Corona Crash 2020
Why small businesses will mostly go bankrupt and how it will influence global economy.
With coronavirus being a global pandemia right now, most countries have taken measures to curb the spread of the virus by either a partial or a total lockdown. Non-essential businesses, so roughly anything outsides of groceries, pharmacies, logistics, banks, are forced to shut down for at least couple of weeks. Let’s look at potential repercussions.
In Economy after Coronavirus I’ve looked at global scale of events arguing that we’re facing a global financial crisis. However the crucial difference between now and 2008 crisis is that we’re facing a forced lockdown of small businesses and this alone will have tremendous effects.
JPMorgan Chase has evaluated that a median small business holds a cash reserve for roughly 27 days. That depends on an industry, restaurants have the lowest median with reserve for 16 days and real estate has the highest median with reserve for 47 days.
As we see from examples in China, the shortest lockdown lasted 3 weeks — the actual time of total lack of operations — with then slowly getting back to work at roughly 60% capacity. This seems like an optimistic scenario which probably is impossible to repeat in the West. More likely we’re going to face a quarantine up to 2 months, so think up until June, and then from June to August 2020 a period of slowly getting back to normal operations at 60% capacity. This is what I argued for in Economy after Coronavirus.
What effect will that have on small businesses?
Roughly 50% small businesses will face bankruptcy within next 2 months. Especially those which are leveraged with loans and have no option of working remotely to make for the loss at least to some extent.
This in turn means that the very foundation of our economy might evaporate: small shops, restaurants, bars, boutiques, barbers, you name it.
According to the Small Business Administration, small companies create 1.5 million jobs annually and account for 64% of new jobs created in the United States
So just looking at small companies it seems we might be facing an evaporation of up to 32% jobs from the market this year.
This is of course the most grim scenario, but in reality we should expect major shifts in job structure and dozens of millions of people losing their jobs.
Compare that with 2008 financial crisis which cause the US losing 2.6 million jobs, and it seems like this crisis is going to be even bigger, even by rough estimates.
The true scale of events will unfold in the next 2 to 3 months, when we see repercussions of lockdowns through Western countries and bankruptcies triggering more black swan events (defaulting on loans, bankruptcies of whole countries, especially those which relying on tourism).
We’re living in interesting times.