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STUDIESCOVID-19, more of an economic crisis than a health risk

ADELINA TOADER (Translated by Cosmin Ghidoveanu)
English Section /

COVID-19, more of an economic crisis than a health risk

The Covid-19 pandemic is considered by most people first of all an economic crisis and only secondly a health crisis, recent studies quoted by the World Economic Forum state.

Aside from the human consequences of the COVID-19 epidemic, the economic uncertainty which it caused will cost the global economy one trillion dollars in 2020, according to estimates by the United Nations Conference on Trade and Development.

Richard Kozul-Wright, head of the globalization and development divisions of the UNCTAD, said: "We expect a slowdown of the global economy by up to 2% this year, and that will probably cost approximately one trillion dollars, compared to what analysts were predicting in September".

By launching the report, Richard Kozul-Wright wanted to warn that few countries will remain unaffected by the ramifications, given that the global financial markets have crashed, following the disruptions of the supply chain from China and the uncertainty of the oil prices set by important producers.

In a scenario presented by the UN where the global economy were to grow just 0.5%, that would mean ""a two trillion dollar blow" to the GDP, the UN official said, who added that the collapse of the price of oil has been ""a factor which has contributed to the growing mood of anxiety and panic".

Richard Kozul-Wright also said that, although it has been difficult to predict how the international financial markets would react to the impact of COVID-19, ""which suggests extreme anxiety", ""there is now a certain level of anxiety, which far exceeds the concerns over the state of health, which are very serious and concerning".

In order to combat these fears, "governments need to spend now to prevent a meltdown which could be even more harmful than that which will occur this year", said Kozul-Wright.

When asked about how various countries could react to the crisis, including China - where the virus may have appeared for the first time in December - and the United States, the UN chief economist said that the Chinese government would probably introduce ""expansionary measures" - such as increasing spending or cutting taxes. "They will almost certainly do that", he said, and he added: ""The US government, which is now in an electoral year, has to respond in some other way than by cutting taxes and cutting interest rates. I suspect it will".

Speaking about Europe and the Eurozone, Richard Kozul-Wright mentioned that the economy was already performing "terribly towards the end of 2019".

"It was almost a certainty that Europe would enter a recession in the coming months; and Germany's economy is extremely fragile, but the Italian economy and other parts of the European periphery are also facing serious uncertainties due to the trends of the last few days", the UN official said. Describing many parts of the Latin-American region as just as vulnerable, he added that they - in particular Argentina - "will struggle as a result of the negative effect of this crisis". Not even the so-called less-developed countries, whose economies depend on the sale of commodities, will be spared.

"Indebted and developing countries, especially commodity exporters, are especially threatened", due to their lower profitability on exports as a result of a stronger dollar, said Kozul-Wright, who added: "The probability of a stronger dollar as investors are looking for safe havens for their money, and the almost certain rise in the price of goods as the global economy slows down, means that commodities exporters are particularly vulnerable".

"Eventually", Mr. Kozul-Wright added, "a number of dedicated political and institutional reforms are needed to prevent a fear about the safety of a food market in Central China from turning into a global economic contraction".

Even though the threat of COVID-19 from turning into an official pandemic "has become very real", the world is not "at the mercy of the virus", Tedros Adhanom Ghebreyesus, the head of the WHO recently said.

He said that it is important not to let somber milestones, such as the number of infected people passing 100,000 across the world, stop us from controlling the epidemic, and stressed that 93% of the deaths so far have occurred in just four countries.

This would be "the first pandemic in history that could be controlled. The conclusion is we are not at the mercy of the virus", he added.

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The drop in bonds and equity leaves investors "without places to hide"

As fears about the spread of the coronavirus intensify, even the safest corner of financial markets has been reached by the global selloff, according to the Financial Times.

Government bonds, commonly seen by investors as shelters in the face of volatility, experienced depreciation yesterday, while fund managers continued to exit riskier assets such as stocks.

In times of crisis, investors tend to take refuge in government bonds for their apparent safety. The markets have followed this playbook in the beginning of the contagion: bond yields all over the world reached record values while prices rose, according to the quoted source.

That model has stopped working over the last few days. Bond market sales have picked up early last Wednesday, pushing ten-year yields of the US treasury above 1.2%, the highest level of the last two weeks and way over the record low of less than 0.4%, reached on March 9th.

The European benchmark, ten-year German government bond, reached a two-month high of -0.23%, while ten-year UK bonds rose to 0.79%.

According to the Financial Times, investors are selling their shares because they need cash. As corporate stocks and bonds continued to decline, customers withdrew their money from mutual funds. To cope with the requests for redemption, investors are forced to give up assets that are easier to sell, traders say.

"Many people are trying to sell what ever they can", said Seema Shah, strategist at Principal Global Investors.

According to the quoted source, it seems that the selloff in bonds has eliminated the last safe haven available to investors, who are instead going into cash. Gold, another asset that usually sees a rise in price in times of market crisis, has collapsed over the past two weeks.

"There are no more safe havens now", said Mrs. Shah. "What you are seeing in sovereign bonds refers to the level of problems in the market. The market is worried that things will continue this way, until the infection rate peaks", she said.

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