The global economy knocked out by Covid-19

Adelina Toader( Translated by Cosmin Ghidoveanu
English Section / 25 august 2020

The new coronavirus continues to cause massive damage to the global economy. No sector or industry has escaped the COVID 19 pandemic, and the negative impact of the first half of this year is witnessing the blow received from SARS-CoV-2.

The latest corporate quarterly reports show huge losses for oil companies, the tourism industry, car manufacturers, but also those in the aviation, banking or retail sectors.

According to a analysis, oil companies were severely affected, recording a total collapse in oil demand. In April 2020, the demand-supply ratio in the oil market was so skewed towards the supply side, that prices became negative. Specifically, the market was flooded with so much oil without enough buyers that producers would literally pay anyone to take it. This new reality directly affected companies such as BP, which, according to the analyzed data, had a loss of $ 21.2 billion, Shell, which recorded a loss of $ 18.1 billion and Chevron, which lost 4.7 billion dollars.

However, oil companies were not the only ones to suffer an epic collapse in consumer demand with the onset of the pandemic. The entire tourism industry has been devastated by the coronavirus pandemic, with $ 320 billion in export losses in the first five months of the year, and more than 120 million jobs at risk, as recently announced by the head of the United Nations. The collapse of the tourism industry was a major shock for developed countries, and for developing countries it has created an emergency situation, especially for many small island states and African countries that depended on the sector.

Data shows that international tourist arrivals have fallen by more than half and earnings have plummeted from last year.

At the same time, the restrictions imposed by the coronavirus pandemic have hit the aviation industry hard. The number of flights has dropped by 80% globally, and most companies have laid off employees. Some have declared bankruptcy and most are waiting for state intervention in order to resume their activity.

The International Air Transport Association (IATA) estimates that global airlines' revenues will drop by about half in 2020 to $ 419 billion, and the industry as a whole will suffer losses of more than $ 84 billion. IATA also predicted that revenue per passenger-kilometer (RPK) for domestic flights will not return to 2019 levels before 2022, and 2024 for international travel.

Delta Airlines alone had negative revenue of $ 6.3 billion, American Airlines lost $ 4.3 billion and Air France-KLM also suffered a decline of $ 3.1 billion.

Also affected was Boeing, which was already facing significant problems before the global onset of the new coronavirus. Boeing was forced to ground its Max 737 aircraft in March 2019 due to two fatal crashes. Since then, airlines have canceled more than 800 orders for the plane. All these factors led to a combined loss of $ 3 billion for the first half of the year.

The U.S. Transportation Security Administration, which tracks the number of people that pass through its checkpoints at airports in the country, noted that in the second quarter of 2020 over 90% of the market simply disappeared, which directly hit airlines' profits.

Even Warren Buffett decided to give up all his shares in airlines.

In the context of the Covid-19 pandemic, global trade in goods is also declining sharply, according to the World Trade Organization (WTO) Barometer. Its latest data shows that in the second quarter of this year, global trade in goods recorded a historic decline, reaching a level of 84.5 points in the second quarter of 2020, lower by 18.6 points compared to the similar period in 2019.

The auto industry is also seeing a huge drop in sales - an IHS Markit forecast shows a possible 22% drop in light vehicle sales YOY. Carmaker Volkswagen reported a $ 1.8 billion loss in the first half of the year.

Significant losses are also recorded in the banking sector. Governments and central banks around the world have launched trillions of dollars to support the banking system in the context of the Covid-19 pandemic, to ensure credit flow and market functioning, and to help households stay afloat ( by postponing the repayment of installments), but investors are not attracted to lenders. In addition, six months after the outbreak of the Covid-19 pandemic, the top 15 US banks have set aside $ 76 billion to cover non-performing debt, and 32 European banks - 56 billion euros, according to Citigroup data. The combined total of more than $ 130 billion in provisions for loan losses was only exceeded in the second half of 2009 - during the financial crisis, when they amounted to $ 186 billion, the US investment bank said.

Although the outbreak of the coronavirus pandemic has had a strong impact on global stock markets, causing significant volatility and massive declines in stock prices, in recent months they have regained lost ground, approaching pre-Covid-19 values.

In fact, there is a significant disconnect between the real economy and the stock market, as the analysis shows.

For instance, the US is currently facing a record unemployment rate of 10.2% and yet, on Friday the S&P was up 3.47%.

One explanation for this gap is that for some major companies, such as Amazon, the coronavirus pandemic has brought opportunities for growth and increased demand, and now the company accounts for a larger share of the economy, while all smaller companies are suffering. Another reason for the economic gap is that stock prices are inherently future-oriented.

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