Coronavirus Effects on Economy

The Economic Impact of the Covid-19 Pandemic

How the Coronavirus is Affecting Global Investments

As the coronavirus pandemic spreads across the world, companies are painting a grim picture that entails manufacturing activities slowing drastically, disrupted supply chains, empty stores and plummeting consumer demands. Industry giants like Microsoft, MasterCard and Apple made announcements about how the virus is impacting on consumer behaviour, which is part of what will ultimately determine how much damage the outbreak will do to the economy, and of course whether the world will be plunged into another recession.

Limited Optimism Affecting Outcomes

Even though there is some optimism about governments being able to curb the virus the reality is that it would make business sense to trim planned investments if the threat continues beyond the first quarter of the year. Some companies may be forced to lay off workers, which would further curb economic activity. Microsoft has already cut its sales forecast after production of products slowed down. Apple has said that the closing of stores in China is reducing sales. MasterCard also slashed its growth forecast because fewer people are travelling abroad. Companies like Nestlé and Amazon have suspended international travel by employees.

Factors at Play

  • The Stock Market – According to experts, financial markets are drastically slowing down. The stock market has plummeted the past couple of weeks, which means that investors are getting ready to hear more bad news. Despite a forecast of a 6% increase in earnings, the S&P stock index experienced a decline of at least 10% which was its fastest ever. It is expected that companies making up the S&P 500 will not show any profit growth this year.
  • Reliance on China – One of the major vulnerabilities for investors around the world, and particularly in the United States and Europe, is the ever-increasing dependence countries have on China. Over the past decade or two, China has become entrenched as a major supplier and customer.
  • Lending Standards – Companies may be facing tough times as investors are becoming progressively more reluctant to lend money. The appetite for bonds has dropped exponentially. Experts believe that banks will be hit hard and will be forced to tighten lending standards. In the past couple of months, earnings of the three biggest banks in the United States, Bank of America, Citigroup and JP Morgan Chase have all dropped by considerably more than the S&P 500.

Is it All Gloom and Doom?

Of course, the pandemic could end and markets could begin to recuperate. Investors with a positive outlook are hoping that warmer weather will curb the spread of the virus. Some analysts on Wall Street believe that the economic stress caused by the coronavirus could be offset by interest rate cuts which would give consumers fresh incentives to invest and spend. The central bank and Bank of America have already committed to supporting the economy by cutting rates.

Unfortunately, not every dark cloud has a silver lining. For now, markets are plummeting and many investors are simply not feeling confident enough to assess the current variables when it comes to financial risk. While there is still a level of positivity, the general outlook is that things will get a lot worse before it begins to get better.

Source:
https://www.nytimes.com/2020/02/28/business/economy/companies-coronavirus-economy.html

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