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The Economic Impact of the Coronavirus

COVID-19 changed the economic landscape on a global scale. Literally overnight, countries around the world saw their economic output slashed to level unseen since World War II, tourist arrivals dropped close to zero, and unemployment rose to unsustainable levels. 

All these, because of a health crisis, no one saw coming so fast and with such a strong impact.

Three months into the pandemic, there are social distancing norms in place, masks-wearing becoming mandatory in many countries and societies trying to get back to the new normal. Here’s a glimpse into what happened, what companies and central banks did, and what to expect next as pandemic persists.

COVID-19 Pandemic and Financial Markets

The coronavirus pandemic is responsible for the major pullback in the S&P500 price index since at least the 2008 Great Financial Crisis. A quick look at the events responsible for the corrections on the index reveals the strong impact it had on the equity market as country after country entered lockdown mode in the last month of Q1 2020.

As it turned out, the equity markets’ drop of over 35% was the quickest decline from bullish to bearish markets in history. At one point in time, as the carnage triggered the circuit breakers, some voices called for the stock market to be shut down. This is nothing new – it happened back in time, it could happen in the future.

It didn’t – the market remained open and it rose from the lows. Some indexes (e.g., Nasdaq) even put a new all-time-high in the aftermath.

Central banks were/still are responsible for much of the subsequent rally. They quickly intervened and, in a joint effort, ushered the liquidity constraints in a market screaming for more USD (the world’s reserve currency).

In red, the chart above shows the amount of total assets bought by central banks around the world in response to the coronavirus pandemic. In some cases, like the Bank of Canada, the response exceeds its previous asset-buying programs. The joint effort managed to ease financial conditions further, allowing economies to gain some time against the pandemic’s evolution.

But the fight is not over. Major US banks made bigger provisions for bad debt for the period ahead, mortgage delinquencies are on the rise, as well as bankruptcies.

Three months into the pandemic, we may still have to see the effects of the crisis so far. Many companies and households held with help from authorities, but financial help is likely to dry sooner than the pandemic ends.

If that’s the case, expect more from policymakers. Large deficits and how to finance them is a problem for the future – for now, the focus is to make the economic impact of the health crisis as minimal as possible.

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