Is Covid-19 unleashing the next global financial crisis?

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Areeshya Thevamanohar is a second-year BA Politics student. In this article, she discusses the increasing signs of a global recession following the end of the Coronavirus pandemic, and the international geopolitical impact of such a crisis

Globalisation is a crucial process underpinning how the international political economy currently functions. The rapid spread of the Coronavirus (Covid-19) has been an indication of this mechanism at play in the modern world. In January, the virus originating in the city of Wuhan was still contained within China. Within three months, it has escalated globally, at an unprecedented speed completely blindsiding most governments and populations.

The International Monetary Fund (IMF) has indicated that Covid-19 has begun to plunge the global economy into a recession, with over 80 countries asking for emergency funding. Current predictions show a downturn of the same scale as the 2008 financial crisis, followed by a recovery in 2021. A 1.5 per cent contraction in the global economy is predicted with advanced economies shrinking by 3.3 per cent on average. Since the middle of February, the virus has destroyed $23 trillion in global market value. As countries continue to shut borders and retain populations in lockdown, the effects of a worldwide recession will continue to deepen.

With at least 20 per cent of the world population at home, demand has suppressed significantly. Businesses suffering from reduced demand, are forced to make budget cuts or to shut operations completely, creating a surge in unemployment rates; only suppressing demand further. Sectors such as the airline industry have felt the brunt of it with the International Air Transport Association (IATA) stating that the world’s carriers will possibly require $200 billion in state aid to stay afloat as a result of the travel restrictions placed by many countries. The oil price war between Russia and Saudi Arabia is also adding strain with the price of oil critically reduced met with increased supply and deficient demand, given the current circumstances.

There is no way of knowing how long such bans would need to be in place. If the lockdown were to continue for four months, the Eurozone could face up to a 10 per cent contraction according to S&P Global. The IHS Markit uses a Purchasing Manager’s Index (PMI) to measure the overall health of an economy each month. According to the scale, any score below 50 indicates a contraction in business activity. In March, the US saw a drop to 40.5 for the US (an all-time low) and a 31.4 for the Eurozone. These contractions are a result of reduced business activity within the manufacturing and service sectors in particular.

In the Gulf States, Hong Kong, Taiwan and other economies, migrant workers provide critical revenue. With many workers losing their jobs, they are likely to move back to their home countries. Export reliant countries such as Singapore now have supply chains and revenue earned from travel and trade disrupted. Prominent ports have felt various effects as a result of Covid-19. Table 1.1 shows how these range from temporary closing to reductions in output.

Table 1.1

Governments are prioritising the protection of households and businesses from catastrophic consequences by delivering stimulus packages to safeguard economies, and taking further preventative measures. Table 1.2 highlights some of the steps countries are adopting. These measures will at its core target employees and firms, banks and vulnerable populations, to cushion the economic blows implicated by Covid-19.

Table 1.2

While there is a domestic focus regarding preventative measures, there has been growing attention towards how countries can provide and receive help on an international scope. Australia, Brunei, Canada, Chile, Myanmar, New Zealand and Singapore as a group are to remove existing trade-restrictive measures on essential products such as medical supplies. The IMF is ready to employ all $1 trillion of its lending capacity to aid countries affected economically by Covid-19. G20 leaders have agreed to insert $5 trillion into the global economy to fight the virus. This amount is aimed at subduing economic fallout from the pandemic and helping to fund the gap in the WHO’s response plan.

There is a looming problem with developing countries who are unable to adopt similar measures. Ethiopia’s Prime Minister Abiy Ahmed wrote that “African economies are staring at an abyss.” In Ethiopia alone, the hard currency now not generated by Ethiopian Airlines has meant that the nation is unable to import essential medical supplies. Many also lack access to clean water, making simpler measures such as washing hands a challenge. Densely populated communities such as in Brazil’s overcrowded favelas could soon suffer the consequences of the virus if more stringent steps are not implemented. These are prime examples of countries who may need the assistance of international aid.

History, to an extent, has provided some guidance on how governments should proceed during these unprecedented times. While  a financial crisis in the 1920s did follow World War One, there was a consensus that it would take place over a longer period of time. Consequently, there was less hesitation in commitment as it was easier for governments to plan and allocate economic resources in the right directions. The unpredictability in duration with the present scenario, is a distinct difference.

With Covid-19, the global economy will only be able to begin recovery when successful treatment is in place, and all countries have access to it. However, there is no vaccine available yet, and there is no way of knowing when one would be ready with certainty. There is also no guarantee that a second and third wave may hit countries that are experiencing a substantial decrease in cases. Governments are very much in the dark about what the future holds, and there is increasing pressure on healthcare systems with rising numbers so far, resulting in having to make difficult choices about what to prioritise. There was also no time to prepare for this situation, given the sudden spike in cases (the global count has surpassed four million cases).

A more positive outlook can be observed when comparing the 2008 financial crisis with the current situation. The former was triggered by a series of underlying economic imbalances which required attention before recovery. With the Covid-19 recession, the main obstacle is the virus, which, when counteracted, countries can regrow with more momentum. Bouncing back will depend on three crucial factors, according to The Economist. The first factor is how much goes wrong as a result of the initial shock. If countries can withstand the severe drops in output while sustaining minimal institutional damage, they are more likely to experience a well-paced recovery. The second factor is dependent on the extent of damage done to global trade networks. The ability for trade ties to be restored successfully depends on the “robustness of the economic rebound.” When the pandemic ebbs, it is crucial to focus on trade recovery. The third factor depends on the success of the macroeconomic policy. Governments should try to avoid “sluggish recovery” because it could potentially expose countries to economic and political vulnerabilities, as was seen with the Eurozone after the 2008 financial crisis.

Harvard epidemiologist Marc Lipsitch explains the global nature of the threat “like a forest fire, intense control in one place fails if there are sparks from other places.” A global effort is required to overcome the virus. Most governments now have to prioritise domestic interests and put the health and safety of its people first while also bolstering the economy. Procedures to help countries in need of additional assistance will also need to be considered. Global collaboration is the only way to control the virus, find a treatment for it and then allow economies to rehabilitate.

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