COVID-19 AS GLOBAL ECONOMIC CRISIS
The evolution of the disease and its economic impact is highly uncertain which makes it difficult for policymakers to formulate an appropriate macroeconomic policy response.
Given the epidemiological assumptions based on previous experience of pandemics, we create a set of filters that convert the shocks into economic shocks to reduced labor supply in each country (mortality and morbidity); rising cost of doing business in each sector including disruption of production networks in each country; consumption reduction due to shifts in consumer preferences over each good from each country (in addition to changes generated by the model based on change in income and prices); rise in equity risk premia on companies in each sector in each country (based on exposure to the disease); and increases in country risk premium based on exposure to the disease as well as vulnerabilities to changing macroeconomic conditions.
The bull run in US stocks ended in pretty gory fashion this month. But how long this bear market lasts will depend largely on what kind of economic shock the coronavirus proves to be — and what other financial vulnerabilities it uncovers or exacerbates.
The S&P 500 is now almost 30 per cent below its peak, leaving analysts and investors wondering whether this is now an opportunity to dive back into the equity market, or whether there is more pain to come.
Goldman Sachs’s chief global equity strategist Peter Oppenheimer has tallied 27 bear markets since the 1800s. He found that the average decline is 38 per cent, and that it has on average taken 60 months for US equities to return to their previous peak. However, the dispersion between different types of bear markets is significant.
The old continent is one of the most infected area of the world. The ECB is thinking about the Eurobond, or better known now as “corona bond”. Here we are talking persistently in these days of corona bond, an instrument that would seem to have found a certain consensus in European circles for now, because it would allow Member States to finance the extraordinary expenses necessary for health, for the purchase of devices doctors and masks, to face the business crisis and support families in a phase of great difficulty.
Economists have forecast global growth will slip to 2.4% this year, the slowest since the Great Recession in 2009, and down from earlier expectations closer to 3%. For the United States, estimates are falling to as low as 1.7% growth this year, down from 2.3% in 2019.
What to do in the face of a supply shock, large but – it must be emphasized – temporary? We cannot eliminate it but we can try to mitigate its consequences by distributing them over time and among the whole population. The most obvious ways to do so consist of using savings or indebtedness: to mitigate the effect on today’s consumption of the fall in production by using resources accumulated in the past or by borrowing them, accepting that in the future we will have to reduce consumption a little, to replenish savings stocks or to repay debt.
By: Domenico Greco
