COVID-19 and Global Financial Crisis
In the wake of 2020, world economies were shaken to the core due to the novel COVID-19 pandemic. The World’s largest financial institutions, like the World Bank and IMF, predicted the most massive recession to the World’s economies. The forecast placed the 2020 recession 40 times higher than the 2009 global economic collapse. The economies of most nations, both developed and developing, came down crumbling barely 11 years since they started building their economies again (Felipe, 2020). Millions of people lost their jobs. Consequently, the income taxes drastically reduced, per capita income declined, and as a result, the Gross Domestic Product, which is the measure of a nation’s growth rate, met a hard blow. Major sectors like the transport sector, hospitality, and tourism came to a stall. Governments concentrated on formulating comprehensive measures of curbing the spread and effects of the COVID-19 pandemic.
Unexpected changes in economic growth in 2020 are dramatic, changing from stable or rational to the point of a serious recession. The 20 members of the G20 (including the EU) make up 85% of the world economy. A group that tracks and forecasts the economic development of the G20 recently reported that the Economist Intelligence Unit lowered its global growth rate from 2.3% to 2.2% from its pre-crisis forecast. This dramatic rewrite of global growth forecasts is unprecedented. The impact varies from country to country. The Brazilian economy is currently expected to reverse nearly 8 percent from the projected growth rate. Meanwhile, Japan is now expected to suffer a milder 1.9% reversal. Growth is currently expected to decline by 2.4% in Australia and 4.1% in Indonesia.
Country
Real GDP growth
% in 2020
Previous Forecast
Before the pandemic
Deviation
Italy
-7
0.4
-7.4
Germany
-6.8
0.9
-7.7
Mexico
-5.4
1.1
-6.5
Australia
-0.4
2
-2.4
US
-2.8
1.7
-4.5
Japan
-1.5
0.4
-1.9
Global
-2.2
2.3
-4.5
Financial markets often serve as a key indicator of farms, factories, and households’ subsequent impact. Current financial markets’ movements show that the entire globe is experiencing difficult times ( Zhang, 2020). Roller coasters of rising and falling stock prices in recent weeks are only part of the challenge. In fact, the impact can vary from market to market. Some markets are hit harder than others, reflecting a more or less significant loss of collective social wealth. In addition to stock market indicators, currency fluctuations also reflect changes in the country’s relative wealth and asset valuation conditions. Considering the variability in how some economies were affected. Currency movements from the beginning of the year just before Covid-19 became a topic of serious global interest. We used USD as the basis for comparison. The comparison date is the end of March 2020. Market valuations of currencies and equities provide a responsive and even super-responsive response to change.
Two of the most affected economies are currently Indonesia and Australia. In Australia’s case, the surprisingly sharp decline in currency valuation is related to the fact that Australian interest rates have never fallen to the near-zero interest rates found in many developed countries like in the United States. This gives the Reserve Bank of Australia (RBA) more flexibility to lower interest rates than elsewhere (Ball, 2020). However, since we have been actively working on it these days, it has had the effect of rapidly lowering the AUD’s reputation. Simultaneously, as an energy exporter, the country is also feeling the impact of falling energy prices on trade conditions and, ultimately, currency valuations. The latter issue may have also affected energy exporters like Indonesia. Indonesia is now a major oil importer, but a huge coal exporter and the World’s largest exporter of palm oil (the price fell by almost 25% this year). Indonesia also had the opportunity to lower interest rates. The rupee fell sharply following the central bank’s recent sharp cut in policy rates (Bank of Indonesia). Moreover, in some recent global or regional financial instability cases, Indonesia tends to be walloped early, as its emphasized economic power leads to corrections to the economy, but very quickly (Yunita, 2020). Noteworthy, in the global financial crisis of 2008/09, Indonesia boosted its growth momentum a bit, even if the global economy slowed down. I think it was clear that one of the reasons for this was that in 1997 many of the fatal flaws in the disclosure of governance and financial system ethics were rectified before the global financial crisis.
In many ways, the challenges we all face today are not a financial crisis in the traditional sense. It is essentially a consumer crisis: a collapse in the speed of economic activity and consumption and also production. Part of the response to this economic crisis must include a heavy focus on increasing or at least securing consumption levels, especially in the face of community lockdowns. In the face of this financial, and ultimately economic crisis, it should be noted that some traditional options for stimulating an economy are quite limited for many economies. For most major economies, pre-existing interest rates were already at historically low levels. Therefore, reducing interest rates to stimulate investment is not a realistic option. Australian interest rates have already fallen significantly, a factor that has undoubtedly contributed to the sharp decline in AUD valuations. Indonesia is in a better position to cut interest rates than most other major economies. Still, the interest rate cuts announced in mid-March will send the rupee down again, perhaps towards new lows. Many countries, particularly in Europe and, frankly, the United States, face limited options for increasing budget deficits to stimulate spending given the size of pre-existing budget deficits. Here Australia has more leeway than many other countries. Indonesia has opportunities, but not huge, to increase its budget deficit. Fortunately, for many countries in the Southeast Asian region, including Australia, national debt levels are quite modest.
Interestingly, inflation is also superficial; indeed, deflation is a much bigger threat than inflation. The most likely rise in inflation will be due to supply chain disruptions. Civil, regional, and national lockdowns threaten supply chains, even for basic food needs. Panic purchases and other similar behaviors will also affect prices and availability. Authorities may feel compelled to suspend market-based mechanisms to “stabilize” the situation. I think the Nobel Prize in Economics is waiting for anyone who can combine new challenges and existing dynamics to predict the way out of this crisis.
Following this unprecedented financial crisis, every nation came up with policies in an attempt to recuperate or prevent further economic collapse. The 2008/09 Global Financial Recession Experience left policymakers more experienced to face such challenging economic catastrophes. The use of previously unconventional financial instruments, such as quantitative easing, has proven to deploy them when needed ( Meegan, 2018). The economic response to COVID-19 is unprecedented. The government is committed to paying the private-sector wages, deferring tax liability, and increasing social security costs. For instance, in the US, these recuperation policies have cost an estimated 11 percent of GDP, compared to five percent in the UK. Central banks are moving fast to support these monetary costs by buying debts governments need to offer issue.
Conclusively, these economic and financial initiatives are welcome. They seem to have focused on tackling the crisis’s main economic challenge – the abrupt end to consumption and production. The fall was not due to financial imbalances or overproduction, as was the case with many previous economic downturns and crises. Rather, it was caused by a new, contagious, and deadly virus for no prevention or treatment. Given this reason, it can be concluded that other issues, including pending control, economic and financial measures, will work on this health issue. The longer it takes to control the spread of the disease and rabies, the more expensive it is to prevent it. In part, the ability to control the disease does not depend on a single country. This requires the joint efforts of all nations. While closing borders may take a while, they will eventually reopen. However, if some regions have been ineffective in controlling the disease, there is every possibility of re-identification in those regions that have overcome the disease. Of course, epidemiologists and virus experts can advise on this dynamic. Even so, further outbreaks before vaccines or treatments leave societies and their economies in the “shock” of the future for economic evacuation.
Finally, greater clarity on the spread of the virus and our ability to deal with it can help determine if current assessments are fair or a good purchase opportunity. But markets are a forward-looking mechanism, and we should not rule out the possibility of future volatility. Still, we must remember that markets reevaluate future growth before economic data supports any slump.
References
Meegan, A., Corbet, S., & Larkin, C. (2018). Financial market spillovers during the quantitative easing programmes of the global financial crisis (2007–2009) and the European debt crisis. Journal of International Financial Markets, Institutions and Money, 56, 128-148.
Felipe, J., & Estrada, G. (2020). What Happened to the World’s Potential Growth after the 2008-2009 Global Financial Crisis?. Journal of the Japanese and International Economies, 101072.
Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 101528.
Ball, M., Clarke, A., & Noone, C. (2020). The Global Financial Safety Net and Australia. 1. 1 Managing the Risks of Holding Self-securitisations as Collateral 2. 11 Government Bond Market Functioning and COVID-19 3. The Economic Effects of Low Interest Rates and Unconventional 21 Monetary Policy 4. Retail Central Bank Digital Currency: Design Considerations, Rationales, 100.
Yunita, P. (2020). The Future of Indonesia Islamic Banking Industry: Bankruptcy Analyzing the Second Wave of Global Financial Crisis. International Journal of Islamic Economics and Finance (IJIEF), 3(2), 199-226.