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Global financial markets have largely ignored the spread of COVID-19 while it was isolated to China. As it spread across the globe, the tension slowly rose and it’s slowly culminating with a very strong reaction. The market downturn could be a sign of a coming recession, but it might be too soon to tell. There are lots of ways that the virus could damage the economy, and it’s important to emphasize how and why this might happen.

The markets are a telling sign

Recently, the coronavirus has shown that it can significantly impact the economy on a short-term basis. This became apparent when the global financial market had a brutal drawdown in the wake of the virus spreading to pandemic levels. This ripple in the economy has rippled everywhere. Safe asset valuations have spiked sharply and term premiums for US bonds have fallen to record lows.  While this is a surefire sign of the economy getting closer to a recession, it’s not as cut and dry as it may seem. The impact is not uniform across the whole economy. Credit markets remain relatively intact and they don’t foresee financial problems just yet. While equity valuations have dropped, they remain relatively high in this period.  There is a definitive impact on the global markets and people should be wary. However, there's no guarantee that the current situation will lead to a recession, but it will have significant consequences either way.

The risk of recession is real

While the situation could improve itself at some point, it currently seems as if the world is headed towards a recession. Major economies are very vulnerable to these kinds of impactful events, and countries are likely unable to absorb a financial shock of this scale. It’s important to distinguish the type of recession the coronavirus could cause. This wouldn’t be akin to the 2008 situation, as this was more of a financial crisis. It was a culmination of slow build-up of financial imbalances that rapidly unwound. The coronavirus crisis would lead to a “real” recession.  This is the result of a capital expenditure boom that derails financial expansion. It’s the same way wars, disasters, and other disruptions can cause a recession. Right now, most countries aren’t equipped to deal with the risks that the virus poses, which is why a recession could occur. The good news is that, although severe, a real recession is a transient problem that is resolved once supplies balance out.

Industries are shifting

Due to the infectious nature of the virus, many of the world’s countries have introduced measures to prevent its spread to better handle existing cases. Quarantines and home isolation have become the norm, as the free movement of individuals is restricted. People are hardly allowed to leave their homes, so they are a lot less likely to go out to buy products and services. This has led to an enormous boost in-home delivery systems, while also boosting other remote forms of business. Isolation leaves people with little choice but to do their purchases online and through local apps. Many that have previously been unfamiliar with this system are now growing accustomed to it, and they might continue using online shopping as their preferred method as the virus subsides. The boom in e-commerce has also caused a rapid rise in warehousing needs. The current demand for reliable national warehousing is only getting bigger. These businesses are now adapting and adding space while increasing efficiency along the way. The many industries that previously didn't rely on shipping and home delivery very well might switch to this system in the coming months. Whether or not it will stay permanent is still unknown. 

Lasting economic consequences exist

There are many ways that the coronavirus can affect the economy in a long-lasting way. An indirect hit to confidence is the classic way that exogenous shocks disrupt economies. Markets start falling rapidly and this reduces average household wealth. This, in turn, leads to the fall of consumption, as people increase their savings in their time of need. In advanced economies, this can have an enormous impact on the entire country for years to come, as the differences even out.  The virus is already shutting down production, causing a supply-side shock to the economy of most markets. Supply chains are disrupted and it’s difficult for businesses to get their products and services to every client. These gaps turn into faults and pretty soon the business cannot function.  It doesn’t apply as much to industries like digital marketing in a direct way, but the effect on other industries ripples and reflects on every other market. Just about every market is affected to a degree, which is why it’s such an enormous problem. It’s too soon to determine the financial legacy of COVID-19, but looking at historical pandemics can give insight into the potential future. The SARS epidemic caused an increase in online shopping for Chinese consumers. Various countries might adjust their approach to healthcare and the economy to better improve their chances in a future pandemic. It’s hard to tell what’s to come, but there are some tell-tale signs to watch out for.

Conclusion

Global financial markets have largely ignored the spread of COVID-19 while it was isolated to China. As it spread across the globe, the tension slowly rose and it’s slowly culminating with a very strong reaction. The market downturn could be a sign of a coming recession, but it might be too soon to tell. There are lots of ways that the virus could damage the economy, and it’s important to emphasize how and why this might happen.

The markets are a telling sign

Recently, the coronavirus has shown that it can significantly impact the economy on a short-term basis. This became apparent when the global financial market had a brutal drawdown in the wake of the virus spreading to pandemic levels. This ripple in the economy has rippled everywhere. Safe asset valuations have spiked sharply and term premiums for US bonds have fallen to record lows.  While this is a surefire sign of the economy getting closer to a recession, it’s not as cut and dry as it may seem. The impact is not uniform across the whole economy. Credit markets remain relatively intact and they don’t foresee financial problems just yet. While equity valuations have dropped, they remain relatively high in this period.  There is a definitive impact on the global markets and people should be wary. However, there's no guarantee that the current situation will lead to a recession, but it will have significant consequences either way.

The risk of recession is real

While the situation could improve itself at some point, it currently seems as if the world is headed towards a recession. Major economies are very vulnerable to these kinds of impactful events, and countries are likely unable to absorb a financial shock of this scale. It’s important to distinguish the type of recession the coronavirus could cause. This wouldn’t be akin to the 2008 situation, as this was more of a financial crisis. It was a culmination of slow build-up of financial imbalances that rapidly unwound. The coronavirus crisis would lead to a “real” recession.  This is the result of a capital expenditure boom that derails financial expansion. It’s the same way wars, disasters, and other disruptions can cause a recession. Right now, most countries aren’t equipped to deal with the risks that the virus poses, which is why a recession could occur. The good news is that, although severe, a real recession is a transient problem that is resolved once supplies balance out.

Industries are shifting

Due to the infectious nature of the virus, many of the world’s countries have introduced measures to prevent its spread to better handle existing cases. Quarantines and home isolation have become the norm, as the free movement of individuals is restricted. People are hardly allowed to leave their homes, so they are a lot less likely to go out to buy products and services. This has led to an enormous boost in-home delivery systems, while also boosting other remote forms of business. Isolation leaves people with little choice but to do their purchases online and through local apps. Many that have previously been unfamiliar with this system are now growing accustomed to it, and they might continue using online shopping as their preferred method as the virus subsides. The boom in e-commerce has also caused a rapid rise in warehousing needs. The current demand for reliable national warehousing is only getting bigger. These businesses are now adapting and adding space while increasing efficiency along the way. The many industries that previously didn't rely on shipping and home delivery very well might switch to this system in the coming months. Whether or not it will stay permanent is still unknown. 

Lasting economic consequences exist

There are many ways that the coronavirus can affect the economy in a long-lasting way. An indirect hit to confidence is the classic way that exogenous shocks disrupt economies. Markets start falling rapidly and this reduces average household wealth. This, in turn, leads to the fall of consumption, as people increase their savings in their time of need. In advanced economies, this can have an enormous impact on the entire country for years to come, as the differences even out.  The virus is already shutting down production, causing a supply-side shock to the economy of most markets. Supply chains are disrupted and it’s difficult for businesses to get their products and services to every client. These gaps turn into faults and pretty soon the business cannot function.  It doesn’t apply as much to industries like digital marketing in a direct way, but the effect on other industries ripples and reflects on every other market. Just about every market is affected to a degree, which is why it’s such an enormous problem. It’s too soon to determine the financial legacy of COVID-19, but looking at historical pandemics can give insight into the potential future. The SARS epidemic caused an increase in online shopping for Chinese consumers. Various countries might adjust their approach to healthcare and the economy to better improve their chances in a future pandemic. It’s hard to tell what’s to come, but there are some tell-tale signs to watch out for.

Conclusion