The world has never seen anything like it, at least not in living memory. Millions of people in quarantine, businesses shut and economic activity brought to a standstill. In the short term, the impact is enormous, but once the crisis abates and the world has recovered, what will it mean for the economy, working practices and climate targets?
The stock markets have crashed. The FTSE 100 Index is down by 34%, Dow Jones by 31% and the Nikkei by 27% (at the time of writing). Both the Dow and the FTSE have witnessed their worst days since 1987. Investors agree that the virus could have a catastrophic impact on the economy.
To compare it, let’s look at the impact of another outbreak, SARS, in 2013. It impacted thousands of people around the world and shaved two percentage points off China’s GDP, according to various estimates. However, the COVID-19 coronavirus is already ten times as wide-spread as SARS.
Most estimates compare it to the financial crisis of 2008. According to IMF, the fallout will be at least as severe as 2008. Even so, it says it still expects a recovery in 2021. So far, 80 countries have asked the IMF for emergency finance and governments around the world are taking extraordinary measures to stabilise the economy. The UK has injected more than £300bn, into the economy to stabilise businesses and worker pay, and have effectively nationalised the entire private sector by agreeing to guarantee 80% of people’s pay. Germany is preparing a €500bn package and the US has announced their $2 trillion stimulus bill. Central Banks have slashed interest rates with the UK reaching a record low of 0.1%.
The measures are extraordinary and it is remarkable how quickly economic orthodoxy has been abandoned. Ideas such as basic income or quantitative easing for the people which, until a short time ago, were on the fringes are now moving into the mainstream.
But the real question is: what happens next. When the economy finally picks itself up, what will it look like?
The immediate impact for regulators is to abandon so called non-essential work to focus on the more pressing matters in hand. Both in the US and in the UK, regulators have been urging relief for borrowers with payment holidays.
They are considering loosening some of the tighter rules on banking lending. EU regulators are likely to relax their attitudes towards non-performing loans and US regulators are considering relaxing liquidity rules on banks to ease the financial pressures on them during the COVID-19 outbreak. The aim is to encourage banks to make loans to companies who will currently be seen as an economic risk.
Another question will be what happens to targets for climate change. In the immediate term, COVID-19 may be an unexpected boost in countries’ attempts to hit their Paris targets. The virus has shut down industrial production, temporarily bringing about a dramatic reduction in pollution levels. Images from the European space agency show a dramatic drop in pollution levels over China compared with 2019.
Paul Monks, Professor of Air Pollution at the University of Leicester, has predicted that there will be some crucial lessons to learn.
“We are now, inadvertently, conducting the largest-scale experiment ever seen,” he said.Paul Monks
“Are we looking at what we might see in the future if we can move to a low-carbon economy? Not to denigrate the loss of life, but this might give us some hope from something terrible. To see what can be achieved.”Paul Monks
The reduction in air pollution could be beneficial for asthma sufferers and may reduce the spread of some diseases. Already, reports suggest water sources are cleaner and the canals in Venice are clearer than they have been in living memory.
The question will be:
Is this a temporary slow down and will things return to normal after the outbreak?
The slowdown has been remarkable. The airline industry, one of the heaviest producers of emissions is in freefall. Oil use is dramatically down. It may take years to recover to pre-crisis levels.
On the other hand, during past economic crises, emissions have been quick to rebound. However, with prudent management of stimulus funds and permanent changes in behaviour this crisis could be the disruption the economy needs. Companies are working virtually, travel is being reduced. The world is about to discover that it can work much more effectively remotely than it imagined.
Coronavirus has already had an incredibly disruptive influence on markets, behaviours and attitudes. It will change the way businesses operate and has given a timely boost towards climate targets. Whether those changes will prove to be permanent, time will tell.