A ‘Contagion’ In The Global Economy And Its Financial Institutions

Recommended mitigation, suppression, flattening curve and lockdown guidelines forwarded by the World Health Organization has ripped-off almost every economy till date. Just as much as the contagion is spreading globally with R naught value of 2-2.5, economic recession has been as much fast as it has been predicted by renowned economists. How long these lockdowns will be allowed to control this pandemic and how deep the recession is going to be in order to have predictions about future and necessary liquidity injections financial institutions must be ready for proper release to avoid global economic depression, much worse than the 1929s keeping in view its super declining market trends due to virus? No one has the exact numbers and answers.

Coronavirus outbreak emerged inside wet market of Wuhan, China, and is believed to have reproduction rate of 2.5, leading to WHO’s guidelines that lockdowns are necessary to control this pandemic along with national and international response guided by internationally laid down principles. But populist leaders across the globe have made things worse. Some follows their own guidelines laid down by their CDC and some considers WHO as China-centric, which has led to divided and confused responses globally.

When things gotten out of control in China, the Chinese Community Party announced total lockdown in Hubei province for 76 days which led to flattening of curve and control of viral pandemic. Chinese statistical experts had predicted that lockdowns will cause decline in 4% of commercial activities of business whose revenues are dependent on consumer dealings and over 20% in airline and retail industries. But what happened after 76 days of lockdown and post statistical analysis was much worse. Chinese businesses declined by over 80% losing almost 280billion US$ during lockdown. This had led to global supply chain shock in the beginning and rising prices all across the globe.

It is believed that Chinese economy has V-shaped recession. They have predicted that economy would contract by 2.6% of its GDP and that growth would decrease significantly owing to global supply and demand shocks. When China locked down its machinery, world experienced supply chain shocks. But as soon as Chinese officials controlled this pandemic but spread to regions all over the world, things changed and caused demand shocks. European countries went into quarantine and social distancing measures to try to curb this pandemic, which led to demand shocks and trade recession in the beginning.

Chinese economic V-shaped recession will take few years to recover, but European economies have been facing existential threats. Italy is in total chaos. Lockdown has been in place for weeks and things are not still flattening, and infectious diseases experts even fear second wave of infections. European politicians have described global pandemic as their biggest challenge since World War II. Lockdowns cause economic recession on one hand and flatten’s pandemic curve on the other, and this leads to supply and demand shocks simultaneously. This is something we have not witnessed throughout our lives.

Global lending institutions are also in total confusion. Some are advancing debt restructuring measures. Others are focused on debt relief measures and liquidity injections worth trillions of US dollars to protect businesses, layoffs and jobs. IMF and World Bank are helping developing economies by giving them coronavirus relief funds. And the dangerous fact is that world is still far away from witnessing global pandemic peak. We have yet to reach peak globally and economic costs are devastating.

Italy’s economy is in shambles. Europe is trying to convene emergency meeting of the European Union to issue coronavirus bonds or issue collective debt relief measures to alleviate economic costs. Some European countries have gone nationalist just to avoid taking extra burden on their economies. Some are threatening the entire European Union. There have been some media news reports that EU will agree on 500billion€ relief funds to help member countries cope with this crisis. But economic shocks are yet to come as soon as lockdown measures are relaxed. Consumer oriented businesses are in total zero business profit. They will layoff 96% of their workforce if they are not paid their relief share. Layoffs and job losses mean political and social instabilities which mean threatening political order and capital structure of the world. These issues are yet to be seen because of enforced lockdown measures.

India, with its population of over 1.4 billion people, has gone in total global isolation due to its suspension of flights and lockdown measures. They have yet to see their peak but have, so far, tried their best to flatten the curve. The main issue in Southeast Asia is that if virus enters Katchi-Abadis, it will be a total disaster. Neither economy nor lockdown measures will help. It will spread like fire. This fear has prompted Southeast Asian region countries and SAARC member countries to convene emergency meeting to announce coronavirus funds so that things are taken and controlled through collective decisions and comprehensive framework.

Global financial institutions are also facing financial threats. IMF can not alone finance such huge lending costs to its member nations because even its powerful voting members have been facing recessions in their economies. Things are going to become a lot worse when we see global pandemic’s peak weeks and devastating lockdown and economic costs.

United States is the global largest economy and its currency (US dollar) as the global reserve currency. Much of global trade is denominated in this fiat currency. WHO has declared that United States is becoming the new epicenter of contagion and that cities will go into social distancing and lockdown measures to curb it. New York has so far lost over 38billion US$ in businesses, let alone leave the fear of business layoffs and unemployement. Over 1.3 crore Americans have filed for unemployement in the United States. The Federal Reserve has decreased its interest rate to zero and pumped trillions of dollars worth liquidity injections and bank lendings in order to have enough US dollars globally. This will have devastating inflationary consequences for the globe. United States economy has also entered recession and will contract by over 26.5% annualised rate in the next quarter if pandemic is not curbed. US Congress has announced stimulus packages worth 2.2 trillion US dollars in order to protect jobs and business, but still things are going out of control.

Not only the world’s largest economy and reserve currency is in crisis, but almost every economy has introduced stimulus packages accordingly to curb pandemic and pacify economic repercussions caused by mitigation, suppression and lockdown measures.

What is going to happen next? Economists are all agreeing on one point: no matter what are the economic costs, control this pandemic as soon as possible and save healthcare systems and lives. Countries have, so far, totally failed in doing so. What is yet to be seen is whether such globalised village driven by globalization and artificial intelligence will try to develop treatment for this virus in short period of time to pacify all costs or either vaccine will be developed in its record time of 6 to 18 months to prevent second wave of infections. It is yet to be seen. Artificial intelligence is working on closely following existing 15,000 drugs to test if there is, any, drug available which will kill this novel virus. Almost 60 universities and companies are working on developing a vaccine for this novel virus to control pandemic. Believe me the fear is of such extent that there are no spending limits on development of treatment and vaccine research and innovation in order to curb it. We have been trapped and it’s all because of one issue: global village has made us exposed to this deadly virus which has spread like fire globally.

We hope that scientists all around the globe will successfully develop treatment and vaccine for this novel virus and things will revert back to new normal. If they failed to do so, we will wait for herd immunity to develop and in the process, millions of people will die with future in view of economic depression and total chaos.

We will be successful. Trust the process.

Shazmah Khan is a writer, political analyst and expert on international relation. The views and thoughts are expresssed in this article belong to the author and do not necessarily reflect Millat Times’s editorial stance.