,000. Therefore, during the stock market crash, bitcoin has fallen to $4,000. As the demand for the safe-haven assets, bitcoin may move higher with the increase in demand. The decline in the global financial market is a clear indication of the financial recession that forced central banks to cut rates.
#2 Decline in Employment
During the financial recession in 2009, there were a lot of high valued employees who lost their jobs. However, the possible recession due to the outbreak of coronavirus may affect the middle class and lower class employees only. For example, as we know the virus may reduce the social interaction between people. Therefore, employees from industrial sectors, restaurants, consumer dealing sectors, and other sectors that are related to mass people will be affected most. Moreover, the effect of the decline in employment will be bigger compared to the financial recession that happened earlier.
Washington lawmakers are arguing how as a $1.8 trillion stimulus package stalls in Congress. The major point of the bill is $500 billion in loans to support corporations to keep workers paid and employed. This package is not to pay bonuses to CEOs and dividends. However, the urgent part of the bill is a potential payout to every American. For workers, it’s like the sky is falling and they need the money now.
As we know, people from the middle class and lower class status do not have any financial backup to live their life without having any income for a moderate time. Therefore, the effect of the coronavirus outbreak would be devastating for those.
#3 Decline in Manufacturing
The virus outbreak has already started to affect the manufacturing sectors. If you look at Chinese manufacturing in February and March, you may see that it is already in a declining mode. Moreover, the US government has decided to ban travel from Europe. Therefore, there is a possibility that it will decline in financial activities between those countries. As a result, most of the countries will face a decline in the manufacturing sector. The countries that are mostly dependent on manufacturing like Japan, China and the US will be affected most.
Overall, the decline in manufacturing means a reduction in the country’s economic activity. As a result, countries will face lower employment.
#4 Travel and Tourism Sector
China is one of the largest oil importers in the world. As the coronavirus outbreak halts the economic activities in China, the oil demand decreases. Moreover, as the virus expanded to the world, the economic activities around the world have declined as well. Therefore, OPEC+ decided to cut oil production to make a balance between supply and demand.
However, Russia refused to join the OPEC+ and a fight between Saudi Arabia and Russia started to rise. As a result, uncertainties in oil prices started to increase. Most of the analysts believe a negative price for oil.
On the other hand, people are scared of the virus that it might transfer from people to people. Therefore, the quarantine started to keep people in the home. The travel and tourism sector becomes the biggest victim of it.
Central banks are taking decisions to overcome the current uncertainties by stimulating programs. However, still, there are no effective signs in the stock market. On the other hand, the slowdown in economic activity might hamper the overall economic growth of the world. Therefore, it is time for the world to come together to cope up with the situation.
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