In a matter of weeks, new cases of Covid-19 dropped off in China but exploded everywhere else, with the World Health Organization declaring the disease a pandemic on March 11th. The resulting circumstances have been dramatic, and it is likely to cause multiple knock-on effects for the global economy.
In the beginning, global exchanges remained steady and markets seemed to be predicting growth, but plunged once the virus breached China’s borders. Exacerbated by an oil-price war between Saudi Arabia and Russia, the stock market appears to be stuck in a downward spiral, and is all but guaranteeing a global recession. The 19-point tumble of the S&P is the worst seen in a decade, and unlikely to recover soon.
The reduction of oil prices by 25 percent has triggered panic selloffs, a response to Russia’s rejection of the Organization of the Petroleum Exporting Countries’ call to cut production, which prompted OPEC to scrap all production limits. Crude prices were down to almost 27 euros a barrel, fueling fears of a 2014-style price crash at a time when the market can least afford it. The selloff was so steep on Monday, March 9th, that automatic “circuit breakers” kicked in and halted trading, marking the first time this has happened since the current breakers were set in 2013. Major European stock markets dived more than 7 percent, Japanese indexes fell over 5 percent, and US markets sank over 7 percent. European growth this quarter was minimal.
“There’s panic”, said Dan Krieter, an analyst at BMO Capital Markets. “We’re heading into what looks to be a global recession, including the US.”
The virus has majorly disrupted global supply chains as factories in China were shuttered for a month and some in northern Italy soon followed suit. Tourism has been disrupted all over the world. Meanwhile, as consumer spending falls and businesses falter, stocks are dropping. This results in investors seeking safer bets, such as government bonds, which sends prices up and yields down, and in turn strains the banking industry. Banks are then less able to finance businesses – especially those that are smaller, with more limited resources, that are facing immediate economic and existential distress. When those businesses fail, there are more layoffs and fewer places hiring. Wages decline, and consumers spend even less.
It’s not a pretty picture. In the United States, the Federal Reserve hoped to constrain the downward spiral by increasing the volume of short-term loans available to banks in order to enable continued lending, right after an emergency interest rate cut unrolled on Sunday, bringing it near zero. The US stock market plummeted into bear market territory last week, in response to growing investor concern that the global economy could fall into a deep recession.
The European Central Bank (ECB), on the other hand, announced on Thursday of last week that instead of pushing interest rates down any further – which are already in negative territory – it would instead support bank lending, ramping up its asset purchase program by 120 billion euros. The move took investors by surprise, spurring a freefall in European stocks, that was further exacerbated by US President Donald Trump’s travel ban on the majority of countries within the old continent. On Monday, European shares plunged to record lows that haven’t been registered since 2012.
“It seems pretty difficult to avoid a recession in the first half of the year. The spread of the disease in Europe is a game changer. The question is how deep it will be, and how long it will last”, said Ángel Talavera, Head of European Economics at Oxford Economics in London.
More worrisome is that even though the coronavirus is present in every country in Europe, there is no consistency in containment protocol. “Right now, the epicenter — the new China — is Europe”, Robert Redfield, the head of the US Centers for Disease Control and Prevention said according to The Associated Press. Europe’s generous social welfare may help alleviate the worst of the crisis for some, including the financial cost of staying home from work, but it cannot prevent the illness from spreading.
Across Europe new policies are unrolling, almost on a daily basis, as Member State governments scramble to mitigate the dissemination of the virus. On Monday, the European Commission proposed a 30-day ban on non-essential travel to the bloc, which could be approved as early as Tuesday via video conference. “We think non-essential travel should be reduced right now in order to not spread the virus further, be it within the EU or by leaving the EU,” said President Ursula von der Leyen.
Spain’s government imposed a nation-wide lockdown on Saturday, after President Pedro Sánchez declared a state of emergency. With 9,191 confirmed coronavirus cases on Monday, and 329 deaths, some 47 million people are quite literally home-bound, with the exception of those buying food or medicine, going to work or a hospital, or supporting the elderly or a child in their care. The new measures also place private healthcare providers and facilities under state control.
In France, ministers are no longer shaking hands; more meetings are being teleconferenced and extra measures are in place to protect the health of President Emmanuel Macron. On Saturday, French Prime Minister Edouard Philippe announced the closure of restaurants, cafés, schools, and all other “non-essential” commerce. With the number of cases doubling every three days, more measures are expected to be announced very shortly.
Italy at the Forefront
While coronavirus is truly global, Italy has been the hardest hit country in Europe with an estimated 28,000 infections and more than 2,100 deaths to date, becoming the largest concentration outside of China. Rome has taken drastic measures to limit the spread of the disease. First putting the country’s industrial centre, Lombardy, on quarantine, Italy was the first state in Europe to institute a nation-wide quarantine. Over 62 million people are still on lockdown in the most drastic restriction of movement since WWII. This has been a deeply controversial move condemned by some and praised by others.
Travel within Italy has also been severely restricted, and citizens have been instructed to stay home unless working, seeking health care, or accessing other necessities. Businesses must close by 6:00 pm, and people are being told to remain a metre away from each other when in public. Streets are empty in Milan, Rome, and Venice. Millions of euros have already been lost due to the total collapse of the tourism and hospitality sectors as the disease continues to spread. Meanwhile, Italy’s textile and fashion brands are expecting up to a billion euro setback.
The new quarantine also triggered prison riots on March 8th and 9th due to restrictions on family visitation. Inmates demonstrated, set fires, and escaped, with some even taking guards hostage. Italy’s prison system is the most overcrowded in Europe, which makes them more vulnerable to disease spread. Twelve died as a result of the riots – a majority from overdosing on drugs the inmates raided from clinics.
Most manufacturing in Italy’s north is still on schedule, but this could change. If it does, the auto industry in Europe can expect to be hit hard, as the parts made in the Mediterranean country are used all around the world. Brembo’s Executive Deputy Chairman Matteo Tiraboschi suggested that Europe should coordinate on manufacturing production to curb the fall out. “The fall out for the global auto industry would be huge, as auto parts produced in northern Italy are used by half of the world’s automakers…Now Italy is shut, then it might be France’s turn and then probably Germany’s. We risk tripling the overall time of economic struggle in Europe: better shutting altogether now”, Tiraboschi said.
On Monday, the Italian government approved a 25 billion euro package dedicated to combating the outbreak and minimising the impact. This is an increase from the 7.5 billion requested by the EU’s cabinet, before the outbreak took a dramatic turn for the worse. Italy’s Deputy Economy Minster Laura Catelli also announced mortgage payments would be temporarily suspended as a means to soften the economic blow on homeowners, and lenders will offer debt holidays to small firms and families. Similar measures were taken during the financial crisis ten years ago, with businesses and families given extra time to repay debts. Taking their cue from Italy, banks in the UK have offered similar delays on mortgage payments. Even so, Italy was already teetering at the brink of recession before the pandemic came to the country’s shores. Stimulus is unlikely to prevent economic pain, though it will help blunt the impact.
“We all must give something up for the good of Italy”, Conte said in a televised address on Monday, March 9th, while announcing the nationwide lockdown. “There is no more time.”
“The main objective is to protect citizens’ health, but we must take into account that there are other interests at stake”, Conte said at a news conference. “We must be aware that there are civil liberties that are being violated, we must always proceed carefully.”
“This is not an armoured shutdown like in China”, said former Prime Minister and current leader of Italia Viva party Matteo Renzi. “There is space for movement for people who have urgent needs. We need to reduce the contagion to a minimum, not only because of the death rate but also because the impact on the health system is colossal. Intensive care units are filling up and if you have a stroke or heart attack, you can’t be treated.”
Even so, Italy possesses one of the world’s oldest populations, and many remain uniquely vulnerable due to the large number of elderly among the Italian population. Its medical sector is overwhelmed, and it is likely to get worse before it gets better. There is grave concern as to what this could mean for other parts of Italy, who unlike the more developed and richer north, could face undersupplied and understaffed medical facilities.
Writing on Facebook, Dr. Daniele Macchini, who works at the Humanitas Gavazzeni Hospital in the northern city of Bergamo, wrote of the strain doctors and nurses are working under as the number of people requiring care is beyond the capacity of medical institutions to handle. This has forced some doctors to triage on whom to treat – as if they were on a battlefield – and make decisions on who they can save, and who they can’t.
Meanwhile, Italy is displeased with the rate of response coming out of Brussels and has accused the EU of being too slow to come to their aid. Holding a summit via teleconference, country leaders noted that about 70 percent of their populations are likely to catch Covid-19 at some point. This makes the lack of solidarity with Italy all the more grating, as member states have mostly failed to respond to a call by Italy for extra supplies of medical equipment. Germany and France are among the EU countries that have imposed limits on the export of protective medical equipment in anticipation of their own domestic need for it.
Fortunately, on Thursday of last week the desperately needed medical supplies finally arrived – from China – on a flight coordinated by the Chinese Red Cross, including a medical team of nine, and approximately 30 tonnes of supplies, including ventilators and masks.
Writing on Politico’s website, Italian ambassador to the EU, Maurizio Massari, said “We must ensure, under EU coordination, the supply of the necessary medical equipment and its redistribution among those countries and regions most in need. Today, this means Italy; tomorrow, the need could be elsewhere. Italy has already asked to activate the European Union mechanism of civil protection for the supply of medical equipment for individual protection. But unfortunately not a single EU country responded to the commission’s call. Only China responded bilaterally. Certainly this is not a good sign of European solidarity.”
At the conclusion of the summit, EU leaders vowed to increase coordination and release funds of up to 25 billion euros. The EU Commission is set to make 7.5 billion euros available, which may help trigger national governments pouring in additional funding of 17.5 to 18 billion euros. The EU has also said it will be more flexible in enforcing rules on state aid to allow governments to subsidise industry where required, to help ride out the economic effects of the pandemic.