Monday September 28, 2020

Markets are spooked. How bad could it get?

Jun 26, 2020
4 min read
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Markets are spooked. How bad could it get?

The global economy has had years of pain following the financial crisis in 2008. The governments have spent effort on stimulating their economies by enlarging government spending, and other promotions for entrepreneurs. Even a trade war between the US and China has begun to get some advantage in international trade to get more share from the global capital investments. In contrast, it has made it worse for the other national economies. The Brexit, the armed conflict in Syria, and immigration from the war area to the developed countries, the migration from the least developed countries to the developed economies have been among the negative factors influencing the economies adversely. Then, the whole world has faced the corona outbreak. When it started in China, it appeared as if the coronavirus would disturb other countries, and eventually, the virus spread to them all. At the current time, we have disconnected national economies with closed borders. Only some critical goods are traded between the countries, and this is one of the most significant crises after the great depression in 1927. Would it be worse? No one knows the answer. Scientists are working on the development of medicine and vaccine for the coronavirus, which will answer this question.

There is enormous uncertainty, and the coronavirus outbreak is expected to continue at least a few months longer. The governments have announced economic packages to keep their domestic demand alive. The Fed has promised to inject liquidity to support individuals and businesses until the outbreak ends. The other central banks are also developing stimulative reactions against the crisis. The trade war has been transformed into a battle for medical appliances and masks between countries. It is impossible to foresee whether these economic recovery policies can sustain the national economies if the outbreak continues longer.

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Humankind has experienced plenty of economic crises, including the Great Depression and the supply shock crisis in the 1970s, but this one is much different from the previous ones. Perhaps being in the middle of the crisis, understanding the size of the double crisis as the sum of the financial crisis, and the corona outbreak is quite challenging at the current time. The demand side and the supply side have some critical challenges. Without state intervention, it seems impossible to sustain the national economies. The global production chain created by the multinational companies has got some damage while the demand in almost all countries concentrated on the products necessary for surviving. The medical appliances have become very crucial for all nations. Although there is somehow cooperation in the supply of medical devices, it is easy to observe fierce competition in the demand side of these products. Subsequently, this crisis is a deep and two-sided crisis regarding the demand and the supply side of the national economies.

How much deeper can this crisis go? The governments have used significant resources so far to bail out businesses and help individuals make them survive. How much more would it be necessary to spend heavily depends on how long this outbreak would continue. Assuming that the invention of a cure would take at least a few months, and the vaccine's design would take longer than one year, the governments would have to spend more while their tax income decreases. In conclusion, the end of the corona outbreak does not mean starting a recovery in economies. After the end of the corona outbreak, the national economies need long years to recover. It seems like the state intervention would not be that much needed in humankind's history without any doubt.

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