An L-Shaped Coronavirus Recession Looms Large Over The Global Economy

As the disastrous Coronavirus pandemic truculently spreads across the globe, killing hundreds of thousands of people, uprooting the life of many millions of humans like greased lightning, the probability of the world hitting a severe recession in the next few months is irrefragably a whole one; while a depression in subsequent years is but imminent. The unpredictable epidemiology of the disease has certainly given rise to a great deal of market uncertainty, rendering it almost difficult to draw a decisive conclusion. However, the risk of an L-shaped depression looms large over the global economy owing to the following baneful distinguishable indicators.

1. Deficit

Covid-19 has prompted governments to adopt urgent drastic expansionary fiscal policies in the form of increased spending on healthcare, financial rescue packages to businesses and aid to households at a time when they were already consistently running massive budget deficits. Air France has recently obtained a state aid worth $7.66 billion from the French state. Many airlines like Deutsche Lufthansa, American Airlines, Alitalia among others have filed for bankruptcy and have been saved by bailouts worth billions of dollars. Put it all together, with families coping with unemployment and firms with loss of income, potentially leading to mass defaults and bankruptcies, the future looks sorely unpromising.

2. Debt

The increase in borrowing by governments around the world as a result of the Coronavirus crisis will be dauntingly substantial. Globally, net public debt is projected to hike from 69.4% to 85.3% in 2020. As reported by the IMF, the debt ratio of the average advanced economy will surpass 120% of GDP. Emerging countries notably Africa, Afghanistan and Mozambique will bear the brunt of the pandemic.

3. Deflation

According to the OEDC, inflation plummeted considerably to 0.9% in Canada in March 2020. There were also steep declines in the general level of prices in the US, France, Germany and Italy for the same period. Against a backdrop of falling global oil prices exacerbated by a plunge in demand from consumers and businesses alike, the Coronavirus could trigger a dangerous deflationary spiral.

4. Currency debasement

In an endeavour to prevent liquidity problems, facilitate access to credit and anchor a healthy low interest rate environment conducive for investment, the key actions that most central banks will take include: decreasing the discount rate, lowering the reserve ratio, quantitative easing and printing of money. This will debase all the bigger currencies in the world as people will lose trust in the financial system. Presently, bitcoin and other cryptocurrencies have joined gold as a safe haven thereby heralding a gradual but certain migration from the traditional banking system to the distributed blockchain-based financial system which is majorly risky, complicated and fraudulent in nature.

5. Supply Chain Shock

The Coronavirus has adversely impacted global supply chains. China is at the heart of GVCs for many world-leading companies like Apple Inc., Intel and Sony. Companies will be more prudent in their future risks assessment before they decide to relocate production or assembly to other countries. In any event, the likelihood of a second wave of the COVID-19 pandemic or any other similar pandemic erupting anytime cannot be cast off.

6. Deglobalisation

Post the pandemic, countries will impose even more stringent protectionist policies: sanctions, trade controls and tariffs to shield their domestic firms and workers from global disturbances. There will be tighter restrictions on the movement of goods, services, capital, labour, technology, data and information. For instance, immigration to Australia and the US has largely been cut off.

7. International Conflicts

Diplomatic relations between different economies have been aggravating over the past years; the COVID-19 crisis will simply pour gasoline over the fire. The ongoing war between Saudi Arabia and Russia and the US and China will have significant far-ranging spillover effects on the rest of the world. Either to grasp at straws for survival or to seek economic dominance over one another, the scenario for a cyber warfare is perfectly staged. Spoiler alert: the future is bleak.

8. Technological Disruption

Worse, the threat posed by technological revolution will be more pronounced than ever because firms will re-think old operating models, accelerate the pace of automation, digitalise their business model and lay off more workers in the next few years in order to remain competitive. Technological unemployment may characteristically become structural in the long-term.

9. Climate Crisis

The financial implications of the current climate crisis are astronomical. There is an unmalleable pressure on governments to ensure a green Coronavirus recovery that will be intensely challenging in itself since it is going to force a disruption in many industries like coal on which we are heavily dependent. The agricultural industry will be the saviour in the face of widespread famine of biblical proportions. Are today’s Homo-technologicus ready for a 180 degrees turn?

10. Social Problems

The Coronavirus will damage society in many ways. As youngsters find themselves trapped in a vicious cycle of poverty and joblessness, social problems specifically drug abuse, alcohol abuse, prostitution and theft, for e.g. hackers stealing people’s money from their bank accounts, will be on a historic rise. Hopeless adults may lapse into depression. Cases of suicide will soar. On a grander scale, the public will be confronted with an upsurge in money embezzlement, crime, corruption, violence and tax evasion.

The most appropriate policy response to the COVID-19 crisis would be one that prioritises the population’s well-being over economic growth. New Zealand’s Prime Minister, Jacinda Ardern is doing a laudatory feat for her country. Under New Zealand’s revised policy 2020, all new spending must promote one of five government priorities: improving mental health, reducing child poverty, addressing the inequalities faced by indigenous Maori and Pacific islands people, thriving in a digital age, and transitioning to a low-emission, sustainable economy.

In light of the above, it is hoped that people are not led to falsely believe that things will improve in a month or in a year; because things are going to get worse in the years to come. It is the same mighty storm although admittedly we are in different vessels; some are navigating in superyachts, some in ferries, some are skimming in sailing boats while others in canoes. Civilization is not standing at a crossroad but has come to the end of the road. We could be facing a lost decade ahead. The devastation has been done. People are going to be vulnerable. It is the sacrosanct responsibility of a conscientious state to adopt policies to empower its citizens.

If the Coronavirus is an ugly, frightening werewolf; and should mankind be reduced to mere tiny ants in comparison, let us not despair, for ants are also the epitome of hard-work, indefatigable perseverance and unswerving dedication.

Who’s with me?