The combination of a viral pandemic and an oil shock may have brought us to the brink of an economic crisis – with no end in sight.
Leave it to a microscopic pathogen to bring capitalism to a grinding halt.
Ever since the Coronavirus (Covid-19) began its romp from China in January and spread around the world, it has begun to wreak havoc: disrupting supply chains, sowing travel turmoil, dampening sales of consumer products, cancelling major events and festivals.
Now officially declared a pandemic, entire cities – if not countries – are virtually shutdown or on pace to be very soon.
Thrown into the mix is an oil price war between Russians and the Saudis, which saw oil’s sharpest one-day drop since the 1991 Gulf War. Competition is exacerbating the price collapse: Moscow and Riyadh have reverted to seeking greater market share and the Russian’s strategy aims to punish US shale, which Moscow blames for the global oil glut.
Many US shale companies have hedged their production and could be at risk of bankruptcies.
The one-two punch of a viral pandemic and an oil shock has been devastating, as stock markets suffered one of the worst weeks since the 2008 financial crisis. Wall Street plummeted as the Dow Jones dropped more than 2,000 points on Monday. Markets in Asia and Europe tumbled, adding to growing fears of a looming global recession.
How extensive any economic fallout will be, is hard to predict at this moment. But it’s clear from market volatility and the uncoordinated response from governments, that all signs point to a significant downturn.
Signals are bleak
With Covid-19 depressing global economic activity, and following the collapse of Saudi Arabia’s OPEC+ production-limiting agreement with Russia, oil prices will probably hover around $30 per barrel over the next six months and fall to as low as $20 per barrel if the virus’s spread is not slowed.
Given there is still much we don’t understand about Covid-19 and until an adequate global response contains its spread, it will be hard to gauge the severity of strain on economies.
We can begin to get a picture of what it might look like from China. All indications of the impact of Covid-19 on the Chinese economy has been worse than initially forecasted.
According to a CSIS report, Chinese manufacturing and services sectors plunged to record lows in February. Meanwhile, automobile sales sank by a record 80 percent, while exports fell by 17.2 percent in January and February.
As China goes, so does the global economy.
The ripple effect is being felt by Apple, Nike, and many smaller manufactures due to the virus’ impact on production and retail with government-mandated lockdowns across several cities in China. Luxury fashion brands which depend on Chinese buyers could cost the market $43 billion in sales in 2020.
Industries tied to travel and tourism are being hammered by the outbreak. Airlines could lose as much as $100 billion. The hospitality sector has to come to terms with cancellations and postponements after travel bans, and hourly workers are likely to be the first causalities in the food and beverage industry.
If one sector is recession-proof, it is the healthcare industry as demand for healthcare workers is only set to increase.
While all recessions are not the same, there is cause for concern when you consider the interconnectedness of our economic architecture and how a black swan event, Covid-19, could end up accelerating what have long been lingering structural fault lines that were masked by a heady decade on the stock market, quantitative easing and low-interest rates since the 2008 collapse.
That is because the pandemic has hit at a time when major economies were already beginning to appear weak. The world economy has already slowed to a ‘stall speed’ of 2.5 percent. The US is growing at just 2 percent; Europe and Japan at 1 percent; China and India have slowed down significantly; emerging economies like Brazil, Russia, Turkey and Mexico are all sluggish.
The OECD has warned that its previous 2020 forecast for global economic growth of 2.9 percent could be halved to 1.5 percent due to the lasting effects of the Covid-19 outbreak. The IMF too has reduced its already low growth prognosis for this year.
What have been the policy reactions to avoid a serious slump so far? China announced billions in special-purpose loans to firms confronting liquidity constraints. The US Federal Reserve and the Bank of England (BOE) have cut interest rates. The European Central Bank (ECB) decided not to cut rates but announced a stimulus.
Apart from the IMF and World Bank announcing the availability of $50 billion and $12 billion financing, respectively, to support low income and emerging markets’ response to the virus, so far the responses have been country-specific and lacking in global coordination.
While these prescriptions have some short-term effect, cuts in interest rates and cheap credit are more likely to end up being used to boost the stock market with yet another round of ‘fictitious capital’, which never trickles down to the real economy.
Furthermore, the problem now is that any recession that follows is not going to because of a lack of demand, but rather by a ‘supply-side shock’, as BOE deputy governor Jon Cunliffe highlighted. In other words: the loss of production, investment and trade.
One of the major reasons economies are stagnant can be pinned on a long-term decline in the profitability of capital: indicated by a productivity growth slowdown, monopoly consolidation in key industries, low-grade precarious jobs, and acute vulnerability to crisis.
To add to the underlying fragilities facing global capitalism, is a debt crisis.
A decade of record-low interest rates has precipitated a borrowing binge that has led to massive corporate debt – a recipe for disaster if the profitability of capital was to nosedive any further.
According to the Institute of International Finance, the ratio of global debt to gross GDP hit an all-time high of over 320 percent in Q3 of 2019, with total debt reaching $253 trillion.
Even if Covid-19 doesn’t trigger a protracted economic slump or financial crash, the conditions for any significant recovery just do not look promising.
Globalisation has seen trade, migration and tourism dissolve national borders. Once economies begin to quarantine themselves, it only exacerbates the pain. Our instinct toward crisis has been to look inwards: self-isolate, choke commerce, build walls.
A virus has revealed just how sensitive and interdependent the systems we’ve built are. But we’re still part of nature, one that can self-correct when faced with an irrational economic organism steering us toward climatic collapse.
As we suffocate the planet’s ecosystem with CO2, it has now returned the favour with a biological weapon that targets our respiratory system. Earth has hauled us to rehab, and its time we listened and changed for the better.
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