A global recession, once unthinkable in 2020, is now a foregone conclusion and some experts warn that the pandemic could drag the world’s economy into a depression. More bad news: The coronavirus outbreak may just be getting started.Central banks and governments are now unleashing a tsunami of interest rate cuts, loan guarantees and new spending, tapping emergency powers to reassure investors, cushion the shock to companies and workers and preserve the foundations of a functioning economy for the future.
In the United States, the Trump administration is asking Congress to approve a rescue bill that would inject $1 trillion into the economy to prevent mass layoffs as huge swaths of the world’s biggest economy shut down and airlines, hotels and restaurants run out of cash. In an extraordinary move, the UK government on Friday said it would pay 80% of the wages of anyone at risk of losing their job because of the pandemic.
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Yet the rescue efforts may already be too late. Goldman Sachs estimates that 2.25 million Americans filed for unemployment benefits this week — that would be the biggest number on record. Meanwhile, the number of coronavirus cases marches higher. The global number of infections has topped 270,000, and more than 11,000 people have been killed worldwide. Spain, Italy, France and the United Kingdom are under partial or complete lockdowns. California, which boasts the world’s fifth largest economy, has directed 40 million people to stay at home.
“The coronavirus has created unprecedented financial and societal disruption,” David Kostin, chief US equity strategist at Goldman Sachs, said this week.
Most exposed to the fallout are businesses and workers in transport, the energy industry and hospitality as international aviation shuts down, oil consumption collapses and pubs, bars and restaurants are ordered to close.”In the worst case, entire industries could be destroyed,” Moody’s Investor Services said in a note on Friday.
While the pandemic is still unfolding, economists are already thinking about how it will change the world. Many expect significant shifts in how supply chains are constructed and how global trade is conducted. The merits of capitalism, democratic systems of government and globalization are likely to come under intense scrutiny.
A warning from Apple
February 17 was a holiday in the United States and stock markets were closed. But on that Monday, Apple sounded the alarm. It warned that it wouldn’t meet its revenue projections for the first three months of the year because the coronavirus had reduced iPhone manufacturing capacity in China, and with Chinese stores closed or operating reduced hours, demand for the company’s products was also dropping. When US markets reopened on February 18, investors pushed the company’s stock down by 2.6%.
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The initial hit to its stock may have been modest, but Apple was the first major US company to warn that the coronavirus was affecting its business in a big way. What’s more, Apple laid out exactly why the epidemic was such a big threat: the reaction to the outbreak was hammering both supply and demand.
That dual threat is exactly why pandemics can be much more damaging than many other “black swan” events. People are more likely to stay home during an outbreak to avoid getting sick. Doing so limits demand for consumer goods and services, as well as energy. Decisions by companies and governments to close shops and idle factories, meanwhile, curtail production.
“A severe pandemic would resemble a global war in its sudden, profound, and widespread impact,” the World Bank said in a report from 2013.
In the month following Apple’s (AAPL) warning, thousands more companies came under huge pressure. Carmakers, which rely on global supply chains and timely deliveries to keep their plants open, shuttered factories in Europe and then the United States. Airlines canceled international flights to China, and then just about everywhere else. CAPA Centre for Aviation, a consultancy, says most carriers will be bankrupt by the end of May unless governments bail them out.
Eswar Prasad, a professor of trade policy at Cornell University, said the nature of the pandemic will encourage companies to begin reviewing the costs of global economic integration. “The free flow of goods, capital, and people has generated enormous benefits but also created channels for rapid worldwide contagion from financial shocks, geopolitical conflicts, and epidemics,” he said.
The debate over how companies and governments should respond is already underway, with some observers arguing that countries must make more essential products including medical supplies at home in order to prevent shortages, an impulse that could accelerate a rollback of globalization exemplified by the trade war between the United States and China.
But William Reinsch, a senior adviser at the Center for Strategic and International Studies, said that the pandemic can’t undo the technological advances that have dramatically boosted global trade over the past 50 years. “The larger question is whether those tools will be used in the same way and to the same degree as they have been,” he said. One change that Reinsch sees coming is how executives think about the supplies they need. “The coronavirus crisis has taught them that supply chains are a lot more fragile than they thought, that supplies can be suddenly interrupted for unexpected reasons, and that a prudent manager will not only have a Plan B, but a Plan C and Plan D as well,” he said.