Economy after Coronavirus — level of meltdown and financial crisis in 2020
We’ll face global financial crisis in 2020 due to COVID-19 outbreak.
Prospects of spreading the virus and total death toll right now looks pretty grim. There are many hospitals which are over their capacity, the number of infected people is growing, especially in the US and Europe, and it will take some time to stop the virus entirely. How will our economy look after coronavirus?
As a mathematician I like looking at numbers. In this text I want to run through numbers related to economy, in order to evaluate the lower bound coronavirus might have on our economy in different parts of the world and globally. I’m no economist and you should take no action upon this text before consulting your local expert.
Main takeaways from this text:
- Europe and the US should prepare for a total lockdown from April to June, and 60% working capability from June to August 2020 while slowly going back to normal.
- Coronavirus outbreak will cause a major financial crisis with a meltdown at least at the level of 2008 financial crisis, but probably worse.
Lockdown period for businesses
Working assumptions: heavy restrictions like shutdown of non-essential business (remote work only) will be in place for 2 months of heavy restrictions, after that businesses will be back to normal but working at 60% capacity for the next 2 months.
This assumption is the largest guess in this post. It’s based on news coming from China which was the first to put on shutdown and the first to let them go in the last week.
The total lockdown in Hubei province in China (where Wuhan lies) was announced on 23rd January 2020 and some cities started ending the total lockdown end of February, beginning of March, though the measures are still in place with restrictions of going out.
According to Bloomberg Economics, Chinese factories were operating at 60% to 70% of capacity in the last weeks, which is also confirmed by New York Times, evaluating it at 50%-60%. For example Starbucks reopened 85% of their coffee shops in China. Going back to normal is a lengthy process. Many companies are still mostly working remotely in China.
None province in China has already fully resumed its operational capacities, and thus 2 months of 60% output is just an educated guess and should be treated more as a lower bound for what might happen. Also 2 months of total lockdown might be inaccurate for certain regions. Some cities in China managed to end the lockdown just after 3 weeks, but in many the lockdown is still ongoing after 2 months.
It’s hard to predict what will exactly happen in each European country or in the US or Canada, as western countries are driven by a different culture and politics, and the Chinese scenario might be impossible to repeat.
Lockdown measures are being implemented as we speak in the UK, USA and other western countries, with a possible total lockdown scenario starting at the beginning of April (grosso modo, Italy is already under lockdown with Poland, France, Spain following similar measures soon or already implemented; total lockdown means for example closure of non-essential businesses).
Thus putting it all together it seems reasonably to assume that a total lockdown period in most Western countries will last from April to June 2020 and from June 2020 until August 2020 we will have a period of 60% output, going slowly back to normal.
Evaluating GDP losses due to Coronavirus Lockdown
The industry which will be most heavily impacted by coronavirus outbreak is definitely tourism and travel. Tourism is totally shutdown and travel almost completely suspended between countries, meaning loses especially for international operators (airlines). Tourism itself contributes about 3% of GDP worldwide and about 10% of GDP indirectly through entertainment and adjacent services.
In 2018 that was directly $2,750.65B and $8,810.96B indirectly or roughly $2.75 trillions and $8.8 trillions respectively. On average, which is not the best measure here as tourism is generally performing better in certain periods and worse in others, this gives respectively $0.22 trillion directly and $0.73 trillion indirectly monthly. Now using our 2–2 model (2 months lockdown — 2 months at 60% output), the losses will average around $0.44 + $0.26 = $0.7 trillion directly and $1.46 + $0.87 = $2.33 trillion in indirect losses.
It shows that the lockdown of tourism alone will make us lose over $2 trillion which is around 2.2% of global GDP.
To make it more concrete let’s compare it to 2008 financial crisis and GDP growth on average before and after. In 2007 GDP grew by 4.2%, by 1.8% in 2008 and shrink by 1.73% in 2009. Then it got back to the before the crisis growth in 2010 with 4.32% growth. Assuming that the growth in 2008 would be similar to 2007 if the bubble hadn’t burst, that is 4.2% instead of 1.8% we see a loss of roughly 2.4% in GDP due to the crisis in 2008 and then of roughly 5.73% in 2009.
This computation is not exactly correct because of a couple of simplifications I’ve done along the way, but I’m going for the easiest estimates now to understand the scale of current events. And what becomes evident is that lockdown of tourism alone might cause a meltdown at the level of financial crisis in 2008.
Now let’s evaluate other parts of economy to see the full picture. Tourism and travel might be actually in much harder situation than the above computations show because the 2–2 model is based mostly on manufacturing data from China — factories getting back to work at 60% capability after 2 months of lockdown. Tourism and travel relies on people willing to travel and we don’t know how coronavirus will influence people willingness to travel. The above might be an optimistic scenario.
Let’s now go to manufacturing data on which 2–2 was modelled to see potential losses there.
Manufacturing constitutes 16% of global GDP or roughly $14 trillion. Running the same scenario of 2 months lockdown, 2 months at 60% capacity, we can estimate the losses. $14 trillion makes roughly $1.1 trillion monthly. Thus 2–2 gives us losses at the level of $2.2 + $1.3 = $3.5 trillions. Global GDP being evaluated at $88 trillions this gives us $3.5 trillions of losses and makes almost 4% of GDP worldwide.
Putting manufacturing and tourism losses together we get roughly $5.5 trillions of losses or 6.2% of GDP worldwide more than not only the loss we suffered in 2008 but also more than the loss in 2009, 5.73%, most likely the largest loss in GDP since The Great Depression.
These estimates can change by the fact that not all countries or regions are impacted in the same way. However this may be both lower or higher, as for example some regions are largely depended on tourism as the main source of income. Moreover because our economies are all connected, especially at the global level when we think about tourism and manufacturing, lockdown in Europe and North America will have an impact on the whole world.
Summing up we’re facing a global crisis scenario within 2 months, which has already begun with stocks on major stock exchanges falling in value by 30%-70%.
So far we have only looked at tourism and manufacturing, but what about other businesses?
Other business domains are hard to evaluate as the loss will largely depend on how digitized a given company is and whether there are good processes for remote work already in place. Restaurants, bars and coffee shops might depend on shifting their models to deliveries and collaborating with local delivery services to minimize the impact of lockdown. Technological companies might be the least influenced if they have managed to put necessary measures in place before the crisis.
In the end most of the companies will face major disruptions for a time being and hence will lose some effectivity in their performance. The end effect will depend on measures taken and a level of flexibility of operations. Lockdown will be the hardest for smaller companies with a low supply of free cash, operating mostly from month to month. We’re going to see a lot of bankruptcies along the way, both of smaller companies and larger enterprises which won’t be able to cope with 2 months of total shutdown and don’t have enough savings to survive. This will cause major layoffs with millions of people losing their jobs overnight. In 2008 just the US lost 2.6 million jobs. Here we’re talking about a global crisis with much larger scale and thus it is conceivable that dozens of millions people will lose their jobs globally.
The scale of these events will be unprecedented in modern history and will in effect cause a global recession. It’s hard to anticipate how our global economy will change because of this crisis as COVID-19 outbreak will cause a general shift of paradigms related to how we work and operate in business.